Wednesday, June 08, 2016 9:34:07 AM
ZNGA: CEO FRANK GIBEAU,SPEAKS,OF,VR,&,AR,VIA,NATURALMOTION,WHY,FACEBOOK,&,MICROSOFT,EYEING,THE,VIRTUAL,REALITY,SPACE
AR = augmented reality,
a technology that superimposes a computer-generated image on a user's view of the real world, thus providing a composite view.
IS VIRTUAL REALITY THE NEXT BIG DRIVER IN THE GAMING SPACE?
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
WHAT IS VIRTUAL REALITY GAMING?
IN VIRTUAL REALITY (OR VR) GAMING, PLAYERS CAN EXPERIENCE A 3D ENVIRONMENT AND INTERACT WITH THAT ENVIRONMENT THROUGHOUT THE DURATION OF THE GAME. A RESEARCH REPORT FROM FORRESTER ESTIMATES THAT 52 MILLION VR DISPLAYS WILL BE USED BY CUSTOMERS and enterprises by 2020.
ACTION AND SPORTS GENRES DOMINATE THE VIDEO GAMING SPACE
BY ADAM ROGERS | JUN 6, 2016 5:30 PM EDT
SHOOTER AND ACTION GAMES ACCOUNT FOR 45% OF TOTAL VIDEO GAME SALES…
VIDEO GAMERS CROSS ALL AGE GROUPS IN THE US
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
29% OF VIDEO GAMERS ARE BETWEEN 18-35 YEARS
According to the Entertainment Software Association (or ESA), 29% OF ALL VIDEO GAME USERS ARE BETWEEN 18–35 YEARS OF AGE, whereas 27% OF PLAYERS ARE BELOW THE AGE OF 18. A surprising number—26% OF GAMERS—ARE ABOVE THE AGE OF 50, while the remaining 18% LIE BETWEEN AGES OF 36 AND 49 YEARS…
HOW IS THE DIGITAL GAMING MARKET GROWING?
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
Mobile gaming to reach $52.5 billion by 2019
ACCORDING TO A RESEARCH REPORT BY NEWZOO, THE GLOBAL GAMING MARKET SHOULD REACH $99.6 BILLION IN REVENUES FOR 2016. This indicates a growth of 8.5% YoY (year-over-year) compared to 2015.
Digital Revenues: Key to EA’s and Activision’s Long-Term Growth
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
Focus on recurring digital revenue streams
Electronic Arts (EA) was previously a hits-driven business. This means that if a game was one of the top games launched, the firm would benefit greatly in that particular period, but it would also suffer financially if it didn’t become a hit. Gamers usually play a game for six to eight weeks and then move on to the next available game on the market.
…Massive move toward the consumption of digital products
Like other product categories, the gaming space has also seen a transition toward digitalization. In November 2015, Activision Blizzard (ATVI) announced the signing of a definitive agreement with King Digital Entertainment (KING), a major player in the online gaming sector. ZYNGA (ZNGA) also HAS A STRONG ONLINE PRESENCE.
Electronic Arts (EA) wants to create a business model in which users engage more with something they find interesting. Online sports games are popular as users enjoy creating fantasy teams, allowing them to compete online and against friends.
GROWTH OF E-SPORTS A KEY DRIVER FOR THE GAMING INDUSTRY
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
THE E-SPORTS MARKET EXPECTED TO REACH $1 BILLION
ACCORDING TO SUPERDATA RESEARCH, THE TOTAL GLOBAL E-SPORTS MARKET WAS VALUED AT $748 MILLION AT THE END OF 2015. Its YoY (year-over-year) revenue growth is driven by an increase in advertising as well as more brands entering the segment.
THE GLOBAL E-SPORTS MARKET IS EXPECTED TO REACH $1 BILLION IN 2017.
Betting and fantasy sites are attracting investments
Platforms such as e-sports betting and fantasy sites have attracted investments of more than $150 million. Revenues earned in 2015 are expected to be $56 million. According to SuperData, “Fans remain more comfortable wagering virtual gaming content over cash, causing real-money sites to gain traction slower than anticipated.”
APPROXIMATELY ONE-THIRD OF THE E-SPORTS FANS IN THE UNITED STATES (SPY) PARTICIPATE IN ONLINE AMATEUR TOURNAMENTS. As the number of players increases, the number of sites has also increased, leading to saturation in the e-sports market. THE NEXT BIG THING IN THIS MARKET IS EXPECTED TO BE THE MOBILE E-SPORTS SPACE, WHERE AUDIENCES HAVE INCREASED BY 19% YOY IN THE US.
MARKET POTENTIAL
Because there is immense potential in this segment…
IS VIRTUAL REALITY THE NEXT BIG DRIVER IN THE GAMING SPACE?
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
WHAT IS VIRTUAL REALITY GAMING?
IN VIRTUAL REALITY (OR VR) GAMING, PLAYERS CAN EXPERIENCE A 3D ENVIRONMENT AND INTERACT WITH THAT ENVIRONMENT THROUGHOUT THE DURATION OF THE GAME. A RESEARCH REPORT FROM FORRESTER ESTIMATES THAT 52 MILLION VR DISPLAYS WILL BE USED BY CUSTOMERS and enterprises by 2020.
VIRTUAL REALITY TECHNOLOGY IS EXPECTED TO BE THE NEXT STEP IN GAMING INNOVATION. AT THE E3 2015 LIVE STREAMS AND PRESS CONFERENCE IN JULY 2015, FACEBOOK (FB) AND MICROSOFT (MSFT) ANNOUNCED THE COMBINATION OF FACEBOOK’S OCULUS RIFT AND MICROSOFT’S XBOX ONE.
This clearly indicates Facebook’s and Microsoft’s growing interest in the virtual and augmented reality space, the latest innovation in the gaming world. The leading players in the gaming space are Microsoft’s Xbox One and Japan-based (EWJ) Sony’s (SNE) Nintendo (NTDOY).
THE VIRTUAL REALITY MARKET EXPECTED TO REACH $5.2 BILLION BY 2018
ACCORDING TO A KZEROWORLDSWIDE REPORT, and as the chart above shows, the consumer VR market is expected to total $5.2 billion by 2018.
TECHNOLOGY FIRM NVIDIA (NVDA) ALSO USES ITS PLATFORM AND NETWORK APPROACH AND LEVERAGE AND SCALE APPROACH IN THE GAMING SECTOR. The company is tapping the opportunity for advanced technology brought by the upgraded gaming consoles such as Sony’s PlayStation 4, gaming content such as mods, and VR.
WHY ARE FACEBOOK AND MICROSOFT EYEING THE VIRTUAL REALITY SPACE?
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
FACEBOOK ACQUIRED OCULUS IN 2014
In March 2014, Facebook (FB) acquired Oculus, the leader in immersive virtual reality technology. Oculus has built a strong interest among developers.
According to a press release from Facebook, the company plans to expand the Oculus Rift headset’s applications beyond gaming to broader fields such as media, entertainment, communications, and education.
MICROSOFT ACQUIRED HAVOK LAST YEAR
In line with its aim to dominate in the VR (virtual reality) space, Microsoft (MSFT) announced the acquisition of Havok in early October 2015. Havok develops 3D physics engines, which is the middleware used by game developers to create the physics for their games.
Havok’s popularity in the video games space can be gauged from the fact that all leading game developers have employed it, including Activision (ATVI), Electronic Arts (EA), Sony (SNE), and Japan’s (EWJ) Nintendo. Its products have become the de facto software for various popular games such as HALO, CALL OF DUTY, ASSASSIN’S CREED, DESTINY, DARK SOULS, AND THE ELDER SCROLLS.
MICROSOFT HAS ALSO STATED THAT IT IS LOOKING TO MAKE ITS VIRTUAL REALITY SOFTWARE, WINDOWS HOLOGRAPHIC, AVAILABLE TO HARDWARE AND SOFTWARE DEVELOPERS.
Microsoft’s blog stated, “FOR OUR PARTNERS, THIS CREATES NEW BUSINESS OPPORTUNITIES, UNLOCKING MIXED REALITY EXPERIENCES ACROSS DEVICES. For developers, Windows Holographic apps can be written today with confidence that they will run on the broadest set of devices.”
Source:
marketrealist.com/2016/06/is-virtual-reality-the-next-big-driver-in-the-gaming-space/
ZYNGA’S, CEO FRANK GIBEAU'S MENTION OF VR & AR IN MAY 2016 CONFERENCE CALL,
SEE BELOW:
Edited Transcript of ZNGA earnings conference call or presentation 4-May-16 9:00pm GMT
May 5, 2016 3:28 AM Thomson Reuters StreetEvents
•
Q1 2016 Zynga Inc Earnings Call
San Francisco May 5, 2016 (Thomson StreetEvents) -- Edited Transcript of Zynga Inc earnings conference call or presentation Wednesday, May 4, 2016 at 9:00:00pm GMT
TEXT version of Transcript
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Corporate Participants
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* Joo Mi Kim
Zynga Inc - Senior Director of Finance & IR
* Frank Gibeau
Zynga Inc - CEO
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Conference Call Participants
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* Brian Pitz
Jefferies & Company - Analyst
* Eric Sheridan
UBS - Analyst
* Chris Merwin
Barclays Capital - Analyst
* Colin Sebastian
Robert W. Baird & Company - Analyst
* Mike Hickey
The Benchmark Company - Analyst
* John Lanterman
Morgan Stanley - Analyst
* Arvind Bhatia
CRT Capital Group - Analyst
* Heath Terry
Goldman Sachs - Analyst
* Ben Schachter
Macquarie Research - Analyst
* Mike Olson
Piper Jaffray - Analyst
* Justin Post
BofA Merrill Lynch - Analyst
* Richard Greenfield
BTIG - Analyst
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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to Zynga's first-quarter 2016 results conference call.
(Operator Instructions)
As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference, Ms. Joo Mi Kim, Senior Director of Finance and Investor Relations. Ma'am, please go ahead.
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Joo Mi Kim, Zynga Inc - Senior Director of Finance & IR [2]
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Thank you, and welcome to Zynga's first-quarter earnings call. As you've seen, we published our Quarterly Earnings Letter on our investor website so that we can increase the time you have with Frank Gibeau, our Chief Executive Officer; and Michelle Quejado, our Interim Financial Officer, to answer questions. Shortly, we will open it up for live questions, interspersed as appropriate, with questions submitted to me in advance.
During the course of today's call, we will make forward-looking statements related to, among other things, our business plan, strategy and expectations for future performance, including our guidance for Q2, and our plans for our game slate and launches in 2016. Actual results may differ materially from the results predicted. Factors that could cause or contribute to such differences are detailed in our press release, Quarterly Earnings Letter, and under the caption Risk Factors in our Forms 10-Q and 10-K, and elsewhere in our SEC filings.
