Zynga (ZNGA) Q1 2017 Results - Earnings Call Transcript

| About: Zynga (ZNGA)

Zynga, Inc. (NASDAQ:ZNGA)

Q1 2017 Earnings Call

May 04, 2017 5:30 pm ET

Executives

Rebecca Lau - Zynga, Inc.

Frank D. Gibeau - Zynga, Inc.

Gerard Griffin - Zynga, Inc.

Analysts

San Q. Phan - Mizuho Securities USA, Inc.

Eric J. Sheridan - UBS Securities LLC

Timothy L. O'Shea - Jefferies LLC

Michael Olson - Piper Jaffray & Co.

Justin Post - Bank of America Merrill Lynch.

Doug Creutz - Cowen and Company, LLC

Heath Terry - Goldman Sachs & Co.

Jonathan P. Lanterman - Morgan Stanley & Co. LLC

Dae K. Lee - JPMorgan Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the Zynga First Quarter 2017 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

I would now like to introduce your host for today's conference Ms. Rebecca Lau, Manager of Investor Relations and Corporate Finance. Please go ahead.

Rebecca Lau - Zynga, Inc.

Thank you, and welcome to Zynga's first quarter earnings call. As you've seen, we've consolidated our earnings related news into our Earnings Letter and are no longer distributing a separate detailed earnings press release. Additional materials including our earnings slides are available on our Investor Relations website.

On the call with me today are Frank Gibeau, our Chief Executive Officer; and Ger Griffin, our Chief Financial Officer. Shortly, we will open up the call for live questions.

During the course of today's call, we will make forward-looking statements related to our business plan and strategy, as well as expectations for our future performance. Actual results may differ materially from the results predicted. Factors that could cause or contribute to such differences are detailed in our earnings materials and under the caption Risk Factors in our 10-K and when filed our 10-Q, as well as elsewhere in our SEC filings.

In addition, we will also discuss non-GAAP financial measures. Our earnings letter, earnings slides and when filed our 10-Q will include reconciliations of our GAAP and non-GAAP financial measures. Please be sure to look at these reconciliations as the non-GAAP measures are not intended to be a substitute for our GAAP results.

This conference call is being webcasted and will be available for audio replay on our Investor Relations website in a few hours.

Now, I'll turn the call over to Frank for his opening remarks.

Frank D. Gibeau - Zynga, Inc.

Thanks, Rebecca. Good afternoon, and thank you for joining our call. We're off to a strong start in 2017. We delivered a great quarter beating guidance on all key financial measures. Our strategy of growing our live services while sharpening our operating model is really paying off.

Over the past 12 months, we significantly improved the fundamentals of the company. We've seen a marked improvement in profitability, cash flow, revenue and bookings, all of which are the strongest we delivered in years.

We're pleased with Zynga's momentum and how our turnaround is pacing. This past quarter, revenue was $194.3 million, up 4% year-over-year and bookings were $207.4 million, up 14% year-over-year. This growth was driven by the best mobile performance in Zynga's history with mobile revenue up 19% and mobile bookings up 27%.

Our payer conversion rates have also increased, up 36% year-over-year. There were three key drivers to our Q1 performance. First, our mobile growth. Second, the strength of our live operations and third, our improved operating efficiency.

Starting with mobile growth, in addition to our record-breaking revenue and bookings, our mobile audience grew 16% year-over-year to 18 million DAU, the highest we've seen in two years. I'm most encouraged by the growth of mobile in-app purchase revenue and bookings, which were up 31% and 40% respectively year-over-year, the best in company history.

We've now reached to a point where 83% of our revenue and 85% of our bookings are coming from mobile. Next, we're starting to hit our stride in growing our live services and in Q1, they were anchored by the results of our forever franchise, Zynga Poker. The games mobile revenue was up 63% year-over-year, and mobile bookings were up 76% year-over-year. This was Zynga Poker's highest quarterly mobile performance in the franchise's history.

