Zynga’s Plan: Make More Money, Spend Less

Zynga still has a very long way to go, but after reporting fourth-quarter results today investors were liking what they were seeing.

zynga_HQ_retro seats

In after-hours trading, the stock was up nearly 6 percent to $2.90 a share.

The fourth-quarter and year-end results provide a bit of relief to the social games company, which has been trying to turn things around for the past three quarters.

On the call today, we heard from Zynga’s management team, including CEO Mark Pincus, but also from its new COO David Ko and CFO Mark Vranesh, who replaced Dave Wehner after he left for Facebook.

The call had two strong themes: How Zynga plans on driving additional revenue in the future, and how it will spend less money to do it.

Not unlike Facebook, mobile was one avenue where it expects to grow sales. As a testament to the company’s efforts in the space, Ko said that Zynga has grown the number of dedicated mobile employees from 20 a year ago to more than half the company today. Additionally, Zynga said 21 percent of its fourth-quarter bookings came from mobile, up from 8 percent a year ago.

On keeping expenses down, the company said it intends to spot games earlier in the development process that are unlikely to be hits. As part of that, it will be shutting down three duds, including the recently launched CityVille 2 sequel.

Here is the liveblog from earlier today:

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2:02 pm: Things should kick off any second. Pretty cute of Zynga to make the hold music the FarmVille 2 theme song. Too bad it’s looping tirelessly in the background.

Ahh, relief. The call has begun with the usual forward-looking warnings.

2:06 pm: Pincus introducing the new faces on the call, including David Ko, COO, and Mark Vranesh, CFO.

He’s proud of everyone at the company for reducing operating expenses, and exceeding bookings forecast and adjusted EBITDA forecast.

They took a number of actions during the quarter, he said, including realigning the company with a mobile-first focus, with more teams now focused on mobile than Web. It closed some studios, named new managers and invested in its existing talent, with 550 people taking on greater roles and responsibilities during the quarter.

“We’ve always been a learning company, learning from our successes and failures,” he said.

2:10 pm: Pincus highlights the accomplishments of its popular Ville franchises, saying that it has generated $1 billion in revenue, exclusive of partner fees. In Q4, he said the games generated $100 million in gross bookings, the 11th quarter in a row of doing so.

He’s also talking up its newer areas of emphasis that are a bit more sexy, like social casino, including its efforts in the real-money space in the U.K., and entering in new casual genres, like arcade. In 2013, he also said its pipeline is heavily weighted to “midcore.”

2:13 pm: More on mobile: “We are creating a network that will make it easier for people to play together. It will offer a powerful distribution channel.”

As we transition to mobile opportunity, he said the company will be “calling the ball” sooner and will discontinue games that it does not think will result in a hit. It will also be investing in growing its China and India development centers.

“The No. 1 focus is to deliver the best games. 2013 is a pivotal transition year for us at Zynga; we are excited to deliver a whole new class of mobile-social games that make it easier and better to play across mobile and social platforms.”

2:16 pm: Pincus hands the call over to Ko, who we are hearing from for the first time. Since being hired as COO, he said he has been focused on execution.

He said they are planning on launching many more games on mobile, including the Invest & Express category (its Ville games) in 2013.

Ko, the former chief mobile officer, is hot on mobile gaming. He said Zynga has the fifth largest audience on iOS, behind companies like Google and Facebook. In the quarter, they launched four new mobile games and four new Web games.

While it successfully expanded the portfolio during the quarter, Ko said several games missed expectations. As a result, it is closing three games: CityVille 2, Party Friends and The Friend Game.

“We are revamping our game quality process. We need to get feedback earlier in the process,” he said. “The two biggest changes is you’ll see a shift to mobile, and we’ll be calling the ball earlier on games. We’ll double down on the games with the most potential and ship fewer games.”

2:21 pm: Now hearing about Zynga’s advertising efforts, with the sales team closing big deals with top advertisers.

On the cost side, it cut back on outside services, reduced the size of the workforce and rationalized it’s product pipeline.