We will also discuss non-GAAP financial measures. Our Quarterly Earnings Letter, press release and the investor presentation on our website, and when filed, our 10-Q, will include a reconciliation of GAAP and non-GAAP financial measures. Be sure to look at these reconciliations, as the non-GAAP measures are not intended to be a substitute for GAAP results.
This conference call is being webcast on the Internet, and is available through Zynga's investor relations website. An audio replay of this call will also be available on our website in a few hours. Now I will turn the call over to Frank for his opening remarks.
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Frank Gibeau, Zynga Inc - CEO [3]
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Good afternoon, and thank you for joining us for Zynga's Q1 earnings call. Earlier today, we released our Quarterly Earnings Letter, which details our progress and performance over the last quarter. It's been a productive two months leading Zynga as CEO. Across the Company, I'm seeing our momentum and pace improve, as our teams continue their commitment to growing our established live franchises and demonstrating more cost and operating discipline. As a result, we delivered a strong Q1 and a good start to the year.
In terms of our Q1 performance, bookings were above the high end of our guidance range at $182 million. And adjusted EBITDA was above our range at $11 million. There were three key factors that drove the out-performance. First, in live game services, our teams executed well, with our core mobile franchises driving our performance in the quarter. Bookings are up 54% from last year, and up 5% sequentially.
Second, our mobile momentum continued, with mobile bookings now representing 76% of total bookings, and mobile audience up 7% sequentially. Apple is now our largest platform partner, surpassing Facebook in terms of online game bookings. Third, discipline cost control remains a focus for us. This past quarter, gross margins benefited from our migration to AWS, and operating margins were further boosted as operating expenses decreased as a percentage of bookings.
Before turning to guidance, I'd like to tell you more about where we want to take the Company. My priority is to bring Zynga's unique social gaming vision to life in our games, and lead our teams to deliver high-quality experiences for our players on time and profitably. In a competitive mobile market with increasing acquisition costs, our approach is to build games around social features and systems, to deliver a high-quality player experience with increased levels of engagement, organic acquisition, and long-term retention.
In order to deliver on that, we are building a world-class studio in innovative creative culture. In my experience, the best games in the world are made by small, complete teams with great chemistry, who build games in a predictable and profitable way. We will be aggressive in bringing in additional creative talent and leadership, while maintaining our financial discipline.
The biggest surprise to me since joining Zynga has been how much operating leverage we have across the Company that we are just starting to unlock. We need to do more to concentrate our best and brightest on our biggest ideas. There's an opportunity to create more rigorous and consistent development practices across our studios. That includes more focused green-light process, increasing cross-team collaboration to cut down on duplication, and rising the bar on RIO for our for new product starts and marketing spends. We believe that over the long term, there's no reason why Zynga's margins can't be more in line with its peers'.
An example of how we've unlocked this operating leverage in our live services is in our Words With Friends franchise. Words With Friends just had it highest Q1 bookings performance in six years, with mobile bookings up 60% year over year, driven by our Weekly Challenges bold beat. A key component of our Words With Friends live service strength is our advertising business. Overall, advertising and other bookings grew 42% year over year, generating $47 million in the quarter. We're confident that going forward, we can continue to grow our core live mobile franchises -- Slots, Words With Friends and Zynga Poker.
Turning to guidance, we expect Q2 bookings to be in the range of $160 million to $170 million. The majority of the sequential decline in bookings is due to legacy non-core mobile games and continued decline in web games. We expect adjusted EBITDA to be between breakeven and positive $5 million. The sequential decline in EBITDA is expected to be driven by the decrease in bookings, as we've are planning to hold non-GAAP operating expenses roughly flat.
Looking at our slate, we remain on track to launch 10 games this year. So far, we've launched four new games worldwide, and our remaining titles in our 2016 slate are all currently in soft launch with players.
For NaturalMotion, I'm pleased to announce that we will be launching CSR2 in early Q3, and Dawn of Titans in the Q4 holiday season. For Dawn of Titans, the feedback from soft launch is that our players are excited with the game's quality and production values. We plan to focus the remaining time in development to increase long-term player retention and optimize the game for live services, post-launch.
Going forward, we're prioritizing quality over quantity in terms of our title release schedule, because our goal is to deliver sustainable games that engage over the long term and drive growth across audience, bookings and EBITDA. Our success will be determined by the quality of the games delivered, rather than the number of games launched.
In closing, I believe that Zynga has all the ingredients needed for a successful turnaround, and it's well-underway. From our social vision to our proven brands and popular genres, to our mobile momentum and strong balance sheet, we're well-positioned to take advantage of the growing market around us. With that, I'd like to turn the call over to the operator and get started with questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Brian Pitz, Jefferies.
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Brian Pitz, Jefferies & Company - Analyst [2]
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Thanks for the questions. Frank, maybe you could outline your strategic vision for the Company and what may be different or change under your leadership? Also, maybe you could weave into there any additional comments on NaturalMotion, leveraging some of those other game engines or assets embedded in there.
And then finally, any thoughts on monetizing the San Francisco real estate asset? I know there was some talk in the papers a few months back, but I'd love to get your current take on that. Thanks.
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Frank Gibeau, Zynga Inc - CEO [3]
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Yes, thank you for the question. I'd like to start with the vision that we're looking at. As you look at Zynga as a Company, and where it was founded around the idea that it's more fun to play games with friends and family, and to build games around the notion that you create core loops and systems that create a social experience from the outset. That's a unique vision that I think is as relevant today on mobile as it was when it was originally brought to life in Facebook.
The founding principles of the Company are based on social gaming. And bringing that gaming vision to life in our products is really job one and what we are focused on in these early stages. What I bring to the table, I think, is over the last two years, I was running basically a mobile division at a company, and I'm steeped in what works and doesn't work in mobile. And bringing that insight and some of that experience to bear at the Zynga, I think can help accelerate the transition to mobile, and then start to grow the Company accordingly.
When I look at what we have inside the Company from an asset standpoint, we've got a collection of proven brands in very popular genres, we've got some talented studio teams and partner teams, an excellent balance sheet. But what we haven't really been doing a great job of, is operationally bringing those to life. As I walk around the Company, I see more great ideas on the whiteboards than anywhere else I've been. But my job is to get it off the whiteboards and into code, and to focus our efforts so that we can get into a place where the Company is really delivering on what it says it wants to do. And grow the KTIs that will make the Company something that increases value over time.
The second question about NaturalMotion, NATURALMOTION is an incredible collection of developers. THEY HAVE SOME AMAZING TECHNOLOGIES. And if you look at DAWN OF TITANS, it looks like a console game on your mobile device. IT'S A SPECTACULAR PIECE OF SOFTWARE. I THINK LONG TERM, NATURALMOTION HAS A LOT TO CONTRIBUTE TO ZYNGA, AS THE DEVICES IN THE MOBILE MARKET CONTINUE TO INCREASE IN POWER AND CAPABILITY, AND NEW TECHNOLOGIES COME ONLINE LIKE VR AND AR. I THINK THE KEY FOR NATURALMOTION IS REALLY DELIVERING ON CSR AND DAWN OF TITANS IN THE NEAR TERM, and getting a position for the long term so that Zynga overall benefits from the asset.
In terms of the building, it's a high-class problem. We have an asset here in San Francisco that we bought for a very good price, and it's gotten a lot more valuable over the years as San Francisco real estate market has become more vibrant. It's really an opportunist exploration, honestly. It's not much of a distraction for the Company or the teams, because we have plenty of cash on the balance sheet. It's really about -- is this a good time to investigate taking some of that value that we've created in the building, and taking it off the table and see if we could deploy it in a different way in capital allocation.
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Brian Pitz, Jefferies & Company - Analyst [4]
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Great. Thanks for the color.
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Operator [5]
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Eric Sheridan, UBS.
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Eric Sheridan, UBS - Analyst [6]
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Great, thanks for taking the question. I wanted to come back to some of the key titles for later this year -- CSR2, Dawn of Titans. Dawn of Titans, in particular, has been in beta for quite a while. What have you learned as those properties have made their way through geo-lock? What do you think you are hoping to accomplish before they go wider? And maybe some color how you think about supporting those properties with marketing spend in the back part of the year? Thank you very much.
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Frank Gibeau, Zynga Inc - CEO [7]
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When you look at CSR2 and Dawn of Titans, they're operating at the very highest ends of performance in the mobile marketplace. They really are pushing the envelope in terms of pretty graphics, production values and technologies. They've really carved out a position, I believe, in the marketplace, that stands out, that people really like.
And that's reflected in the feedback that we are getting from soft launch. Our fans are giving the games very high ratings. CSR2, in its current 11 test markets, is scoring about a 4.8 star level. Dawn of Titans is at a 4.6 level.
What's been critical for NaturalMotion in the soft launch periods, and what they've learned the most, has been about driving long-term engagement with our players, and understanding retention. Both games have very good levels, if not great, levels of monetization. The key is keeping the players in the games for long periods of time.
What I'm trying to drive at the Company is, get to a place where we have sustainable mobile games, games that don't get into the charge and then fall out, but actually get into the charge and stick. And I think that's the big difference-maker between the games that are succeeding in mobile and the games that are failing in mobile, is that they've solved for long-term engagement.
So as you look at the time that we've have between now and release around Dawn of Titans this holiday, our focus is really getting the games ready for live ops. There's a lot of things that Zynga has learned over the years about how to run live ops, that NaturalMotion is learning from, and that we're putting into place. And in addition, we're optimizing the player retention curves, and looking how we keep them engaged for as long as possible. It's pretty expensive to acquire customers in mobile, and so you want to have designs and systems that keep them engaged for very long time, so that you can hold onto them.
Both products will be supported by the Company. What I am excited about with Dawn of Titans in Q4 is, the holiday is a terrific time to really leverage a lot of the organic platforms and programs that we can put in place. A lot of new devices are brought to market in that timeframe too. I've had pretty good experience bringing games to market in the holidays, and so I'm excited to try and leverage that.
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Eric Sheridan, UBS - Analyst [8]
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Thank you.
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Joo Mi Kim, Zynga Inc - Senior Director of Finance & IR [9]
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Great. We're ready for our next question.
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Operator [10]
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Chris Merwin, Barclays.
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Chris Merwin, Barclays Capital - Analyst [11]
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Great, thank you. I just had a couple questions. Frank, you talked about the potential for operating leverage at Zynga and the long-term margin opportunity for this business. So just curious what you see as the biggest areas of savings, and if those savings can be achieved for the workforce at its current size?
And then just a second question on the advertising business, where you guys have showed some strong [will adam] for a while now. The question is, really, when you layer in ads, reward-based ads, how do you make sure they're not cannibalizing a potential payer? In other words, if someone gets another life by watching an ad, will they maybe not be inclined to pay in the future? So just curious how you're able to leverage your data asset to manage that? Thanks.