Last year, we aggressively invested in new features for Zynga Poker, including challenges, leagues and Poker Week. These bold beats continue to drive momentum into 2017. Zynga Poker also posted impressive gains in audience, with average mobile DAU of 78% year-over-year. The strongest audience growth in the last two years of this franchise. As the game celebrates its 10th anniversary this July, the team is focused on delivering a steady roadmap of bold beats for players.

Another highlight in our live operations is CSR2, which had a great holiday season and continued that momentum into Q1. The team's commitment to delivering bold beats helped to put CSR2 into the Top 15 Grossing Game charts in the U.S. App Store last month. We recently launched a new integration with the blockbuster movie, The Fate of the Furious. The bold beat includes a series of in-game events and social challenges featuring the characters and cars from the film.

Turning to our operating efficiency. We continue to improve our business fundamentals and sharpen our operating model. Over the last year, we focused on live operations as a core strength of the company, while reprioritizing our investments and dramatically increasing year-over-year profitability.

On a GAAP basis, operating expenses are down to 71% of revenue compared to 84% a year ago. Non-GAAP operating expenses were also down 58% of bookings compared to 68% last year. We're encouraged by this progress, and believe there is more work to be done in unlocking further operating leverage across Zynga and increasing shareholder value.

Looking forward, an important part of our strategy is to expand and grow our portfolio of forever franchises. Words With Friends is a great example of how we're pursuing this. In terms of the core game experience, we're increasing the pace of new feature development and testing new bold beats like Hindsight, Radar and Tile Swap, which introduce dynamic new ways for players to engage with this popular game. Words With Friends audience and engagement continues to grow with mobile DAUs up 4% sequentially. After eight years, this forever franchise continues to be a daily part of so many of our players lives.

Today, we launched Crosswords With Friends to global audiences. This is the first product from our acquisition of PuzzleSocial last year. Crosswords With Friends is a new game that extends our With Friends brand and marries pop culture with brain puzzle gameplay. As part of our launch, the game will feature a unique crossed platform partnership with People Magazine including content inspired by trends and entertainment news.

Finally, we're also experimenting with new platforms to broaden the reach of Words With Friends. As a social game company, we're always looking for new ways to reach bigger audiences. Some of the largest and most social audiences on mobile are in messaging apps. Words With Friends is a mass market player-versus-player experience that lends itself particularly well to the chat environment. And earlier this week, we partnered with Facebook to bring the first ever turn-based game to messenger with Words With Friends for Instant Games. We've also recently introduced new products in the App Store for iMessage with our new collection of iMessage games such as GIFs Against Friends. It's early days, but we're excited about the opportunity to innovate on a new platform.

With that, I'd like to turn the call over to Ger so that he can further discuss Q1 and our Q2 guidance.

Gerard Griffin - Zynga, Inc.

Thanks, Frank. We delivered another excellent quarter in Q1 driven by a strong top-line performance and effective cost management. Our revenue and bookings both exceeded our guidance. Revenue, which is comprised of the net change in deferred revenue and bookings was $194.3 million, $9.3 million ahead of our guidance and up 4% year-on-year. The net change in deferred revenue was an increase of $13.1 million, $8.1 million ahead of our guidance.

Bookings were $207.4 million, $17.4 million ahead of our guidance and up 14% year-on-year. Our over delivery in the quarter was driven by better than expected results from our mobile live services and a partial quarter contribution from our Solitaire game, which we acquired in February 2017. These more than offset the softness in our advertising bookings.

Our operating expenses were broadly in line with our expectations. GAAP operating expenses were $138.4 million, down 12% year-on-year, representing 71% of revenue, down from 84% of revenue in the prior year. The decline in GAAP operating expenses was largely driven by a reduction in stock-based compensation which was down 41% year-over-year.