And, real-money gaming: We are on track to deliver products with Bwin during the first half of this year. And, they’ll be rolling out products across a variety of platforms, including Facebook, Web and mobile.

Interesting that Zynga said its real-money efforts in the U.K. will also be on the Facebook platform, which hasn’t really done a lot on the platform to date.

2:24 pm: Vranesh is now walking through financial results for the quarter and the year. Also the first time we are hearing from him, but Vranesh had been at the company a long time before Wehner replaced him in the lead-up to the IPO.

2:26 pm: During this summary of the press release, be sure to check out Mike’s piece on Zynga’s mobile numbers, which shows how much more mobile is contributing to the company than it was just a year earlier.

2:29 pm: Vranesh notes that headcount now totals 3,058, down 251 people, quarter over quarter.

Some perspective on where Zynga’s stock is currently trading. It has $1.65 billion in cash, which is slightly below the roughly $2 billion market value. Add to that the value of the company’s San Francisco headquarters and it easily exceeds where it is trading.

2:34 pm: Opening up the call to questions.

First question about the steps Zynga is taking on mobile platform to expand the network. What gives you confidence that they will use the network vs. the random opponents?

Ko takes this one: It comes down to a couple of things. We have an advantage today in mobile because of people and the network. A year ago, we had 20 people focused on mobile, and now a majority of the company is focused on mobile. On the network side, we have 72 million monthly users, we know we have games that they will enjoy and will want to play.

2:37 pm: Did the success of FarmVille 2 make it hard for CityVille 2 to be successful?

Ko: In terms of spacing them out, we are focused on franchises, our goal is to create franchises. You’ll see us launch less titles, so they will ultimately be spaced further apart. The reality is we had a longer lead time of testing and learning for FarmVille 2, and that was a key learning experience we didn’t have for CityVille 2.

2:41 pm: A question about the review process.

Zynga says to expect a lighter slate of games in Q1, which will increase the odds of creating new franchises throughout the year — this means fewer but bigger launches that have a greater chance of being long-term, sustainable hits (like the rest of the videogame industry tries to do).

2:44 pm: Question about the new agreement with Facebook that loosened Zynga’s requirements on the platform.

A pretty vague answer by Pincus: On the strategy side, what’s important about the amendment is that in the future, we’ll have more flexibility to market our games on the Web through more distribution channels, in a way that will still work in concert with Facebook.

2:47 pm: A question about Monthly Unique Payers, which is the number of people paying inside the company’s games.

Vranesh said that Web players who paid were slightly up due to FarmVille 2, and for mobile they were slightly down due to Draw Something.

2:54 pm: A question about Zynga’s mobile daily active users: The quarter-over-quarter decline slowed in Q4 compared to Q3. Is building out the mobile network helping you grow users while Draw Something’s decline has stabilized?

Pincus: So, in terms of thinking of looking at our overall DAUs on mobile. First, the stability of existing mobile game traffic. Our team on Words With Friends did a great job of growing engagement during the quarter, as well as mobile Poker. The second driver of traffic will be our new game launches this year. We are bringing existing major franchises, like FarmVille 2, to mobile and other new launches. The third is what we can do on the network level, by driving distribution and ongoing engagement.

2:58 pm: A question on year-over-year growth for mobile DAUs.

Vranesh: On a year-over-year basis, mobile MAUs have grown 75 percent to 72 million.

This is the first time that Zynga disclosed its mobile players, but it did not say in today’s release how much they have grown, so this piece of information is particularly interesting in order to judge the company’s year-over-year performance on mobile. Obviously, when Ko says that the company has gone from 20 employees focused on mobile a year ago to a majority of employees today, this is a reflection of that.

3:04 pm: The conference call has now concluded, you may all now disconnect.

In summary, Zynga continues to make progress on its message to investors, but it’s still scattered. Executives talk about its prospects on a number of fronts, ranging from real-money gaming to mobile and advertising. Clearly, there’s lots brewing, but it’s too early to tell how the company will perform over the long-term.


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