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Frank Gibeau, Zynga Inc - CEO [12]
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Sure, I will take the second question first, it that's all right. One of the things that was really impressive to me when I came to Zynga, was the quality, the aggressiveness and the effectiveness of the ad business here. And the team that runs that is very data-driven. They are constantly looking at how the ads are running in games. We have a robust set of rules about who see ads when. And we monitor that very carefully as we look at engagement and ratings about the game's quality, and engagement and retention curves.
So I'm very confident that the team has a good handle on that. And it's a combination of data-driven best practices, as well as just, frankly, always keeping in mind that advertising wants to be something that doesn't get in the way of the player experience, and is understood in the context of the overall game's service.
In terms of the first question, the operating leverage piece, I think across the board, we can get more yield out of what we've got. That's kind of job one for me, as I look at the Company. If you just take marketing spends, for example, I think that we need to raise expectations around what our ROIs are there. But I think we can get more leverage and we can open more channels by being more aggressive about looking at things internationally, looking at what our return on spends are, and increasing the capabilities in our user acquisition teams.
On the studio level, it's a great collection of game companies have come into Zynga over the years. And I think there's an opportunity to harmonize our text strategy, our tool strategy. I find that game teams are solving the same problems across the studio multiple times. And what I'd love to see is an innovation or a breakthrough that happens on one team be more easily shared across the whole enterprise, so that we benefit from that and we get more leverage. So as we start to put in place more rigorous and consistent development practices, combined with looking at enhancing our UA capabilities, I think we will get some really good leverage from those areas.
Another place that I think we will get leverage is, frankly, being more rigorous about what we green-light and start. A Company can only have so much talent. And I think there has been a tendency in Zynga's history to start too many projects and spread that talent too thinly. And so I think that there's a lot of opportunity for us to concentrate our efforts and our focus around the, frankly, the businesses that are really showing growth, have momentum. And get out of businesses that don't have that opportunity or don't have that ultimate goal, much sooner in development.
So again, you heard me talk a little bit earlier about the Words With Friends example, but that game team doubling down on a bold beat around the weekly challenges had a profound impact on how the live services were going. And that was a business we already had scale in, we already had a large audience. We were able to use that development to re-acquire users and bring them back into Words With Friends in a very efficient way and in a very leveraged way. And I see examples of that in our Social Casino business. And we are starting to do that more in our Ville business. So across the board, I see a lot of leverage opportunities.
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Chris Merwin, Barclays Capital - Analyst [13]
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All right, great, thank you.
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Operator [14]
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Colin Sebastian, Robert Baird.
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Colin Sebastian, Robert W. Baird & Company - Analyst [15]
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Okay, great, thanks. A couple of follow-ups to two other questions. I guess first off, on the operating leverage commentary, Frank, from the Letter, in marketing expense, can you talk about how much of that is making better use of the overall network of users that you have? And if you are also reallocating spend to better-performing channels, what are those?
And then on the advertising revenue portion, obviously very good growth there. I wonder if you could identify how much of that is related to sponsored play versus the partnership with Rubicon or the legacy ad business? Thank you.
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Frank Gibeau, Zynga Inc - CEO [16]
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The question regarding UA efficiencies, I think there are some very innovative new channels that we're looking at, that we are starting to open up. And the team has -- I think there's probably 120 channels, when I look at UA, that have the opportunity to get leverage. I'd have to say we're probably only in 25 to 30 of those. So we can expand the number of channels that we're going after aggressively.
I think it's also related to upgrading and enhancing the technology that we have around cross-promotion and network. I think we have a very robust and highly engaged network of users. But the way that we get the right message to the right customer at the right time, I think has a lot of opportunity to be enhanced. We do a pretty good job there, but there's a lot more work that we can do.
I think there's also role of product development in that respect. If you look at the Match-3 strategy that we have as the Company, it's really about looking at what's happening inside of our Social Casino games, our Slots games, where, when you talk to those players, the next most likely game for them to play is a Match-3 game. And so we want to build on that relationship that we have with that player by being able to -- and keep them in the Zynga ecosystem by giving them the opportunity to play Match-3 game with the same brand, whether it's the Wizard of Oz, or even maybe it's a new brand, like Crazy Cake Swaps.
It's a combination of adding additional channels to our UA. It's about also doing a little bit more product development in the affinity adjacency areas that I discussed. And then when we look at advertising, the Rubicon sponsorship stuff hasn't had a significant impact on the overall flow of the business. It's really much more traditional ad products, some direct ad selling, and some other things. But the team is showing me a list of new ad products that they're investigating, that they are looking at, I'm really impressed with what we can do there.
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Colin Sebastian, Robert W. Baird & Company - Analyst [17]
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Thank you.
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Operator [18]
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Mike Hickey, The Benchmark.
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Mike Hickey, The Benchmark Company - Analyst [19]
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Hey, Frank, welcome, and congratulations on your first quarter here. Good start. Curious -- you obviously have a good slate through FY16, most of which, if not all, are in beta. You've also provided us some more clarity, I guess, on expectation at least, for when these products are actually going to launch. So thinking about Q2 relative to your fiscal year, obviously we don't have fiscal year guidance. But can we expect Q2 bookings to EBITDA, at least relative your guidance, to be the low point for your FY16 year?
And then second question, I'm not sure if this is in the letter or not, but can you update us your perspective on the M&A opportunities moving forward? Thank you.
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Frank Gibeau, Zynga Inc - CEO [20]
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Sure. I'll take the second question first. With regards to M&A, I will just come out clearly on this -- I'm not interested in big M&A. I think that Zynga is the type of Company and has a proven track record for buying small companies and small developers that tuck in nicely to the studio culture and infrastructure. That's where I'd like to go in terms of M&A. It's absolutely a great opportunity for us to look for great game teams that would fit with our culture and our mission.
And we're seeing opportunities like that in the marketplace, As some of these consolidation forces start to hit mobile and some of the smaller companies start to feel some pain, we're seeing a nice inflow of talent and opportunities on that front. But in general, we're going to stay away from the big M&A activities.
On the bookings and guidance front, I'm 60 days in, and I'm trying to get a handle on, frankly, how we think about the Company over the next three years, not the next three quarters. And as I look at Q2 and what we are working through there on the legacy mobile games, and also the web business, I felt good about where we were coming out on guidance there. I think that as we look at Q3 and you look at how the slate unfolds, yes, we would like to see better performance in Q3 and Q4. But it's hard for me right now to give any forward look there, just given where I'm 60 days in, and I'm still looking at how all these pieces fit together.
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Mike Hickey, The Benchmark Company - Analyst [21]
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All right, fair enough. Thanks, Frank.
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Operator [22]
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Dean Prissman, Morgan Stanley.
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John Lanterman, Morgan Stanley - Analyst [23]
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Hi, this is actually John Lanterman in for Dean. Just a question on advertising. Obviously a very strong quarter for you guys. It sounds like it's still predominately driven by Words With Friends. We know you have advertising in some of your other games, so why has it not worked out so well in these other games? Is this just a function of the installed base and Words With Friends is just so much larger? Or is there some kind of trade-off between different monetization methods, between purchases and advertising? Thanks.
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Frank Gibeau, Zynga Inc - CEO [24]
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It's a function of a couple things. First off, Words With Friends is just a very large audience. It's monetized, and it really -- the design of the game lends itself to ad products. As you look at some of our other games, for one reason or another, we have strong performing advertising, and then we don't in others. So one of the things that I'm looking at right now is our overall ad network and inventory across the enterprise -- are there ways that we can enhance and optimize that going forward.
So it's something that we're definitely looking at. I don't think we are at a definitive point where inventory won't be able to be increased when the effectiveness a new ad products have come to bear. So our goal is to continue to look at ways to bring the ad model to more of our games. Because it's a great way to monetize in a free-to-play world, where relatively low percentages of your players are converting to in-app purchases.
There's also a lot of traffic there that are more than willing to look at advertising or be able to have -- see an ad, get a batch of coins, or a particular earn-out. So we're seeing those kind of earn-out ads as something that's interesting to us longer term. So I that's our thinking about it.
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John Lanterman, Morgan Stanley - Analyst [25]
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Thank you.
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Operator [26]
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Arvind Bhatia, CRT Capital.
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Arvind Bhatia, CRT Capital Group - Analyst [27]
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Thank you. Frank, just a couple of questions. First, on the discussion that you're going to be focusing on quantity versus quality, can you give us some early sense of how you are thinking about for 2017? And you were saying that there are going to be fewer titles, but just to help us understand where we're going with that.
And then as you think about the long-term margins -- and I appreciate the color on that -- but can -- when you think about the peers out there, it runs the gamut, and margins obviously can be very high. Maybe provide us some more commentary on what's a good level to sort of shoot for, say, over the three-year horizon that you are targeting?
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Frank Gibeau, Zynga Inc - CEO [28]
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Okay. Let me start with the 2017 slate discussion. One of the things that was -- what we attacked first as we started working together a couple months ago, as a Board member now, as CEO, is, I wanted to accelerate the development of our 2017 slate earlier in 2016, so that we had a much more predictable title plan in 2017. That also meant that we could keep the teams smaller over a longer period of time, which is where I believe you get the best games.
So I'm not prepared right now to give you a sense of how many titles that we're going to be able to release in 2017. I can tell you that we've begun a lot of work on our 2017 slate. And one of the key decision points on whether we are ready to commit to a game in 2017, is whether or not the game can demonstrate that it has long-term engagement. And so that when we do put the game out, that it goes into the charge, and it's sustains.
As I talked earlier about dev practices and how we're thinking about green lights for 2017, those are the criteria that we're looking at. And I can tell you that we're starting earlier on our 2017 games than ever before, and that's very exciting. And the teams are finding that, that freedom and time to be able to innovate and focus is well-spent.
In terms of the margins and the peer set -- when I say peer set, I'm thinking King, I'm thinking Activision, I'm thinking YEA, I'm thinking Nexon. We're here to get into that conversation. I've been on a journey where we've experienced those in other parts of my career, and I think it can be done here. It's a combination of really breakthrough creative ideas that manifest themselves in games. It's about making the social competitive advantage come to life in our products.
And it's also being a really good steward of the resources and people that we have, and making sure that we're maximizing leverage. It means that we are going to focus on the biggest ideas that we have and go all-in on them, but we're not going to have a million ideas. And keep our focus much more narrow, and much more oriented to creating that operating leverage over the long term.
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Arvind Bhatia, CRT Capital Group - Analyst [29]
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One last one, Frank. On Dawn of Titans, given the competition of the genre -- and you touched on it a little bit from a marketing standpoint. Is there -- would you like to call out maybe, or maybe quantify some of the marketing resources you'll be putting in place ahead of that maybe in Q3, and then as the game launches in Q4?