Non-GAAP operating expenses were $121.2 million, down 2% year-over-year, representing 58% of bookings, down from 68% of bookings in the prior year. All of this resulted in a net loss of $9.5 million, $6.5 million better than our guidance and an improvement of $17.1 million over the net loss of $26.6 million in Q1 of 2016.

Finally, our adjusted EBITDA, which includes the $13.1 million net increase in deferred revenue, was $16.7 million. This was above our guidance by $2.7 million and up 4% year-on-year. Overall, I am very pleased with the progress we're making and sharpening our operating model and that we remain on track to deliver margins in line with our peers over the long term.

Looking at our balance sheet, we ended the quarter with cash of $720 million, down from $852 million at the end of December. The sequential reduction in cash was principally due to the $86 million repurchase of common stock and the $42 million acquisition of Solitaire from Harpan.

Turning to our guidance. Our guidance for Q2 is as follows: revenue of $200 million compared to $181.7 million in the prior year; a net loss of $6 million compared to a net loss of $4.4 million in the prior year. I would like to call out that our net loss in the prior year benefited from a credit for contingent consideration of $14.4 million.

Now back to our current guidance. A net increase in deferred revenue of $5 million versus a net release in deferred revenue of $7.1 million in the prior year. Bookings of $205 million compared to $174.7 million in the prior year. Adjusted EBITDA of $19 million, which includes the $5 million net increase in deferred revenue. This compares to an adjusted EBITDA of $18.6 million in the prior year, which included a $7.1 million net release in deferred revenue.

There are several factors to consider in our Q2 guidance as we continue to execute on our turnaround. On a year-over-year basis, we expect our growth to be driven by our live service franchises and our Solitaire acquisition. We believe this growth will be partially offset by continued softness in advertising and declines in our Web and older games. Gross margins in Q2 should be comparable to those in Q1 2017.

We plan to invest in additional marketing spend in Q2 on a year-over-year basis and a sequential basis to maintain the positive momentum in our live services through 2017 and beyond. This investment is informed important by our improved player metrics and a detailed lifetime valuation assessment from our UA teams. We expect our R&D and G&A expenses to deliver operating leverage year-over-year in absolute and percentage terms, as we continue to focus on delivering operational efficiency and sustainable profitability.

In summary, we're off to a very strong start in 2017, and we're very excited about the potential ahead of us, as we continue to sharpen our operating model, enhance our live services and deliver innovation and growth across all of our existing and new games.

With that, we are happy to take your questions.

Question-and-Answer Session

Operator

Thank you. And our first question comes from San Phan from Mizuho. Your line is open.

San Q. Phan - Mizuho Securities USA, Inc.

Hi. Congrats on the quarter. I was wondering can you share some more details on the Harpan acquisition and the Solitaire game?

Frank D. Gibeau - Zynga, Inc.

I think you asked about the Harpan acquisition, this is Frank. Ger can pick it up in the second as well. The strategic intent behind the Harpan acquisition was, we looked at every genre that we're in and we seek to try and build a leadership position. If it's Words With Friends in the Words category or in this particular case, our position of Poker in the cards category and card-based games, we looked at Harpan as an opportunity to expand our position there and we understood from our player data that Poker players, as well as Words with Friends players had an high affinity to Solitaire games. And as part of our corporate development process, we encountered the Harpan group and were able to come to an agreement where we brought Solitaire into Zynga. Obviously, it's an ad-driven game. It's the most installed Solitaire game on mobile devices. It's been a very nice boost for our audience metrics, but also it's a long-term investment for us as we look to expand our leadership position in the card game category.

San Q. Phan - Mizuho Securities USA, Inc.

Okay. And then, secondly, I was hoping, could you flush out your comment about remaining on track to deliver margins in line with your peers a bit? How are you measuring profitability internally now? Is it the former adjusted EBITDA numbers? And then, who do you consider to be your benchmark peers at this time and are there specific markers we should be focused on as you continue on that journey?

Gerard Griffin - Zynga, Inc.

