Zynga reported its quarterly earnings yesterday with disappointing results, falling in at the bottom of the forecast range and disappointing analysts. Investors responded by pushing the share price down 7% since, as Zynga lowered its outlook for the year due to further declines in the web business and the delay of several products that had been expected for the second quarter.
Zynga’s revenue for the last quarter was $175.1 million on a non-GAAP basis ($153.2 million GAAP), with net income of $2.8 million non-GAAP (a loss of $62.5 million GAAP). This compared to the same quarter last year, which was $187.6 million non-GAAP bookings ($230.7 GAAP) with a loss of $6.1 million non-GAAP ($15.8 million GAAP). In other words, revenues are down but losses are sharp (on a GAAP) basis, continuing the trend from the first quarter of this year.
The company attributed the performance to two main factors: “Bookings came in at the low end of our previously provided outlook primarily due to the delayed launches of new games and features as well as the continued decline of our web business,” said CFO David Lee. The decision to move release of key products out of the quarter was a hard one, but CEO Don Mattrick felt it was necessary. “In Q2, we made a decision to hold back the global launches of new Zynga Poker and the new Words with Friends which were originally slated to launch in the quarter,” said Mattrick. “We made these decisions during our geo-lock and testing phases after we identified specific areas where additional development time could improve product quality and customer experience.”
The key numbers for Zynga were an interesting look into the company’s transition. Zynga is moving from its dependence on Facebook and a few titles to a broader range of platforms and products, and the process is painful. The company’s audience, measured by daily active users (DAU) shrank, from 39 million in the same quarter last year to 29 million — but the number was up from the 28 million in the first quarter of this year. While ad revenue was shrinking (dropping 22 percent compared to last year, and 38 percent from the first quarter of this year), average daily bookings per DAU (ABPU) increased from $0.053 in the second quarter of 2013 to $0.067 this waurter, up 28 percent year-over-year (and up 7 percent from last quarter).
Crucially, Zynga is now deriving more revenue from mobile games ($88 million) than from Facebook games ($86 million), the first time this has happened. That’s a key moment in the company’s transition strategy. While two games accounted for 56 percent of the company’s revenue (FarmVille 2 was 32 percent and Zynga Poker was 24 percent), that’s something Zynga is working on changing. In another mark of the company’s transition, Zynga announced a new sports effort featuring licenses with the NFL, NFL Players and Tiger Woods, along with an exclusive licenses with Warner Bros. for Looney Tunes.
“Our Sports effort introduces a new franchise brand for us — Zynga Sports 365 — and with it, new mobile games in football with the NFL and NFL Players Inc. and in golf with one of the most iconic athletes in the world, Tiger Woods” said Mattrick. “Our Runner expansion features a new partnership with Warner Bros. Interactive Entertainment to bring to life their beloved Looney Tunes brand for mobile consumers. We are pleased to launch the geo-lock for our new football game — NFL Showdown — today and look forward to making it, along with our Tiger Woods golf game and Looney Tunes runner game available globally to fans around the world.”
Zynga’s got a deep bench of talent for creating these sports titles. Mike Taramykin, VP at Zynga Orlando, spent eight years at EA Sports where he was the VP and general manager of the Tiger Woods PGA Tour franchise, which included games on HD console, mobile and web. Taramykin was also responsible for bringing Madden NFL to Facebook and free-to-play mobile gaming. Other EA Sports vets on board at Zynga include Jason Shenkman, director of product at Zynga Orlando, who worked on Tiger Woods and Madden; Jeff Luhr, now director of design for NFL Showdown, who worked on NCAA Football and produced several versions of Madden Football; Ian Cummings, director of design at Zynga Orlando, previously the creative director of the Madden NFL franchise forover a decade,; and Michael Cayado, executive producer of NFL Showdown, who lead the design and development of Tiger Woods PGA Tour on Xbox360 and PS3 for seven years.
Zynga COO Clive Downie[a]listdaily spoke exclusively with Zynga COO Clive Downie about the company’s strategy and the new licenses.
[a]listdaily: Has Zynga’s move into sports been contemplated for a while, or is this a new initiative since the new executive team came on board?