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Frank Gibeau, Zynga Inc - CEO [30]
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Yes, the category that it competes in is Action Strategy, which is a competitively intense category, with some fantastic products from Supercell and Machine Zone and some of the others. The key thing is that Dawn of Titans is very differentiated versus those. It really stands out. It's positioning itself to really have a high-end look and feel. It's almost a console game on your mobile device.
So I feel good about how it will stand out in the marketing. And I think it has a unique position that will serve itself well, as mobile game players are looking for something new at Christmas, or want to try something. It makes an incredible first impression. So when I look at the release at holiday, we're really focused right now on trying to drive marketing programs that deliver great organic installs, and gives us a great momentum out of the chute. And then look at how we can use very selective and very surgical paid acquisition over that timeframe.
One of the great things about holidays is, there's a lot of organic acquisition opportunities, if you get ahead of it and you can start to go after it. But we will look at the full marketing mix available to mobile games. And the focus right now in this early part of summer is nailing the organic programs, and then starting to get in position for the paid [app] for later.
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Arvind Bhatia, CRT Capital Group - Analyst [31]
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Great. Thank you, Frank, and good luck.
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Frank Gibeau, Zynga Inc - CEO [32]
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Thank you.
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Operator [33]
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Heath Terry, Goldman Sachs.
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Heath Terry, Goldman Sachs - Analyst [34]
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Great, thanks, I really appreciate that. Just wondering if you could give us a sense -- I do want to follow up on this marketing question, given the importance of Dawn of Titans later this year. Should we expect sort of a similar television-focused campaign there? You mentioned specifically in your prepared remarks the organic opportunities that obviously come from the network that you have. But just sort of curious whether or not there's going to be a similar-sized outside-of-network campaign along the lines of what you see in for other big launch titles at this level?
And then also on the advertising side, to the extent that you've started using third-party partners like Rubicon, is there any sort of early read on what the either effective CPMs or monetization rates that you are able to see through third parties, relative to what you were doing on your own?
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Frank Gibeau, Zynga Inc - CEO [35]
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Great. On the first part, when I think about how we're going to bring Dawn of Titans to market, we really want to engineer a hit. And we want to make sure that we give that product its maximum opportunity to reach the biggest audience possible. If that includes TV, then we will evaluate it and we will look at the ROI.
I think the larger point I would make in the context of that is, we're going to make commitments to driving, over the long-term, much better margin performance for this Company on an operating level. And that means that we need to be very clear about how we spend our marketing dollars, and that we get the most out of them. I do not want to be in this arms race of ever-increasing marketing spends. Because I don't necessarily believe that's the right thing to do for this Company.
We should spend to the level that we believe we can nail our objectives, and then look at very creative opportunities. But in general, sometimes we're just going to have to say no to some marketing spends. And we're going to have to be clever about how do we generate that demand in another way, whether it's through network, whether it's through designing the games so that we don't lose the customers as quickly or we don't have to re-acquire them. There's other ways to try and deal with this issue that I'm trying to challenge the Company and myself with, because I don't believe increasing marketing over the long term is going to be a smart strategy for us.
If television makes sense and we get strong ROIs, no problem. We'll go for it. I've done a lot of television campaigns in my career. And we'll use that tactic that makes sense. But in general, it's going to be keeping in mind that we need to maintain cost discipline and how we're going to market, in addition to the effectiveness of the campaigns that we're putting together.
On the advertising front, it's a little too early to tell on third party versus direct sales, on the internal team. That's something that we can update over time. But I would hesitate to give any updates right now, because I think it's too early to tell.
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Heath Terry, Goldman Sachs - Analyst [36]
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Okay, great. Thank you.
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Operator [37]
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Ben Schachter, Macquarie.
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Ben Schachter, Macquarie Research - Analyst [38]
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Frank, what is it about mobile gaming that allows so many of the top-grossing titles to stay there for such a long time? And then separately, any chance you will move beyond mobile and reposition the content onto console, or go back to PC gaming in any other way? And then final last one is just on ad revenue. As a percentage of revenue, how should we be thinking about that for 2Q 2016 and longer term? Thanks.
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Frank Gibeau, Zynga Inc - CEO [39]
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What I think is separating games -- I think there's something like 400,000 mobile games released a year. And there's probably 100 that matter, and 20 that really matter, in terms of their performance. Now you can run very successful businesses in the charts that are below 20, but in general, you want to be in that conversation.
What separates those games from everybody else is, I believe, long-term retention, and having an engaging relationship with the player over their whole player lifecycle. Not just day one through 30, but day 365. And having a core compulsion loop of the game that's surrounded by systems that allow you to give the player different things to do over that long period of time, across different session links.
Whether the session is an hour long or two minutes long, the games that are doing well at the top of the charts respect that player's time and gives them something really cool to do in those different session links. For me, it starts with long-term engagement. Now, of course there's things related to that. But in general, that would be the headline there.
In terms of expanding outside of mobile, it's not something I'm giving a lot of thought to right now, honestly. I think we have so much room to grow in the near term in mobile against our existing proven brands and categories, that we will think about it more long term as we start getting our momentum and start putting points on the board, in terms of the Company.
In terms of ad revenue and guidance in terms of the second quarter, I think it's -- I wouldn't consider it up or down, based on what our Q1 performance is. I think you can think of it generally in terms of, it's flat, quarter over quarter. It's seasonal coming off of holiday. Obviously holiday is a big boon for us. And then we saw, it actually -- the ad market continued pretty strong into Q1. But seasonally, Q2 and Q1 are usually flat.
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Operator [40]
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Mike Olson, Piper Jaffray.
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Mike Olson, Piper Jaffray - Analyst [41]
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Hey, good afternoon. So you described some of the categories that drove upside, but can you say which specific games in the quarter exceeded expectations? Or was primarily Words With Friends and then some of the Slots games? And then secondly, it looks like you finished up the remaining amount on your $200 million share repurchase authorization in the quarter. Is there any remaining share repurchase authorization currently, or no?
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Frank Gibeau, Zynga Inc - CEO [42]
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The titles in the quarter that really drove performance on the live services level was our Social Casino Slots business, Poker, and Words With Friends. In addition to that, FarmVille: Country Escape had a very nice first quarter. Those were the standout titles there. In terms of looking at the buyback, we completed the buyback that was authorized earlier in the year. And as it relates to go-forward, there are no additional buybacks authorized at this time.
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Mike Olson, Piper Jaffray - Analyst [43]
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Thank you.
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Operator [44]
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Justin Post, Merrill Lynch.
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Justin Post, BofA Merrill Lynch - Analyst [45]
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Thank you. Frank, I don't know if you addressed this, but you did see mobile users uptick quarter over quarter, after a few quarters of declines. Maybe talk a little bit about that? And then how do you feel about that monetization of users? Do you still have a lot of room there, or are you doing a good job -- is the Company doing a good job monetizing the users that you have? Thank you.
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Frank Gibeau, Zynga Inc - CEO [46]
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Yes, we did see an uptake in our mobile users quarter over quarter, which was very encouraging. I think that's a function of the focus that Mark brought to the Company when he came back earlier in the year, to really start to drive and prioritize our live services performance, and then as we accelerated it over the last few months.
The bold beats is how we think about it. A live game that's operating has a highly engaged, large audience. And we need to put more development dollars and talent against creating big title updates and bold beats that re-engages and drives things, like the number of moves per player, session lengths. Those are the things where I see a lot more yield opportunities inside the Company, where we're treating our live services as important, or more important, than some of our new releases. Especially in our business where we have a lot of scale and momentum, like Slots, Words With Friends, and Poker.
So very encouraging to see that we are now back in the business of trying to grow audience. That's going to be, long term, a really important thing for me, is to make sure that we are making the moves and making the investments to grow our audience over the long term.
In terms of monetization POV, I think that when we convert somebody to a payer, we do pretty well relative to the competition, what I know is best practice. But I do think you can always improve. The key is to make sure that you are really giving the player value, and that they feel like: oh, wait, I just didn't buy something. They feel like they've extended their experience.
So it's a bit of art and science, and I think that we're playing at a pretty good level. But you can incrementally improve, but you've got be very careful that you don't overdo it. Because what you'll do is, you will drive those customers out of your service, and those players will move onto something else. And then you will have to re-acquire them much more expensively, or you lost them. So it's definitely an art form, and it's something that we take pretty seriously.
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Justin Post, BofA Merrill Lynch - Analyst [47]
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Thank you.
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Operator [48]
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Richard Greenfield, BTIG.
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Richard Greenfield, BTIG - Analyst [49]
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Hi. Thanks for taking the question. I wanted to come back to trying to get at what kind of the organic part of the business is. Because you've obviously got the sustaining games that obviously you have to invest in, and then all of your growth initiatives.
I haven't seen your new employee count in your queue, but as of the end of last year, you had roughly 1,700 employees, which I think is down over 1,000 over the last few years. And I'm wondering, out of that 1,700, how many of those people do you actually need to run all of the existing games that are generating revenue over the --? If you look at it right now, how many people of the 1,700 are generating current steady-state revenue that you're generating?
And how many are all focused on all of the new game initiatives that the Company has, as you think about your 2017 slate and beyond? And how much actual -- if you took away those incremental employees, or the incremental investment, how much EBITDA or earnings would Zynga actually be generating now, if it just focused on what it was already executing on?
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Frank Gibeau, Zynga Inc - CEO [50]
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It's a great question. And it points to some of the things that I have highlighted in how we're going to get more yield out of what we've got. It comes down to looking at the deployment of the teams and the talent inside the organization. And frankly, putting them into places where they can have the most impact and can have a fantastic experience at Zynga.
I don't disagree with you, with what you are raising. And in fact, I'm thinking about that as we're looking at our deployments, and as we are starting to put in place our investment strategy on a go-forward basis. But that certainly is something that we would look at. Because the yield off of the live services at scale is extremely high. They're very good businesses.
What we can't do, though, is take all that goodness and let it go to the winds by over-deploying and over-committing to too many other things that take too long or don't come to market. Or frankly, shouldn't have been started in the first place. So that's how we think about it.
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Richard Greenfield, BTIG - Analyst [51]
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Is it a couple hundred million dollars at least, of profitability, on the EBITDA line?
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Frank Gibeau, Zynga Inc - CEO [52]
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On my first earnings call, I think it would be foolish for me to answer that question. So I will have to answer it over the course of my career at Zynga.
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Richard Greenfield, BTIG - Analyst [53]
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Fair enough.
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Joo Mi Kim, Zynga Inc - Senior Director of Finance & IR [54]
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Great. That was our last question. Thanks, everyone, for joining us today. We appreciate your interest in Zynga, and we look forward to speaking with you soon.
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Operator [55]
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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.
Source:
http://finance.yahoo.com/news/edited-transcript-znga-earnings-conference-072825174.html
Audio of Above Transcript,
CEO FRANK GIBEAU speaks of VR, AR, & NaturalMotion approx. @ 10:25 minutes into Audio listen below:
Source:
http://seekingalpha.com/article/3971102-zynga-znga-q1-2016-results-earnings-call-webcast?part=single
AR = augmented reality,
a technology that superimposes a computer-generated image on a user's view of the real world, thus providing a composite view.
