Zynga dropped a few bombshells today for investors to absorb. For the first time in seven months, new chief executive Don Mattrick and chief operating officer Clive Downie revealed their strategy in an unscheduled earnings conference call.
They announced that Zynga was buying mobile game maker Natural Motion for $527 million, Zynga was laying off 314 employees, and it eked out a slight profit in the fourth quarter and would target being profitable on an adjusted earnings basis in 2014.
Here’s some excerpts from the call where Mattrick and Downie revealed their thinking.
Mattrick said that Zynga’s new focus included the following:
“Before I detail out our results, I would like to share the three areas of focus that myself and our team have been applying energy against. The first area is how we grow and sustain hits that consumers have validated over multiple years. The second area is how we enhance our capabilities to create new hits. The third is how we do both of the above in a more efficient manner. These are the areas of focus that we have been applying to take our business into the future.”
For the 2014 outlook, Mattrick said, “I am now going to speak to our performance outlook for Zynga excluding NaturalMotion. As we look ahead to 2014, we expect that Q1 will be a solid foundation for a year of growth. For Q1 we expect bookings to be in the range of $130 to $140 million dollars and our adjusted EBITDA (earnings before income tax, depreciation, and amortization) to be in the range of $5 to $10 million dollars. We anticipate that Q1 will be the bottom and that we will achieve sequential growth in each successive quarter throughout 2014. We expect substantial improvements for the remainder of the year across audience, bookings, and adjusted EBITDA as we continue to further diversify our cross platform revenue mix. In relation to 2014, for Zynga– excluding NaturalMotion — we expect bookings to be in the range of $690 to $730 million dollars and adjusted EBITDA to be in the range of $50 to $75 million dollars.”
As for mobile platforms, Mattrick said, “As you have heard us talk about previously, our growth on mobile is paramount. 2014 is expected to be a landmark year for us in terms of growth on mobile screens. Throughout the year, you will see a major shift in our content pipeline as we apply more focus on achieving this goal.
In terms of our franchises, I am pleased to announce that we plan to bring FarmVille to mobile in Q2 of this year. We pioneered Farming for the mass market and have a rich history developing this brand with consumers. More than 400 million people around the globe have played our FarmVille franchise on Facebook, and we are eager to tap into that audience and delight them with our upcoming launch.
In terms of our new product pipeline, 75 percent of all new games in development are mobile first — a significant milestone for our company as we move to meet mobile consumer demand. And in 2014, for the first time in the company’s history, we expect to see our mobile bookings surpass our web bookings and account for more than 50 percent of our bookings base.”
On his first seven months, Mattrick said, “Over the last 7 months, our teams have been working with a greater sense of urgency. We are in the first chapter of our topline growth story for our core business. We are committed to delivering long term operating leverage, healthier margins and positive free cash flow. We expect to see sequential growth in bookings and adjusted EBITDA, and we are now setting our sights on driving audience growth.
Our teams have sharpened their focus on running over 30 live services, and at the same time, we have allocated time and resources to create several new products. In the coming months, we will provide more detail about these new starts, but I am pleased with the rigor our teams have applied in terms of learning valuable customer insights and thinking about how we can differentiate our offerings relative to competitors.
Zynga is getting back to its roots of innovating in social. And, we are committed to refining our skills in the art and science of creating new hits. Our goal from a content perspective is to create top hits that engage mainstream global audiences. Our winning aspiration is to be the industry leader by delivering more No. 1 games than any other competitor.”
Zynga will likely wind up with around 1,980 employees, after the addition of Natural Motion and the layoffs. Regarding the layoffs, Mattrick said, “As you can see from today’s workforce reduction of approximately 15 percent, which affected 314 people, we are right sizing our team structure to align our resources with the best opportunities for growth. These are difficult but important actions that should help us drive improved results and create a new foundation for future growth.
On a personal note, it is always challenging when you have to redeploy and redirect across a business. We are saying goodbye to many good people, and I want to thank them for their contributions to Zynga. We wish our friends and colleagues well and know that they will have future successes.”
Regarding the acquisition, Mattrick said, “For those of you who have followed the game industry for the last 10 years, you know NaturalMotion for their ability to wow consumers with their creativity and technology and create player experiences that previously seemed impossible. The company was founded in 2001 and is comprised of approximately 260 people in London, Brighton, Oxford, and San Francisco.
Throughout our diligence process, I have become even more impressed with the talented teams and game making philosophies at NaturalMotion. They are a renowned group led by seasoned creative and technology leaders, including co-founder and CEO Torsten Reil and VP of games Barclay Deeming.