And I'll take that. When we discuss margin internally, we're talking about our adjusted EBITDA excluding the impact of the change in deferred revenue, primarily because we're trying to link more to the activity in a quarter or a year. In other words, what our players are purchasing and how that's contributing to our company. So, to put that in context, if you were to look at our Q1 actuals, our adjusted EBITDA is externally disclosed with $16.7 million, but if you take into consideration the $13.1 of deferrals due to the – obviously the strong bookings performance, our internal view would be $29.7 million, and you know that's a 14.3% EBITDA margin as it relates to bookings. So, you know from our perspective, that's how we would track our business internally. And, as I said, because it is more linked in with the bookings and the activity in the quarter, obviously, over a lifetime you know our revenue on bookings is the same. It's primarily a timing difference due to the recognition policies.

When we talk about peers, we're talking about more of the larger gaming companies like Activision and EA and we would also throw in their King before the acquisition where their margins are closer to the 30%-plus range. And as I've said, in the number of calls, our base camp as we look at that is to try and get first to 20% and then over the long-term get the 30%.

As we think about in terms of being on track, I feel comfortable right now given the progress and the momentum we have in the company that we're on track to deliver the first base comp of 20% in FY 2018.

San Q. Phan - Mizuho Securities USA, Inc.

Great. Thank you.

Operator

Thank you. Our next question comes from Eric Sheridan from UBS. Your line is open.

Eric J. Sheridan - UBS Securities LLC

Thanks for taking the question. Maybe two. One, on the engagement side, I wanted to understand a little bit, maybe we can take a little bit deeper, on what are some of the tools and metrics you're using in terms of investing against continuing to stimulate engagement in the forever franchises. I want to understand a little bit about the scale of the investments and what you're seeing in terms of the return you're getting on those investments.

And then, maybe for the Q2 guidance, for Ger, I wasn't sure if you could tease out a little bit of what Solitaire contributes to that as well as what some of the headwinds might be from some of the continued run-off in some of the more legacy businesses. Thanks so much, guys.

Frank D. Gibeau - Zynga, Inc.

Thanks for your question. I'll take the first one, and Ger can take the second. When we're making a decision about how to spend R&D time and money, we start by looking at the existing live services that we have that are at scale and that have growth in front of them, and for a given dollar investment, it's a much higher return to invest in audiences that are at scale, that are coming in daily to play the game than it is potentially to start a new product. Getting new games to breakthrough into the charts and mobiles is an extremely difficult proposition in the best of times.

So from our perspective, we wanted to start where we had great positions, great audiences and we start by looking at the feature set, and if that feature set can drive recapitalization of a player that's lapsed, if it can drive the number of additional sessions that a player participates in the given week or day, we think of those as kind of organic engagement metrics related to feature development. They can also drive better LTVs, which allows us to invest incremental dollars in marketing. It also gives us a creative position to base campaigns.

So, in general, we do go into some fairly deep analysis. We look at some of the standard metrics like ROAs and the standards things you would see in an advertising campaign. But honestly when we go into the underlying metrics of engagement and retention side of the game, we really start by looking at feature set developments and the return that we can expect, the expected outcomes for given feature development.

Gerard Griffin - Zynga, Inc.

Yeah. In terms of Solitaire, we don't specifically give guidance in terms of the actual contribution in the quarter, but what I can say to you is the way I look at, and I have said this in the past, I look at acquisitions, specially tuck-in acquisitions like Solitaire. It's obviously accretive and my expectation is we will get our return on that from a flow through perspective in the next three years, which is sort of my hurdle rate.

It obviously won't be an average, it will ramp over time, but that's probably the best indication I can give you in terms of its contribution.

In terms of the weakness in Web and in our older games, we can continue to see that it's declining. It's becoming a less of an impact, but both in terms of the older games and the Web we still expect it to decline year-on-year, I'll leave it there.

Eric J. Sheridan - UBS Securities LLC

Thank you.