IS VIRTUAL REALITY THE NEXT BIG DRIVER IN THE GAMING SPACE?
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
WHAT IS VIRTUAL REALITY GAMING?
IN VIRTUAL REALITY (OR VR) GAMING, PLAYERS CAN EXPERIENCE A 3D ENVIRONMENT AND INTERACT WITH THAT ENVIRONMENT THROUGHOUT THE DURATION OF THE GAME. A RESEARCH REPORT FROM FORRESTER ESTIMATES THAT 52 MILLION VR DISPLAYS WILL BE USED BY CUSTOMERS and enterprises by 2020.
ACTION AND SPORTS GENRES DOMINATE THE VIDEO GAMING SPACE
BY ADAM ROGERS | JUN 6, 2016 5:30 PM EDT
SHOOTER AND ACTION GAMES ACCOUNT FOR 45% OF TOTAL VIDEO GAME SALES…
VIDEO GAMERS CROSS ALL AGE GROUPS IN THE US
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
29% OF VIDEO GAMERS ARE BETWEEN 18-35 YEARS
According to the Entertainment Software Association (or ESA), 29% OF ALL VIDEO GAME USERS ARE BETWEEN 18–35 YEARS OF AGE, whereas 27% OF PLAYERS ARE BELOW THE AGE OF 18. A surprising number—26% OF GAMERS—ARE ABOVE THE AGE OF 50, while the remaining 18% LIE BETWEEN AGES OF 36 AND 49 YEARS…
HOW IS THE DIGITAL GAMING MARKET GROWING?
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
Mobile gaming to reach $52.5 billion by 2019
ACCORDING TO A RESEARCH REPORT BY NEWZOO, THE GLOBAL GAMING MARKET SHOULD REACH $99.6 BILLION IN REVENUES FOR 2016. This indicates a growth of 8.5% YoY (year-over-year) compared to 2015.
Digital Revenues: Key to EA’s and Activision’s Long-Term Growth
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
Focus on recurring digital revenue streams
Electronic Arts (EA) was previously a hits-driven business. This means that if a game was one of the top games launched, the firm would benefit greatly in that particular period, but it would also suffer financially if it didn’t become a hit. Gamers usually play a game for six to eight weeks and then move on to the next available game on the market.
…Massive move toward the consumption of digital products
Like other product categories, the gaming space has also seen a transition toward digitalization. In November 2015, Activision Blizzard (ATVI) announced the signing of a definitive agreement with King Digital Entertainment (KING), a major player in the online gaming sector. ZYNGA (ZNGA) also HAS A STRONG ONLINE PRESENCE.
Electronic Arts (EA) wants to create a business model in which users engage more with something they find interesting. Online sports games are popular as users enjoy creating fantasy teams, allowing them to compete online and against friends.
GROWTH OF E-SPORTS A KEY DRIVER FOR THE GAMING INDUSTRY
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
THE E-SPORTS MARKET EXPECTED TO REACH $1 BILLION
ACCORDING TO SUPERDATA RESEARCH, THE TOTAL GLOBAL E-SPORTS MARKET WAS VALUED AT $748 MILLION AT THE END OF 2015. Its YoY (year-over-year) revenue growth is driven by an increase in advertising as well as more brands entering the segment.
THE GLOBAL E-SPORTS MARKET IS EXPECTED TO REACH $1 BILLION IN 2017.
Betting and fantasy sites are attracting investments
Platforms such as e-sports betting and fantasy sites have attracted investments of more than $150 million. Revenues earned in 2015 are expected to be $56 million. According to SuperData, “Fans remain more comfortable wagering virtual gaming content over cash, causing real-money sites to gain traction slower than anticipated.”
APPROXIMATELY ONE-THIRD OF THE E-SPORTS FANS IN THE UNITED STATES (SPY) PARTICIPATE IN ONLINE AMATEUR TOURNAMENTS. As the number of players increases, the number of sites has also increased, leading to saturation in the e-sports market. THE NEXT BIG THING IN THIS MARKET IS EXPECTED TO BE THE MOBILE E-SPORTS SPACE, WHERE AUDIENCES HAVE INCREASED BY 19% YOY IN THE US.
MARKET POTENTIAL
Because there is immense potential in this segment…
IS VIRTUAL REALITY THE NEXT BIG DRIVER IN THE GAMING SPACE?
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
WHAT IS VIRTUAL REALITY GAMING?
IN VIRTUAL REALITY (OR VR) GAMING, PLAYERS CAN EXPERIENCE A 3D ENVIRONMENT AND INTERACT WITH THAT ENVIRONMENT THROUGHOUT THE DURATION OF THE GAME. A RESEARCH REPORT FROM FORRESTER ESTIMATES THAT 52 MILLION VR DISPLAYS WILL BE USED BY CUSTOMERS and enterprises by 2020.
VIRTUAL REALITY TECHNOLOGY IS EXPECTED TO BE THE NEXT STEP IN GAMING INNOVATION. AT THE E3 2015 LIVE STREAMS AND PRESS CONFERENCE IN JULY 2015, FACEBOOK (FB) AND MICROSOFT (MSFT) ANNOUNCED THE COMBINATION OF FACEBOOK’S OCULUS RIFT AND MICROSOFT’S XBOX ONE.
This clearly indicates Facebook’s and Microsoft’s growing interest in the virtual and augmented reality space, the latest innovation in the gaming world. The leading players in the gaming space are Microsoft’s Xbox One and Japan-based (EWJ) Sony’s (SNE) Nintendo (NTDOY).
THE VIRTUAL REALITY MARKET EXPECTED TO REACH $5.2 BILLION BY 2018
ACCORDING TO A KZEROWORLDSWIDE REPORT, and as the chart above shows, the consumer VR market is expected to total $5.2 billion by 2018.
TECHNOLOGY FIRM NVIDIA (NVDA) ALSO USES ITS PLATFORM AND NETWORK APPROACH AND LEVERAGE AND SCALE APPROACH IN THE GAMING SECTOR. The company is tapping the opportunity for advanced technology brought by the upgraded gaming consoles such as Sony’s PlayStation 4, gaming content such as mods, and VR.
WHY ARE FACEBOOK AND MICROSOFT EYEING THE VIRTUAL REALITY SPACE?
BY ADAM ROGERS | JUN 6, 2016 5:31 PM EDT
FACEBOOK ACQUIRED OCULUS IN 2014
In March 2014, Facebook (FB) acquired Oculus, the leader in immersive virtual reality technology. Oculus has built a strong interest among developers.
According to a press release from Facebook, the company plans to expand the Oculus Rift headset’s applications beyond gaming to broader fields such as media, entertainment, communications, and education.
MICROSOFT ACQUIRED HAVOK LAST YEAR
In line with its aim to dominate in the VR (virtual reality) space, Microsoft (MSFT) announced the acquisition of Havok in early October 2015. Havok develops 3D physics engines, which is the middleware used by game developers to create the physics for their games.
Havok’s popularity in the video games space can be gauged from the fact that all leading game developers have employed it, including Activision (ATVI), Electronic Arts (EA), Sony (SNE), and Japan’s (EWJ) Nintendo. Its products have become the de facto software for various popular games such as HALO, CALL OF DUTY, ASSASSIN’S CREED, DESTINY, DARK SOULS, AND THE ELDER SCROLLS.
MICROSOFT HAS ALSO STATED THAT IT IS LOOKING TO MAKE ITS VIRTUAL REALITY SOFTWARE, WINDOWS HOLOGRAPHIC, AVAILABLE TO HARDWARE AND SOFTWARE DEVELOPERS.
Microsoft’s blog stated, “FOR OUR PARTNERS, THIS CREATES NEW BUSINESS OPPORTUNITIES, UNLOCKING MIXED REALITY EXPERIENCES ACROSS DEVICES. For developers, Windows Holographic apps can be written today with confidence that they will run on the broadest set of devices.”
Source:
marketrealist.com/2016/06/is-virtual-reality-the-next-big-driver-in-the-gaming-space/
ZYNGA’S, CEO FRANK GIBEAU'S MENTION OF VR & AR IN MAY 2016 CONFERENCE CALL,
SEE BELOW:
Edited Transcript of ZNGA earnings conference call or presentation 4-May-16 9:00pm GMT
May 5, 2016 3:28 AM Thomson Reuters StreetEvents
•
Q1 2016 Zynga Inc Earnings Call
San Francisco May 5, 2016 (Thomson StreetEvents) -- Edited Transcript of Zynga Inc earnings conference call or presentation Wednesday, May 4, 2016 at 9:00:00pm GMT
TEXT version of Transcript
================================================================================
Corporate Participants
================================================================================
* Joo Mi Kim
Zynga Inc - Senior Director of Finance & IR
* Frank Gibeau
Zynga Inc - CEO
================================================================================
Conference Call Participants
================================================================================
* Brian Pitz
Jefferies & Company - Analyst
* Eric Sheridan
UBS - Analyst
* Chris Merwin
Barclays Capital - Analyst
* Colin Sebastian
Robert W. Baird & Company - Analyst
* Mike Hickey
The Benchmark Company - Analyst
* John Lanterman
Morgan Stanley - Analyst
* Arvind Bhatia
CRT Capital Group - Analyst
* Heath Terry
Goldman Sachs - Analyst
* Ben Schachter
Macquarie Research - Analyst
* Mike Olson
Piper Jaffray - Analyst
* Justin Post
BofA Merrill Lynch - Analyst
* Richard Greenfield
BTIG - Analyst
================================================================================
Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to Zynga's first-quarter 2016 results conference call.
(Operator Instructions)
As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference, Ms. Joo Mi Kim, Senior Director of Finance and Investor Relations. Ma'am, please go ahead.
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Joo Mi Kim, Zynga Inc - Senior Director of Finance & IR [2]
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Thank you, and welcome to Zynga's first-quarter earnings call. As you've seen, we published our Quarterly Earnings Letter on our investor website so that we can increase the time you have with Frank Gibeau, our Chief Executive Officer; and Michelle Quejado, our Interim Financial Officer, to answer questions. Shortly, we will open it up for live questions, interspersed as appropriate, with questions submitted to me in advance.
During the course of today's call, we will make forward-looking statements related to, among other things, our business plan, strategy and expectations for future performance, including our guidance for Q2, and our plans for our game slate and launches in 2016. Actual results may differ materially from the results predicted. Factors that could cause or contribute to such differences are detailed in our press release, Quarterly Earnings Letter, and under the caption Risk Factors in our Forms 10-Q and 10-K, and elsewhere in our SEC filings.
