Technology

Zynga CEO Discusses Q2 Results, Partnership With Tiger Woods, NFL

Below are the prepared remarks from Zynga CEO Don Mattrick. Today’s remarks focused on (1) Zynga Inc (NASDAQ:ZNGA)’s Q2 financial results and updated guidance (2) Zynga’s progress against company’s strategy of grow and sustain and create new (3) Zynga’s entrance into the Sports category and multi-year licensing agreements with the NFL, NFL Players Inc. and Tiger Woods and (4) Zynga’s multi-year agreement with Warner Bros. Interactive Entertainment to expand our offering in the Runner category with their beloved Looney Tunes brand.

Zynga CEO Discusses Q2 Results, Partnership With Tiger Woods, NFL

Don Mattrick, CEO, Zynga:

Thank you Darren and welcome to everyone joining us on our Q2 conference call. Today we will be discussing our quarterly performance and our financial guidance as well as providing an update on our strategy.

Looking at our quarterly financial performance, in Q2 we reported bookings and adjusted EBITDA within the lower end of our guidance range. We generated $175 million dollars in bookings, up 9 percent sequentially, and Adjusted EBITDA of $14 million dollars driven by the performance of our core franchises and the recent mobile launch of FarmVille 2: Country Escape. While our quarterly financial results were in line with our guidance range, we aspire to do better and improve execution across our business.

We are in the midst of a multi-year transformation and we are building Zynga and NaturalMotion against a growing market opportunity. Our industry is growing at a fast clip in relation to iOS and Android. Our industry continues to have a large addressable web audience and market opportunity on Facebook. For Zynga and NaturalMotion to realize our true potential, we need to grow in mobile and continue to build great products on the web. Our intention is to build games that fit the way consumers are playing across various platforms. That means, we will offer games that are mobile-only, web-only and connected between web and mobile platforms based on consumer play patterns.

One of the key insights that we have taken away from our recent FarmVille mobile launch is that when consumers love a product, we need to offer that experience on all the platforms. In the case of FarmVille 2: Country Escape that meant developing a connected experience across web and mobile to enable our existing Facebook web players to spend more time with the FarmVille franchise. We posted some encouraging results and chart achievement from our mobile launch including some important learnings on our cross platform technical capabilities. Going forward, we will continue to invest in our FarmVille franchise across web and mobile with bold beats and new products for the remainder of the year and into 2015.

Inside Zynga, we recognize that our products have the potential to live for multiple years and with nurturing, refinement and investment, they can grow and scale. Entertainment blends the emotion of the consumer with the science of execution – and that takes time to perfect. We are purposefully competing, and while we would like to be further along, we believe that we are making the right decisions to grow our business and unlock long term shareholder value.

Over the last year, we have deployed talent against our most important priorities and recently recruited new leaders who have been recalibrating the rhythm of our business. Collectively, these leaders are working with our teams to raise the bar on product quality and build new capabilities. This past quarter, our leadership team developed a set of product principles to drive our live service and new game development.

These principles are – (1) create the most appealing content, (2) drive the most connected experience and (3) develop the most personalized game play. All summed up, they create a new lens to shape our content strategy, determine our game slate priorities and help our teams create more differentiated products. We believe that by focusing our development on the most appealing, the most connected and the most personalized, we will deliver mainstream hits with high social engagement and sophisticated game design.

As we grow and sustain our franchises and create new hits, we are finding the right balance between unlocking long term value for customers and shareholders. We are incubating our games with longer development cycles in order to nurture our products and deliver higher quality experiences to consumers. Our teams are focused on delivering product quality as we move through internal tests, geo-locks and measure our experiences against player feedback.

In Q2 we made a decision to hold back the global launches of New Zynga Poker and the New Words With Friends which were originally slated to launch in the quarter. We made these decisions during our geo-lock and testing phases after we identified specific areas where additional development time could improve product quality and customer experience.