Operator

Thank you. And our next question comes from Tim O'Shea from Jefferies. Your line is open.

Timothy L. O'Shea - Jefferies LLC

Yes. Hi. Thank you for taking my questions. So I just want to dig a little deeper on Poker. It's a 10-year old franchise, you've got record quarterly bookings. So I just want to understand where the growth is coming from? I think, Frank mentioned the audience gains, just curious how are you acquiring these new users and how much of the bookings growth is coming from these new players versus maybe more deeply monetizing the existing audience? And then just maybe taking it up to a higher level. How do you think about this franchise on a longer-term basis and how sustainable are these kind of games? Thank you.

Frank D. Gibeau - Zynga, Inc.

Yeah, I'm really pleased with the performance of Poker and it's one of – we call them forever franchises at Zynga. They are franchises that last for years and years, their experiences that stand the test of time. The thing about Poker or Words With Friends is over a long period of time those games have installed and created very large user bases, and a key component of engagement is reactivating players that might have lapsed. So trying to keep people playing on a weekly or daily basis is obviously job one. But sometimes for whatever reason somebody will lapse out of the game, and we look at that as a prime opportunity for us considering the history of Zynga and how long some of these franchises has been around. So if you look at the performance of Zynga, it is a combination of new players coming in through acquisition, we have been spending a little bit of money in player acquisition on Poker, which is incrementally new. But in addition to that, we've really done two things is we've reactivated players, we've taken share from competitors, and in addition to that, with our feature development around leagues, poker league and some other things, the event driven features, we've driven the number of sessions and length of sessions per player higher.

So the combination of those elements has resulted in this strength that we've seen year-over-year. We call them bold beats and these are features that are worthy to drive a game into the charts again or to get re-featured, or to build an advertising campaign. And so for everyone of the forever franchises that we have at the company in our key categories, we build both the roadmaps that we go in and architect over four to eight quarters, how this is going to unfold and we look at each of the different customer segments of existing players, reactivation players, as well as new players and then we put together an integrated campaign to drive that. It's a new process to Zynga that we've really been crafting over the last year, it takes advantage of a lot of the great things that Zynga built over the years in data science and product management, but it adds a few new things especially as it relates to mobile.

So we're starting to expand this across to our social casino business with slots. You're starting to see the impact of that on CSR2. And we're excited to see how this starts to become a competitive advantage for us.

Gerard Griffin - Zynga, Inc.

Yeah. I'd just like to add to that. One of the things from my perspective that I was really excited about in terms of Poker. The way I look at this business, you've got AEM, Acquisition, Engagement, Monetization. From a financial perspective, the more you can do in terms of engagement and going deeper with your players, obviously that is really meaningful, because it's more connected to the next step which is monetization. And I think with Poker, Poker actually from a user acquisition or a marketing perspective has got one of the lowest percentages in our business and what the team have done is they've really gone deep on the engagement in terms of the new player features and that's where we're seeing the dividends. To Frank's point, we will spend incremental pack to continue to drive that momentum, but given the player base that Poker has, if you produced the right kind of features and you really engage with those players, that's where the bang is and from my perspective, obviously as the CFO I like that one, and hopefully we can do that with other games.

Timothy L. O'Shea - Jefferies LLC

Great. Thank you.

Operator

Thank you. Our next question comes from Mike Olson from Piper Jaffray. Your line is open.

Michael Olson - Piper Jaffray & Co.

Hey, good afternoon. As you improve your ability to elongate monetization of existing title through live services, you've talked in the past about fewer new titles, I was wondering if you could share your expectation for new titles in 2017. And then secondly, you kind of just touched on this, but I would imagine that elongating an existing title through live services can be done much more economically than building and marketing an entirely new title. It may be hard for you to say specifically quantifying that, but are there any details you can provide on that and how it impacts your thinking on the title slate going forward? Thanks.

Frank D. Gibeau - Zynga, Inc.