We will also discuss non-GAAP financial measures. Our Quarterly Earnings Letter, press release and the investor presentation on our website, and when filed, our 10-Q, will include a reconciliation of GAAP and non-GAAP financial measures. Be sure to look at these reconciliations, as the non-GAAP measures are not intended to be a substitute for GAAP results.
This conference call is being webcast on the Internet, and is available through Zynga's investor relations website. An audio replay of this call will also be available on our website in a few hours. Now I will turn the call over to Frank for his opening remarks.
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Frank Gibeau, Zynga Inc - CEO [3]
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Good afternoon, and thank you for joining us for Zynga's Q1 earnings call. Earlier today, we released our Quarterly Earnings Letter, which details our progress and performance over the last quarter. It's been a productive two months leading Zynga as CEO. Across the Company, I'm seeing our momentum and pace improve, as our teams continue their commitment to growing our established live franchises and demonstrating more cost and operating discipline. As a result, we delivered a strong Q1 and a good start to the year.
In terms of our Q1 performance, bookings were above the high end of our guidance range at $182 million. And adjusted EBITDA was above our range at $11 million. There were three key factors that drove the out-performance. First, in live game services, our teams executed well, with our core mobile franchises driving our performance in the quarter. Bookings are up 54% from last year, and up 5% sequentially.
Second, our mobile momentum continued, with mobile bookings now representing 76% of total bookings, and mobile audience up 7% sequentially. Apple is now our largest platform partner, surpassing Facebook in terms of online game bookings. Third, discipline cost control remains a focus for us. This past quarter, gross margins benefited from our migration to AWS, and operating margins were further boosted as operating expenses decreased as a percentage of bookings.
Before turning to guidance, I'd like to tell you more about where we want to take the Company. My priority is to bring Zynga's unique social gaming vision to life in our games, and lead our teams to deliver high-quality experiences for our players on time and profitably. In a competitive mobile market with increasing acquisition costs, our approach is to build games around social features and systems, to deliver a high-quality player experience with increased levels of engagement, organic acquisition, and long-term retention.
In order to deliver on that, we are building a world-class studio in innovative creative culture. In my experience, the best games in the world are made by small, complete teams with great chemistry, who build games in a predictable and profitable way. We will be aggressive in bringing in additional creative talent and leadership, while maintaining our financial discipline.
The biggest surprise to me since joining Zynga has been how much operating leverage we have across the Company that we are just starting to unlock. We need to do more to concentrate our best and brightest on our biggest ideas. There's an opportunity to create more rigorous and consistent development practices across our studios. That includes more focused green-light process, increasing cross-team collaboration to cut down on duplication, and rising the bar on RIO for our for new product starts and marketing spends. We believe that over the long term, there's no reason why Zynga's margins can't be more in line with its peers'.
An example of how we've unlocked this operating leverage in our live services is in our Words With Friends franchise. Words With Friends just had it highest Q1 bookings performance in six years, with mobile bookings up 60% year over year, driven by our Weekly Challenges bold beat. A key component of our Words With Friends live service strength is our advertising business. Overall, advertising and other bookings grew 42% year over year, generating $47 million in the quarter. We're confident that going forward, we can continue to grow our core live mobile franchises -- Slots, Words With Friends and Zynga Poker.
Turning to guidance, we expect Q2 bookings to be in the range of $160 million to $170 million. The majority of the sequential decline in bookings is due to legacy non-core mobile games and continued decline in web games. We expect adjusted EBITDA to be between breakeven and positive $5 million. The sequential decline in EBITDA is expected to be driven by the decrease in bookings, as we've are planning to hold non-GAAP operating expenses roughly flat.
Looking at our slate, we remain on track to launch 10 games this year. So far, we've launched four new games worldwide, and our remaining titles in our 2016 slate are all currently in soft launch with players.
For NaturalMotion, I'm pleased to announce that we will be launching CSR2 in early Q3, and Dawn of Titans in the Q4 holiday season. For Dawn of Titans, the feedback from soft launch is that our players are excited with the game's quality and production values. We plan to focus the remaining time in development to increase long-term player retention and optimize the game for live services, post-launch.
Going forward, we're prioritizing quality over quantity in terms of our title release schedule, because our goal is to deliver sustainable games that engage over the long term and drive growth across audience, bookings and EBITDA. Our success will be determined by the quality of the games delivered, rather than the number of games launched.
In closing, I believe that Zynga has all the ingredients needed for a successful turnaround, and it's well-underway. From our social vision to our proven brands and popular genres, to our mobile momentum and strong balance sheet, we're well-positioned to take advantage of the growing market around us. With that, I'd like to turn the call over to the operator and get started with questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Brian Pitz, Jefferies.
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Brian Pitz, Jefferies & Company - Analyst [2]
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Thanks for the questions. Frank, maybe you could outline your strategic vision for the Company and what may be different or change under your leadership? Also, maybe you could weave into there any additional comments on NaturalMotion, leveraging some of those other game engines or assets embedded in there.
And then finally, any thoughts on monetizing the San Francisco real estate asset? I know there was some talk in the papers a few months back, but I'd love to get your current take on that. Thanks.
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Frank Gibeau, Zynga Inc - CEO [3]
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Yes, thank you for the question. I'd like to start with the vision that we're looking at. As you look at Zynga as a Company, and where it was founded around the idea that it's more fun to play games with friends and family, and to build games around the notion that you create core loops and systems that create a social experience from the outset. That's a unique vision that I think is as relevant today on mobile as it was when it was originally brought to life in Facebook.
The founding principles of the Company are based on social gaming. And bringing that gaming vision to life in our products is really job one and what we are focused on in these early stages. What I bring to the table, I think, is over the last two years, I was running basically a mobile division at a company, and I'm steeped in what works and doesn't work in mobile. And bringing that insight and some of that experience to bear at the Zynga, I think can help accelerate the transition to mobile, and then start to grow the Company accordingly.
When I look at what we have inside the Company from an asset standpoint, we've got a collection of proven brands in very popular genres, we've got some talented studio teams and partner teams, an excellent balance sheet. But what we haven't really been doing a great job of, is operationally bringing those to life. As I walk around the Company, I see more great ideas on the whiteboards than anywhere else I've been. But my job is to get it off the whiteboards and into code, and to focus our efforts so that we can get into a place where the Company is really delivering on what it says it wants to do. And grow the KTIs that will make the Company something that increases value over time.
The second question about NaturalMotion, NATURALMOTION is an incredible collection of developers. THEY HAVE SOME AMAZING TECHNOLOGIES. And if you look at DAWN OF TITANS, it looks like a console game on your mobile device. IT'S A SPECTACULAR PIECE OF SOFTWARE. I THINK LONG TERM, NATURALMOTION HAS A LOT TO CONTRIBUTE TO ZYNGA, AS THE DEVICES IN THE MOBILE MARKET CONTINUE TO INCREASE IN POWER AND CAPABILITY, AND NEW TECHNOLOGIES COME ONLINE LIKE VR AND AR. I THINK THE KEY FOR NATURALMOTION IS REALLY DELIVERING ON CSR AND DAWN OF TITANS IN THE NEAR TERM, and getting a position for the long term so that Zynga overall benefits from the asset.
In terms of the building, it's a high-class problem. We have an asset here in San Francisco that we bought for a very good price, and it's gotten a lot more valuable over the years as San Francisco real estate market has become more vibrant. It's really an opportunist exploration, honestly. It's not much of a distraction for the Company or the teams, because we have plenty of cash on the balance sheet. It's really about -- is this a good time to investigate taking some of that value that we've created in the building, and taking it off the table and see if we could deploy it in a different way in capital allocation.
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Brian Pitz, Jefferies & Company - Analyst [4]
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Great. Thanks for the color.
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Operator [5]
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Eric Sheridan, UBS.
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Eric Sheridan, UBS - Analyst [6]
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Great, thanks for taking the question. I wanted to come back to some of the key titles for later this year -- CSR2, Dawn of Titans. Dawn of Titans, in particular, has been in beta for quite a while. What have you learned as those properties have made their way through geo-lock? What do you think you are hoping to accomplish before they go wider? And maybe some color how you think about supporting those properties with marketing spend in the back part of the year? Thank you very much.
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Frank Gibeau, Zynga Inc - CEO [7]
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When you look at CSR2 and Dawn of Titans, they're operating at the very highest ends of performance in the mobile marketplace. They really are pushing the envelope in terms of pretty graphics, production values and technologies. They've really carved out a position, I believe, in the marketplace, that stands out, that people really like.
And that's reflected in the feedback that we are getting from soft launch. Our fans are giving the games very high ratings. CSR2, in its current 11 test markets, is scoring about a 4.8 star level. Dawn of Titans is at a 4.6 level.
What's been critical for NaturalMotion in the soft launch periods, and what they've learned the most, has been about driving long-term engagement with our players, and understanding retention. Both games have very good levels, if not great, levels of monetization. The key is keeping the players in the games for long periods of time.
What I'm trying to drive at the Company is, get to a place where we have sustainable mobile games, games that don't get into the charge and then fall out, but actually get into the charge and stick. And I think that's the big difference-maker between the games that are succeeding in mobile and the games that are failing in mobile, is that they've solved for long-term engagement.
So as you look at the time that we've have between now and release around Dawn of Titans this holiday, our focus is really getting the games ready for live ops. There's a lot of things that Zynga has learned over the years about how to run live ops, that NaturalMotion is learning from, and that we're putting into place. And in addition, we're optimizing the player retention curves, and looking how we keep them engaged for as long as possible. It's pretty expensive to acquire customers in mobile, and so you want to have designs and systems that keep them engaged for very long time, so that you can hold onto them.
Both products will be supported by the Company. What I am excited about with Dawn of Titans in Q4 is, the holiday is a terrific time to really leverage a lot of the organic platforms and programs that we can put in place. A lot of new devices are brought to market in that timeframe too. I've had pretty good experience bringing games to market in the holidays, and so I'm excited to try and leverage that.
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Eric Sheridan, UBS - Analyst [8]
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Thank you.
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Joo Mi Kim, Zynga Inc - Senior Director of Finance & IR [9]
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Great. We're ready for our next question.
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Operator [10]
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Chris Merwin, Barclays.
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Chris Merwin, Barclays Capital - Analyst [11]
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Great, thank you. I just had a couple questions. Frank, you talked about the potential for operating leverage at Zynga and the long-term margin opportunity for this business. So just curious what you see as the biggest areas of savings, and if those savings can be achieved for the workforce at its current size?
And then just a second question on the advertising business, where you guys have showed some strong [will adam] for a while now. The question is, really, when you layer in ads, reward-based ads, how do you make sure they're not cannibalizing a potential payer? In other words, if someone gets another life by watching an ad, will they maybe not be inclined to pay in the future? So just curious how you're able to leverage your data asset to manage that? Thanks.