Clive Downie: This is something that developed since Don [Mattrick] and I and the new management team have been here. We did have a couple of the very talented people who now are in our Orlando studio on staff, they were pushing us to contemplate the sports strategy that they had. I remember sitting down and listening to them… I think it might have been one of the first meetings I had on my first day here, I think Don had been talking about it previously with them.
We’d been thinking about how to get into this space, after seeing this first strategy and plan, and formulating our market insights, looking at the competitive set, looking at the capabilities that we had and then building capabilities. Then we looked at the P&L and committed to it and went about getting our first three partners from a licensing standpoint, the NFL, the NFL Players and Tiger. That’s how that came about.
[a]listdaily: Are any of the sports titles using Natural Motion technology?
Clive Downie: The teams have been talking. As you know, Natural Motion has a wonderful motion engine in Euphoria, and the teams have been talking, sharing needs and opportunities. My hope is that there will be shared technology in the product, if it’s something that can drive efficiencies and match the design aspirations of the team. That’s something we’re trying to do across the board in our new and existing pipelines, is make sure technology is shared. Where appropriate we’re sprinkling the goodness of Natural Motion’s technology throughout the products.
[a]listdaily: NFL management, and golf for that matter, seems to target a narrower demographic than something like FarmVille or Words With Friends — but one with a potential for more devoted fans and higher monetization. In other words, is this a move towards more core gaming, but perhaps with greater ease of use?
Clive Downie: I see sports as an overall market that is obviously segmented, and there are very large numbers of fans of sports who want to participate and spend the time slices they have per day on their mobile devices in a gaming experience, but they’re unable to do so. We’re talking about very large addressable markets that have not been able to participate previously because of the kinds of games that have been available. Generally games on their mobile devices are ports from the console world, very twitch-orientated, not suited to the control mechanisms on the devices, not suited to the time slices that people have.
When you can design a product to match those market aspirations, you’re still talking about a very remarkable scale. I wouldn’t classify them as core. I would classify them as mass. These sports are mass sports, they just haven’t been tapped into in the way that we know they can be, with smart design around time slicing.
[a]listdaily: You have not just the sports licenses, but Looney Tunes, and that said to me that Zynga is interested in licenses that reach into different areas. Should we look for more of that in the future where that fits with your strategy
Clive Downie: Our strategy is to be the at-scale leader. That means our aspiration is to have the number one products and adjacent products in a large number of categories. We already have the broadest portfolio of live and in production games that Zynga has ever had, in terms of the number of categories that we’ve hit. When you have that breadth of portfolio, targeting those large-scale addressable markets, you’re going to have a mix of owned IP and created IP because it’s a wonderful way of going into markets and being successful, by giving people what they need and can relate to.
You’re going to have some licensed IP. I think going forward we will always consider what’s the best way to achieve the aspiration of getting to number one in those categories, and if the aspiration is best fulfilled by combining a licensed intellectual property with innovation in our tech foundations or our tech systems, then we’ll do that. Alternatively, the best way to be number one in a category might be owned IP and created IP from internal at Zynga. You’re going to continue to see a mix, just because of our scale aspirations.
[a]listdaily: With the breadth of the product portfolio, it seems like Zynga is trying to ensure a solid range of successful titles to be ready to have a mega hit. There are companies that are depending on one or two massive hits, but those aren’t really something you can reliably predict or create. In a long-term strategic sense, doesn’t having a strong portfolio of solid successes give you a stable footing so you’re ready to capitalize when you do have a mega-hit?
Clive Downie: You’re right. We’re trying to be the at-scale leader, we’re going to have number one in a variety of categories, and to get to that you have to have shots on goal. We’re going to do that. The benefit of having a very broad portfolio is network strength and the ability to cross-promote relevant games with smart targeting to consumers. The ability of a broad portfolio is, I think, increased predictability of hit-making and the ability to get to a hit. And the ability of Zynga’s scale, with 2000 people, I don’t know if there’s any other company that can do that effectively. We are purposefully at the scale of 2000 people because we want to purposefully create lots of games that we can purposefully prosecute the goal of being the at-scale leader by having number one productss in a variety of categories.