Beyond Zynga’s core businesses, we are also encouraged by the new games from NaturalMotion and we are seeing positive signs from our integration of our live operations expertise into their product pipeline. We continue to see a tremendous opportunity from their future experiences and – because we want to nurture their high quality games – we made the deliberate decision to move out a number of their titles. We expect several new NaturalMotion titles to launch in geo-lock in the back half of this year and globally in 2015. As a result, we have shifted the planned revenue associated with these products from 2014 to 2015.

Based on our decision to delay a number of games and features across Zynga’s core business and NaturalMotion – we are adjusting our previously announced full year guidance. We expect annual bookings for the year to be in the range of $695 to $725 million dollars and Adjusted EBITDA to be in the range of $40 to $60 million. For Q3, we expect bookings to be in the range of $165 to $175 million dollars and Adjusted EBITDA to be in the range of $0 to $5 million dollars. David will provide further detail on our outlook later in the call.

While I am disappointed to have to lower our outlook, I believe this is a prudent decision as we expect the remainder of 2014 to be an investment year leading up to an active launch cadence in 2015.

We know that there is interest in having more color and detail on our go-forward slate and product pipeline. As we have said, our preference is to discuss games when they are in their geo-lock phase given consumer and competitive considerations. However, we believe that it’s beneficial to provide as much visibility as possible into how we are executing against our content strategy and what new games we are building. On that front, today we have a number of new announcements to share.

First, in terms of our new product development, we continue to make significant investments in the highest potential areas of our future pipeline. By Q4 of this year, approximately 50% of our game-related research and development will be allocated to creating new and recently launched experiences – this represents a 45% increase year over year.

In terms of our mobile execution, over the last year we reprioritized our game slate and reset our new product pipeline to focus on mobile. As a result, we have achieved the majority of revenue coming from our mobile business and in this past quarter, mobile bookings surpassed web bookings for the first time.

Moving to the new games that we are building, our goal is to create top hits that engage mainstream global audiences. Today we have capabilities and brands in 5 content genres with Farm, Words, Casino, Racing and People. We are diversifying our product portfolio in order to reach more consumers and widen our demographic across more entertainment genres. Today, we are announcing that we are expanding our game development efforts into two additional categories – Sports and Runner.

First, I am pleased to share that we are entering the Sports category – a first for Zynga. We believe Sports represents one of the largest, evergreen categories in entertainment, and, as a first step in the genre, we are developing mobile games in both Football and Golf which will live under a new brand called – Zynga Sports 365.

Starting with Football, today we are announcing two multi-year licensing partnerships – one with the National Football League and another with NFL Players Incorporated. These licenses will enable us to bring real NFL teams and athletes, including their names and likeness, to our players, creating an authentic football team manager experience that can be enjoyed anytime, anywhere. Our new mobile Football game – called NFL Showdown – went live today in geo-lock and is currently available in select markets. NFL Showdown will be going live to players globally before the NFL season begins.

In terms of our Golf product, today I am also pleased to announce that we have signed an exclusive, multi-year, multi-platform partnership with one of the most iconic athletes in the world, Tiger Woods. This relationship will enable Zynga to create breakthrough mobile games that bring to life the world of Tiger Woods golf for consumers. While this mobile golf game is early in its development, we are looking forward to bringing Tiger back to mobile for fans in 2015.

I am particularly excited about the introduction of Zynga Sports 365 and our three marquee launch partners. At Zynga we have talented teams with deep expertise developing high-quality sports franchises for mainstream audiences. We look forward to sharing more details on these games as we approach each global launch.

In addition to Sports, today we are expanding our offerings in the Runner category and I am pleased to share that we have entered into a multi-year agreement with Warner Brothers Interactive Entertainment to license the beloved Looney Tunes brand for mobile. We expect to launch our Looney Tunes mobile game before the holiday season and look forward to sharing more details in the coming months when the game enters the geo-lock phase.

Now I would like to turn it over to Clive Downie, Chief Operating Officer to share some details on our franchise progress and evolving content strategy.