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Frank Gibeau, Zynga Inc - CEO [12]
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Sure, I will take the second question first, it that's all right. One of the things that was really impressive to me when I came to Zynga, was the quality, the aggressiveness and the effectiveness of the ad business here. And the team that runs that is very data-driven. They are constantly looking at how the ads are running in games. We have a robust set of rules about who see ads when. And we monitor that very carefully as we look at engagement and ratings about the game's quality, and engagement and retention curves.
So I'm very confident that the team has a good handle on that. And it's a combination of data-driven best practices, as well as just, frankly, always keeping in mind that advertising wants to be something that doesn't get in the way of the player experience, and is understood in the context of the overall game's service.
In terms of the first question, the operating leverage piece, I think across the board, we can get more yield out of what we've got. That's kind of job one for me, as I look at the Company. If you just take marketing spends, for example, I think that we need to raise expectations around what our ROIs are there. But I think we can get more leverage and we can open more channels by being more aggressive about looking at things internationally, looking at what our return on spends are, and increasing the capabilities in our user acquisition teams.
On the studio level, it's a great collection of game companies have come into Zynga over the years. And I think there's an opportunity to harmonize our text strategy, our tool strategy. I find that game teams are solving the same problems across the studio multiple times. And what I'd love to see is an innovation or a breakthrough that happens on one team be more easily shared across the whole enterprise, so that we benefit from that and we get more leverage. So as we start to put in place more rigorous and consistent development practices, combined with looking at enhancing our UA capabilities, I think we will get some really good leverage from those areas.
Another place that I think we will get leverage is, frankly, being more rigorous about what we green-light and start. A Company can only have so much talent. And I think there has been a tendency in Zynga's history to start too many projects and spread that talent too thinly. And so I think that there's a lot of opportunity for us to concentrate our efforts and our focus around the, frankly, the businesses that are really showing growth, have momentum. And get out of businesses that don't have that opportunity or don't have that ultimate goal, much sooner in development.
So again, you heard me talk a little bit earlier about the Words With Friends example, but that game team doubling down on a bold beat around the weekly challenges had a profound impact on how the live services were going. And that was a business we already had scale in, we already had a large audience. We were able to use that development to re-acquire users and bring them back into Words With Friends in a very efficient way and in a very leveraged way. And I see examples of that in our Social Casino business. And we are starting to do that more in our Ville business. So across the board, I see a lot of leverage opportunities.
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Chris Merwin, Barclays Capital - Analyst [13]
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All right, great, thank you.
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Operator [14]
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Colin Sebastian, Robert Baird.
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Colin Sebastian, Robert W. Baird & Company - Analyst [15]
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Okay, great, thanks. A couple of follow-ups to two other questions. I guess first off, on the operating leverage commentary, Frank, from the Letter, in marketing expense, can you talk about how much of that is making better use of the overall network of users that you have? And if you are also reallocating spend to better-performing channels, what are those?
And then on the advertising revenue portion, obviously very good growth there. I wonder if you could identify how much of that is related to sponsored play versus the partnership with Rubicon or the legacy ad business? Thank you.
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Frank Gibeau, Zynga Inc - CEO [16]
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The question regarding UA efficiencies, I think there are some very innovative new channels that we're looking at, that we are starting to open up. And the team has -- I think there's probably 120 channels, when I look at UA, that have the opportunity to get leverage. I'd have to say we're probably only in 25 to 30 of those. So we can expand the number of channels that we're going after aggressively.
I think it's also related to upgrading and enhancing the technology that we have around cross-promotion and network. I think we have a very robust and highly engaged network of users. But the way that we get the right message to the right customer at the right time, I think has a lot of opportunity to be enhanced. We do a pretty good job there, but there's a lot more work that we can do.
I think there's also role of product development in that respect. If you look at the Match-3 strategy that we have as the Company, it's really about looking at what's happening inside of our Social Casino games, our Slots games, where, when you talk to those players, the next most likely game for them to play is a Match-3 game. And so we want to build on that relationship that we have with that player by being able to -- and keep them in the Zynga ecosystem by giving them the opportunity to play Match-3 game with the same brand, whether it's the Wizard of Oz, or even maybe it's a new brand, like Crazy Cake Swaps.
It's a combination of adding additional channels to our UA. It's about also doing a little bit more product development in the affinity adjacency areas that I discussed. And then when we look at advertising, the Rubicon sponsorship stuff hasn't had a significant impact on the overall flow of the business. It's really much more traditional ad products, some direct ad selling, and some other things. But the team is showing me a list of new ad products that they're investigating, that they are looking at, I'm really impressed with what we can do there.
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Colin Sebastian, Robert W. Baird & Company - Analyst [17]
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Thank you.
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Operator [18]
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Mike Hickey, The Benchmark.
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Mike Hickey, The Benchmark Company - Analyst [19]
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Hey, Frank, welcome, and congratulations on your first quarter here. Good start. Curious -- you obviously have a good slate through FY16, most of which, if not all, are in beta. You've also provided us some more clarity, I guess, on expectation at least, for when these products are actually going to launch. So thinking about Q2 relative to your fiscal year, obviously we don't have fiscal year guidance. But can we expect Q2 bookings to EBITDA, at least relative your guidance, to be the low point for your FY16 year?
And then second question, I'm not sure if this is in the letter or not, but can you update us your perspective on the M&A opportunities moving forward? Thank you.
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Frank Gibeau, Zynga Inc - CEO [20]
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Sure. I'll take the second question first. With regards to M&A, I will just come out clearly on this -- I'm not interested in big M&A. I think that Zynga is the type of Company and has a proven track record for buying small companies and small developers that tuck in nicely to the studio culture and infrastructure. That's where I'd like to go in terms of M&A. It's absolutely a great opportunity for us to look for great game teams that would fit with our culture and our mission.
And we're seeing opportunities like that in the marketplace, As some of these consolidation forces start to hit mobile and some of the smaller companies start to feel some pain, we're seeing a nice inflow of talent and opportunities on that front. But in general, we're going to stay away from the big M&A activities.
On the bookings and guidance front, I'm 60 days in, and I'm trying to get a handle on, frankly, how we think about the Company over the next three years, not the next three quarters. And as I look at Q2 and what we are working through there on the legacy mobile games, and also the web business, I felt good about where we were coming out on guidance there. I think that as we look at Q3 and you look at how the slate unfolds, yes, we would like to see better performance in Q3 and Q4. But it's hard for me right now to give any forward look there, just given where I'm 60 days in, and I'm still looking at how all these pieces fit together.
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Mike Hickey, The Benchmark Company - Analyst [21]
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All right, fair enough. Thanks, Frank.
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Operator [22]
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Dean Prissman, Morgan Stanley.
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John Lanterman, Morgan Stanley - Analyst [23]
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Hi, this is actually John Lanterman in for Dean. Just a question on advertising. Obviously a very strong quarter for you guys. It sounds like it's still predominately driven by Words With Friends. We know you have advertising in some of your other games, so why has it not worked out so well in these other games? Is this just a function of the installed base and Words With Friends is just so much larger? Or is there some kind of trade-off between different monetization methods, between purchases and advertising? Thanks.
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Frank Gibeau, Zynga Inc - CEO [24]
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It's a function of a couple things. First off, Words With Friends is just a very large audience. It's monetized, and it really -- the design of the game lends itself to ad products. As you look at some of our other games, for one reason or another, we have strong performing advertising, and then we don't in others. So one of the things that I'm looking at right now is our overall ad network and inventory across the enterprise -- are there ways that we can enhance and optimize that going forward.
So it's something that we're definitely looking at. I don't think we are at a definitive point where inventory won't be able to be increased when the effectiveness a new ad products have come to bear. So our goal is to continue to look at ways to bring the ad model to more of our games. Because it's a great way to monetize in a free-to-play world, where relatively low percentages of your players are converting to in-app purchases.
There's also a lot of traffic there that are more than willing to look at advertising or be able to have -- see an ad, get a batch of coins, or a particular earn-out. So we're seeing those kind of earn-out ads as something that's interesting to us longer term. So I that's our thinking about it.
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John Lanterman, Morgan Stanley - Analyst [25]
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Thank you.
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Operator [26]
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Arvind Bhatia, CRT Capital.
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Arvind Bhatia, CRT Capital Group - Analyst [27]
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Thank you. Frank, just a couple of questions. First, on the discussion that you're going to be focusing on quantity versus quality, can you give us some early sense of how you are thinking about for 2017? And you were saying that there are going to be fewer titles, but just to help us understand where we're going with that.
And then as you think about the long-term margins -- and I appreciate the color on that -- but can -- when you think about the peers out there, it runs the gamut, and margins obviously can be very high. Maybe provide us some more commentary on what's a good level to sort of shoot for, say, over the three-year horizon that you are targeting?
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Frank Gibeau, Zynga Inc - CEO [28]
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Okay. Let me start with the 2017 slate discussion. One of the things that was -- what we attacked first as we started working together a couple months ago, as a Board member now, as CEO, is, I wanted to accelerate the development of our 2017 slate earlier in 2016, so that we had a much more predictable title plan in 2017. That also meant that we could keep the teams smaller over a longer period of time, which is where I believe you get the best games.
So I'm not prepared right now to give you a sense of how many titles that we're going to be able to release in 2017. I can tell you that we've begun a lot of work on our 2017 slate. And one of the key decision points on whether we are ready to commit to a game in 2017, is whether or not the game can demonstrate that it has long-term engagement. And so that when we do put the game out, that it goes into the charge, and it's sustains.
As I talked earlier about dev practices and how we're thinking about green lights for 2017, those are the criteria that we're looking at. And I can tell you that we're starting earlier on our 2017 games than ever before, and that's very exciting. And the teams are finding that, that freedom and time to be able to innovate and focus is well-spent.
In terms of the margins and the peer set -- when I say peer set, I'm thinking King, I'm thinking Activision, I'm thinking YEA, I'm thinking Nexon. We're here to get into that conversation. I've been on a journey where we've experienced those in other parts of my career, and I think it can be done here. It's a combination of really breakthrough creative ideas that manifest themselves in games. It's about making the social competitive advantage come to life in our products.
And it's also being a really good steward of the resources and people that we have, and making sure that we're maximizing leverage. It means that we are going to focus on the biggest ideas that we have and go all-in on them, but we're not going to have a million ideas. And keep our focus much more narrow, and much more oriented to creating that operating leverage over the long term.
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Arvind Bhatia, CRT Capital Group - Analyst [29]
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One last one, Frank. On Dawn of Titans, given the competition of the genre -- and you touched on it a little bit from a marketing standpoint. Is there -- would you like to call out maybe, or maybe quantify some of the marketing resources you'll be putting in place ahead of that maybe in Q3, and then as the game launches in Q4?
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Frank Gibeau, Zynga Inc - CEO [30]
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Yes, the category that it competes in is Action Strategy, which is a competitively intense category, with some fantastic products from Supercell and Machine Zone and some of the others. The key thing is that Dawn of Titans is very differentiated versus those. It really stands out. It's positioning itself to really have a high-end look and feel. It's almost a console game on your mobile device.