Okay. Thanks, Mike. The year that we're in right now is really a live services year. We think that we can reach our goals both in terms of growth and efficiency by focusing and really trying to perfect this live operations approach that we're rolling out. So from our perspective we really think about our financial growth and plans where we really don't think that much about new in terms of its contribution. We really look at trying to extract as much leverage from the services that we have, that are out and at scale. As I have mentioned before in earlier question, it's extraordinarily efficient and more leveraged than a new dollar on a new title. We are launching new titles, obviously, Crosswords with Friends is a really nice launch for us, we've launched Boggle this year and these are about extending and expanding our position in the words category.

We have active development for new titles in our other categories, but we're being very careful about how we manage those development dollars and those processes. Because it's so hard to break into the charts, we try and keep the teams small, we try improve the fun as early as possible and we use a lot of testing to really prove out the thesis, before we really start to scale the production team.

So, I think, we'll take a more slow and methodical approach to how we're developing and really focus our energies on the live operations. The live operations requires engineers, it requires designers, creative directors in addition to data scientists, product managers and marketers. So, it really does feel like live operations are developing games for a global audience 27/7, 365. So there's a lot of development techniques as well as studio operations processes that go into that. But again it's still, from a risk reward standpoint, I can put those dollars into a new feature from Poker, I can see those results within a quarter, and I can also understand more deeply what our players are responding to then potentially going out and making a new game.

So, we are going to be making new games, we're going to be very careful about it, but at the same time, as you think about what we're going to do beyond 2017, new will play a role, but we don't ever want to be in a position where it's got to be new in order for us to reach our goals, we think we can get pretty close to our objectives that we've laid out for you guys by continuing to grow and foster our live services.

Michael Olson - Piper Jaffray & Co.

Thank you.

Operator

Thank you. Our next question comes from Douglas Anmuth from JPMorgan. Your line is open.

And it looks like the caller has disconnected. Our next question will come from Justin Post from Merrill Lynch.

Justin Post - Bank of America Merrill Lynch.

Great. Thank you. Couple of questions. You gave us the EBITDA outlook. How do you think about conversion to free cash flow and kind of the amount of CapEx needed for the business as you look out over the next few years? And then the second question is just on the ad headwinds for Words With Friends. Can you just help us understand maybe what's a little bit different about the ad market this year than next year, if you haven't answered that already? Thank you.

Gerard Griffin - Zynga, Inc.

Yeah. This is Ger. From an operating and a free cash flow perspective, we are projecting to be obviously cash flow positive this year. So from that perspective, the business is self-funding. From a use of cash, we will do tuck-in acquisitions, but I don't foresee anything that would materially damage my balance sheet at this point in time, and obviously, we're continuing to execute on our share buyback. So from that perspective we're fine. You will see in Q1, we were negative from a operating cash flow perspective as it was about minus $4 million below. There is a few things I'd like to just call out on that. One is in Q1 of this year, we did pay bonuses where last year, we didn't have any cash bonuses in the quarter. And secondly, and I think this has come out in some other calls, Apple changed their fiscal timing, so that we actually have a phasing issue in terms of some of the receipts from Apple which will flow into Q2 as opposed to Q1. The cum of those two items was approximately $28 million. So even if you translate that back into the minus $4 million, we were cash flow positive in Q1, and I expect the balance of the year to be cash flow positive.

Frank D. Gibeau - Zynga, Inc.

Your second question.

Justin Post - Bank of America Merrill Lynch.

Yeah, on the...

Frank D. Gibeau - Zynga, Inc.

Oh sorry, advertising, yes.

Justin Post - Bank of America Merrill Lynch.

Yeah.

Frank D. Gibeau - Zynga, Inc.