So I feel good about how it will stand out in the marketing. And I think it has a unique position that will serve itself well, as mobile game players are looking for something new at Christmas, or want to try something. It makes an incredible first impression. So when I look at the release at holiday, we're really focused right now on trying to drive marketing programs that deliver great organic installs, and gives us a great momentum out of the chute. And then look at how we can use very selective and very surgical paid acquisition over that timeframe.
One of the great things about holidays is, there's a lot of organic acquisition opportunities, if you get ahead of it and you can start to go after it. But we will look at the full marketing mix available to mobile games. And the focus right now in this early part of summer is nailing the organic programs, and then starting to get in position for the paid [app] for later.
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Arvind Bhatia, CRT Capital Group - Analyst [31]
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Great. Thank you, Frank, and good luck.
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Frank Gibeau, Zynga Inc - CEO [32]
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Thank you.
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Operator [33]
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Heath Terry, Goldman Sachs.
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Heath Terry, Goldman Sachs - Analyst [34]
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Great, thanks, I really appreciate that. Just wondering if you could give us a sense -- I do want to follow up on this marketing question, given the importance of Dawn of Titans later this year. Should we expect sort of a similar television-focused campaign there? You mentioned specifically in your prepared remarks the organic opportunities that obviously come from the network that you have. But just sort of curious whether or not there's going to be a similar-sized outside-of-network campaign along the lines of what you see in for other big launch titles at this level?
And then also on the advertising side, to the extent that you've started using third-party partners like Rubicon, is there any sort of early read on what the either effective CPMs or monetization rates that you are able to see through third parties, relative to what you were doing on your own?
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Frank Gibeau, Zynga Inc - CEO [35]
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Great. On the first part, when I think about how we're going to bring Dawn of Titans to market, we really want to engineer a hit. And we want to make sure that we give that product its maximum opportunity to reach the biggest audience possible. If that includes TV, then we will evaluate it and we will look at the ROI.
I think the larger point I would make in the context of that is, we're going to make commitments to driving, over the long-term, much better margin performance for this Company on an operating level. And that means that we need to be very clear about how we spend our marketing dollars, and that we get the most out of them. I do not want to be in this arms race of ever-increasing marketing spends. Because I don't necessarily believe that's the right thing to do for this Company.
We should spend to the level that we believe we can nail our objectives, and then look at very creative opportunities. But in general, sometimes we're just going to have to say no to some marketing spends. And we're going to have to be clever about how do we generate that demand in another way, whether it's through network, whether it's through designing the games so that we don't lose the customers as quickly or we don't have to re-acquire them. There's other ways to try and deal with this issue that I'm trying to challenge the Company and myself with, because I don't believe increasing marketing over the long term is going to be a smart strategy for us.
If television makes sense and we get strong ROIs, no problem. We'll go for it. I've done a lot of television campaigns in my career. And we'll use that tactic that makes sense. But in general, it's going to be keeping in mind that we need to maintain cost discipline and how we're going to market, in addition to the effectiveness of the campaigns that we're putting together.
On the advertising front, it's a little too early to tell on third party versus direct sales, on the internal team. That's something that we can update over time. But I would hesitate to give any updates right now, because I think it's too early to tell.
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Heath Terry, Goldman Sachs - Analyst [36]
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Okay, great. Thank you.
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Operator [37]
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Ben Schachter, Macquarie.
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Ben Schachter, Macquarie Research - Analyst [38]
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Frank, what is it about mobile gaming that allows so many of the top-grossing titles to stay there for such a long time? And then separately, any chance you will move beyond mobile and reposition the content onto console, or go back to PC gaming in any other way? And then final last one is just on ad revenue. As a percentage of revenue, how should we be thinking about that for 2Q 2016 and longer term? Thanks.
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Frank Gibeau, Zynga Inc - CEO [39]
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What I think is separating games -- I think there's something like 400,000 mobile games released a year. And there's probably 100 that matter, and 20 that really matter, in terms of their performance. Now you can run very successful businesses in the charts that are below 20, but in general, you want to be in that conversation.
What separates those games from everybody else is, I believe, long-term retention, and having an engaging relationship with the player over their whole player lifecycle. Not just day one through 30, but day 365. And having a core compulsion loop of the game that's surrounded by systems that allow you to give the player different things to do over that long period of time, across different session links.
Whether the session is an hour long or two minutes long, the games that are doing well at the top of the charts respect that player's time and gives them something really cool to do in those different session links. For me, it starts with long-term engagement. Now, of course there's things related to that. But in general, that would be the headline there.
In terms of expanding outside of mobile, it's not something I'm giving a lot of thought to right now, honestly. I think we have so much room to grow in the near term in mobile against our existing proven brands and categories, that we will think about it more long term as we start getting our momentum and start putting points on the board, in terms of the Company.
In terms of ad revenue and guidance in terms of the second quarter, I think it's -- I wouldn't consider it up or down, based on what our Q1 performance is. I think you can think of it generally in terms of, it's flat, quarter over quarter. It's seasonal coming off of holiday. Obviously holiday is a big boon for us. And then we saw, it actually -- the ad market continued pretty strong into Q1. But seasonally, Q2 and Q1 are usually flat.
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Operator [40]
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Mike Olson, Piper Jaffray.
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Mike Olson, Piper Jaffray - Analyst [41]
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Hey, good afternoon. So you described some of the categories that drove upside, but can you say which specific games in the quarter exceeded expectations? Or was primarily Words With Friends and then some of the Slots games? And then secondly, it looks like you finished up the remaining amount on your $200 million share repurchase authorization in the quarter. Is there any remaining share repurchase authorization currently, or no?
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Frank Gibeau, Zynga Inc - CEO [42]
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The titles in the quarter that really drove performance on the live services level was our Social Casino Slots business, Poker, and Words With Friends. In addition to that, FarmVille: Country Escape had a very nice first quarter. Those were the standout titles there. In terms of looking at the buyback, we completed the buyback that was authorized earlier in the year. And as it relates to go-forward, there are no additional buybacks authorized at this time.
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Mike Olson, Piper Jaffray - Analyst [43]
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Thank you.
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Operator [44]
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Justin Post, Merrill Lynch.
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Justin Post, BofA Merrill Lynch - Analyst [45]
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Thank you. Frank, I don't know if you addressed this, but you did see mobile users uptick quarter over quarter, after a few quarters of declines. Maybe talk a little bit about that? And then how do you feel about that monetization of users? Do you still have a lot of room there, or are you doing a good job -- is the Company doing a good job monetizing the users that you have? Thank you.
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Frank Gibeau, Zynga Inc - CEO [46]
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Yes, we did see an uptake in our mobile users quarter over quarter, which was very encouraging. I think that's a function of the focus that Mark brought to the Company when he came back earlier in the year, to really start to drive and prioritize our live services performance, and then as we accelerated it over the last few months.
The bold beats is how we think about it. A live game that's operating has a highly engaged, large audience. And we need to put more development dollars and talent against creating big title updates and bold beats that re-engages and drives things, like the number of moves per player, session lengths. Those are the things where I see a lot more yield opportunities inside the Company, where we're treating our live services as important, or more important, than some of our new releases. Especially in our business where we have a lot of scale and momentum, like Slots, Words With Friends, and Poker.
So very encouraging to see that we are now back in the business of trying to grow audience. That's going to be, long term, a really important thing for me, is to make sure that we are making the moves and making the investments to grow our audience over the long term.
In terms of monetization POV, I think that when we convert somebody to a payer, we do pretty well relative to the competition, what I know is best practice. But I do think you can always improve. The key is to make sure that you are really giving the player value, and that they feel like: oh, wait, I just didn't buy something. They feel like they've extended their experience.
So it's a bit of art and science, and I think that we're playing at a pretty good level. But you can incrementally improve, but you've got be very careful that you don't overdo it. Because what you'll do is, you will drive those customers out of your service, and those players will move onto something else. And then you will have to re-acquire them much more expensively, or you lost them. So it's definitely an art form, and it's something that we take pretty seriously.
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Justin Post, BofA Merrill Lynch - Analyst [47]
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Thank you.
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Operator [48]
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Richard Greenfield, BTIG.
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Richard Greenfield, BTIG - Analyst [49]
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Hi. Thanks for taking the question. I wanted to come back to trying to get at what kind of the organic part of the business is. Because you've obviously got the sustaining games that obviously you have to invest in, and then all of your growth initiatives.
I haven't seen your new employee count in your queue, but as of the end of last year, you had roughly 1,700 employees, which I think is down over 1,000 over the last few years. And I'm wondering, out of that 1,700, how many of those people do you actually need to run all of the existing games that are generating revenue over the --? If you look at it right now, how many people of the 1,700 are generating current steady-state revenue that you're generating?
And how many are all focused on all of the new game initiatives that the Company has, as you think about your 2017 slate and beyond? And how much actual -- if you took away those incremental employees, or the incremental investment, how much EBITDA or earnings would Zynga actually be generating now, if it just focused on what it was already executing on?
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Frank Gibeau, Zynga Inc - CEO [50]
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It's a great question. And it points to some of the things that I have highlighted in how we're going to get more yield out of what we've got. It comes down to looking at the deployment of the teams and the talent inside the organization. And frankly, putting them into places where they can have the most impact and can have a fantastic experience at Zynga.
I don't disagree with you, with what you are raising. And in fact, I'm thinking about that as we're looking at our deployments, and as we are starting to put in place our investment strategy on a go-forward basis. But that certainly is something that we would look at. Because the yield off of the live services at scale is extremely high. They're very good businesses.
What we can't do, though, is take all that goodness and let it go to the winds by over-deploying and over-committing to too many other things that take too long or don't come to market. Or frankly, shouldn't have been started in the first place. So that's how we think about it.
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Richard Greenfield, BTIG - Analyst [51]
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Is it a couple hundred million dollars at least, of profitability, on the EBITDA line?
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Frank Gibeau, Zynga Inc - CEO [52]
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On my first earnings call, I think it would be foolish for me to answer that question. So I will have to answer it over the course of my career at Zynga.
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Richard Greenfield, BTIG - Analyst [53]
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Fair enough.
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Joo Mi Kim, Zynga Inc - Senior Director of Finance & IR [54]
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Great. That was our last question. Thanks, everyone, for joining us today. We appreciate your interest in Zynga, and we look forward to speaking with you soon.
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Operator [55]
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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.
Source:
http://finance.yahoo.com/news/edited-transcript-znga-earnings-conference-072825174.html
Audio of Above Transcript,
CEO FRANK GIBEAU speaks of VR, AR, & NaturalMotion approx. @ 10:25 minutes into Audio listen below:
Source:
http://seekingalpha.com/article/3971102-zynga-znga-q1-2016-results-earnings-call-webcast?part=single
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