In terms of the headwinds in advertising, the main headwind that we're seeing – it starts with the Web advertising where it's sort of linked in with the overall decline in the Web. But from that perspective there is, I think, even more significant pricing pressures and you've also got an inventory issue. On the mobile side of the business, I think that side of the business is more robust and resilient in terms of advertising. And so from a Words With Friends perspective, the way I would look at it is we've seen some very strong metrics from a player perspective and we believe that that franchise in particular has got a strong resonance as it relates to advertisers. The other thing I would say is we added Solitaire to our portfolio. So, I still believe as I look at my advertising business for the year, we won't be up 12% like we were up 15% to 16%, but I still do expect us to be up year-on-year by a smaller amount.

Justin Post - Bank of America Merrill Lynch.

Great. Thank you.

Operator

Thank you. Our next question comes from Doug Creutz from Cowen. Your line is open.

Doug Creutz - Cowen and Company, LLC

Just a broader question with you and a few of your peers having reported, it seems like the mobile gaming market had really a pretty strong Q1 from a user monetization perspective. Do you see anything going on in the broader market that might explain that or do you think that that might just be specific to the companies that have given public statements on their performance? Thanks.

Frank D. Gibeau - Zynga, Inc.

Great question. I think, our thesis is that the mobile gaming platform is so effective from a player standpoint in terms of being able to play anytime anywhere, the amount of choice that's available to them, in terms of the number of games, the types of games we think that that's just winning out over the long term in terms of a platform, you also see a lot of expansion in international markets, as you start to see even more aggressive growth around some of the smart devices in some of the emerging markets. Our Poker business for example is extraordinarily strong internationally.

We also are starting to see – people are getting better and better at running live operations and services and understanding how to get value to players and having them convert from players to payers. So in general, I think there's a natural growth of effectiveness of the players in the marketplace, the overall growth in marketplace internationally and then finally just the effectiveness of it. It's getting to be where a smart device has the computing power of consoles and some of the lower end PCs, so you can put out some really spectacular experiences as well. So I think for a variety of reasons, those were pretty interesting factors that we look at.

Doug Creutz - Cowen and Company, LLC

Okay. Thanks.

Operator

Thank you. Our next question comes from Heath Terry from Goldman Sachs. Your line is open.

Heath Terry - Goldman Sachs & Co.

Great. Thanks. Just wondering if you can give us a sense within the newer launch categories racing, Dawn of Titans category, what you're generally seeing from a competitive standpoint, particularly around cost of customer acquisition, and as you think about sort of the roadmap and the pipeline categories that you want to design against, what role does that sort of competitive cost of acquisition landscape play in your decision-making?

Frank D. Gibeau - Zynga, Inc.

Yeah. It's a really good question because you do see dramatically different costs in – CPIs in different categories and in the power of brands. So brands that are known or on sequels, that plays a big role in the efficiency for how you go to market. So at the very earlier stages of greenlining projects at Zynga, we absolutely look at the cost of install and the dynamics related to how much you have to invest in marketing in order to be successful in that category. Fortunately, we're in position of leadership in some categories that are very efficient for us to attract audiences, we like the mass market brands that we have with Words With Friends and some of the other categories.

And so from our perspective, it's integral to figure that out as early as you can in development. As you might make a great game that you frankly can't afford or don't want to spend the marketing in order to compete in that category. And so that's a very important thing to understand and it definitely is integral to our decision making about how we put together a portfolio for the long-term.

Gerard Griffin - Zynga, Inc.

Just like to add to that, I think from a game perspective, especially with a new game, I think it's critically important to give the game time in soft launch, and you make sure that you are getting the game that's resonating with players, before you start to turn on the dollars in terms of the marketing, historically there is – you've seen it in the industry where there – the sort of focus on acquisition before you really have the true engagement loop and the ability to monetize, that can be fatal. So from our perspective, in our live services, it's obviously a case where we've got deep relationships with our players, so we can test with our new games, we're patient, we take the time, we make sure that the games are starting to resonate and then we can actually invest.

Heath Terry - Goldman Sachs & Co.

Great. Thank you very much.

Operator

Thank you. Our next question comes from Brian Nowak from Morgan Stanley. Your line is open.

Jonathan P. Lanterman - Morgan Stanley & Co. LLC

Hi guys. This is Jon on for Brian. I just have two questions. First one is about live services, you guys have obviously done a very good job, which you can see in Zynga Poker, what are kind of some of the challenges and hurdles you guys have seen in Poker, and then maybe other genres as well? And then looking at your slots business, there's been a few kind of higher profile acquisitions made in this area in the last 12 months to 18 months. Is this something you'd consider for your own portfolio and if not kind of what are your plans to maybe turn around this, which has kind of been lagging Poker? Thanks.

Frank D. Gibeau - Zynga, Inc.

When you look at our live operations, if you look just specifically at Poker, we have a – we have a big competitor there in World Series of Poker and we welcome it, we like the competition. And so it really does bring the best out in a team, it's certainly something that I think is an important part of how you lead teams is to think about how you compete against somebody like World Series of Poker, that puts out such a great quality product.

So, as we think about how we're growing Zynga Poker competition is right there at the forefront. How we expand internationally, but also grow share in North America. And there are other Poker companies out there beyond World Series of Poker that we look to obviously it's a share gain kind of business. And so we look at those types of issues. When you look at live services overall and this is a point that Ger was touching on, while you're in live ops you're looking for this kind of perfect set of factors that come together that leads to a place where you can invest, and you can grow the business through UA, through investing in players and its combination of features and paid acquisition.

Some of our games like Dawn of Titans we're still actively building that game, we're still looking for that right combination of things that leads us to a place where in a very competitive category action strategy games, we can actually have a sustainable long-term position. So we're committed to a game like Dawn of Titans like we are to Poker, and we're constantly experimenting, trying new things and trying to get to that right mix of elements that lead you to the position where you can invest to grow. CSR2 is a good example of another action game that we did spend that time, we came out we released great, (37:37) we spent some extra time in live ops to get the right combination of things, and we are seeing that pay dividends as the feature roadmap unfolds and we are investing in that game actively right now. So each game has its own story, each genre has its own dynamics as it relates to acquisition and customer dynamics and we take a very careful, data driven, creative driven approach to each one of those.

Question related to slots, and yeah, it's a very dynamic time in slots. There is a lot of consolidation, there is a lot of purchases and deals being announced. And our slots business has a very strong position centered on Hit It Rich, Spin It Rich, Wonka, Wizard of Oz, as well as Black Diamond. We really like the products that we have there. And the team has been very focused on growing the older game features and driving the intent – the engagement and the retention curve for those products and we're actively competing against all the other guys in that category.

We definitely have an open mind to acquisition and from our perspective that's one way to grow. We are looking to grow organically honestly is our prime focus right now. We want to be able to have a sustainable growth rate for slots, while paid acquisition goes up in the category. I mean, we – we're looking at how all the different companies are thinking about their competition or competitive positions going forward.

Jonathan P. Lanterman - Morgan Stanley & Co. LLC

Thanks.

Operator

Thank you. And our next question comes from Douglas Anmuth from JPMorgan. Your line is open.

Dae K. Lee - JPMorgan Securities LLC

Hi, this is Dae Lee in for Doug, sorry about earlier, I lost connection, and thank you for taking my question. Just a higher level question on the messaging platform, could you talk about the monetization potential for that platform and how do you see that evolving over time? Thank you.

Frank D. Gibeau - Zynga, Inc.

I didn't get that question. It's a bad line. Hello?

Dae K. Lee - JPMorgan Securities LLC

Hello? Can you guys hear me?

Frank D. Gibeau - Zynga, Inc.

Yeah. We didn't catch the question. I think, you are on a bad line.

Operator

And Mr. Anmuth (sic) [Dae Lee] has disconnected.

Frank D. Gibeau - Zynga, Inc.

Thank you very much for your questions today everyone and we look forward to speaking to you again next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Internet Information Providers,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.