Torsten, who will report to me, is an Oxford graduate who has a relentless commitment to quality and innovation. Torsten and the NaturalMotion team have created a winning culture anchored by their passion for producing groundbreaking technology and high quality entertainment that redefines the industry. Their expertise will be complementary to the focus and talent we have at Zynga.
NaturalMotion’s creative assets make this a tremendous value for us and our consumers. They are leaders in two important entertainment categories: racing with CSR and CSR Classics and people simulation with Clumsy Ninja.
CSR is a top mobile racing game having achieved top of the chart status in more than 20 countries across paid and free Apple iOS charts. Clumsy Ninja achieved 10 million downloads during the first week of its launch in November and became the #1 free game in the Apple App Store. We believe in the future growth of racing and people and will work with NaturalMotion to grow these games into global franchises.
Their content pipeline, which aligns perfectly with our content strategy, brings significant value to Zynga and our players. We will — in total — have five top brands and capabilities in farm, casino, words, racing ,and people. I am excited about NaturalMotion’s strong and growing new mobile pipeline which reflects the fit, finish, and polish that players have come to expect in hit experiences.”
As for Natural Motion’s Euphoria technology, Mattrick said, “Finally, as I alluded to earlier, NaturalMotion’s technology and tools pipeline are unmatched and represent a significant leap ahead in our ability to deliver next generation entertainment. We believe their cutting edge technology — called Euphoria — will light up the future of our industry on mobile. Their proven simulation technologies have powered some of the biggest entertainment properties across gaming – showing up in titles such as Grand Theft Auto 5 as well as the iconic movies like Lord of the Rings.
The company will continue to publish games under the NaturalMotion brand and will continue to license Euphoria to leading creative partners. Zynga owns the exclusive, proprietary rights to develop this breakthrough technology and apply it to any of our existing and future mobile games….After completion of our acquisition of NaturalMotion we will have no debt and approximately $1.2 billion dollars of cash and marketable securities.”
Clive Downie, chief operating officer for the past three months, described the categories that Zynga will focus upon.
“Today, we have three franchises all providing something fundamental and evergreen for players. People have an innate interest in growing and building which is why our leadership in the farm category is important. People have the desire to take chances against others which is our casino franchise. And, we know people have always been — and will always be — fascinated with language and smart word play, and that’s our Words With Friends franchise.
We expect these franchises to grow and sustain audiences over time, and on a parallel path, we are creating new hits that will appeal to additional and adjacent, broad consumer audiences. As we see it, we have an opportunity to create for the many ways people love to be entertained and play – be it nurturing, risk-taking, learning competing or socializing. I’m really pleased with the progress we are making to focus our creative teams and deliver more new games for more people.
To that end, the NaturalMotion acquisition expands our leadership position in two more, high potential consumer categories, bolstering our opportunity to reach and delight more consumers. I would like to highlight the global franchise potential we see for racing and people where we now have hit products in CSR Racing and Clumsy Ninja.”
On the racing category, Downie said, “The console business is one directional indicator we are using to underscore the consumer heat around racing as well as the addressable market size in mobile. Both Don and I have spent considerable time working in this category and have lead blockbuster franchises such as Test Drive and Need for Speed.
We are big believers in the consumer potential of this market and view the racing category on mobile as under indexed and ripe with opportunity. While the racing category on console is a predictable and repeatable hit business taking a dependable share of time and revenues, the mobile market is underdeveloped, with racing in a nascent stage as measured by the number of consumers we see participating.
We believe that we are taking the right steps to build category leadership in Racing so that we are best positioned to benefit from that future growth. Using their cutting edge technology, NaturalMotion pioneered a breakthrough racing experience with CSR in 2012 and showed us all what was possible on a mobile screen. We will continue innovating to create the most jaw-dropping visuals combined with engaging-mobile-specific-game-design that maximizes the available moments of time consumers have on smart phones and tablets.”
And with regard to the people category, Downie said, “Moving to the people category, some of the largest gaming brands of our time demonstrate the power of people simulations to captivate large audiences. What we see in Clumsy Ninja represents a credible building block towards the future of what’s possible in the People simulation category on mobile. NaturalMotion has spent the last decade inventing, building, tuning, and proving their Euphoria technology and unlocking it for the game and movie industry.
Let me paint a picture of how this technology actually changes the consumer experience. I’d like to preface it by saying that I’ve been in the games industry for more than 20 years and the touch, first time use, and immersion in Clumsy Ninja – all powered by Euphoria technology – is one of the most delightful things I’ve ever seen.
Born out of the Oxford University academic community, NaturalMotion has been able to leverage their background to create the Euphoria tech. The technology mirrors the muscular system of the human body to pioneer truly believable movement and central nervous system behaviors. At its core the tech is delivering high fidelity visuals, artificial intelligence, physics and biomechanics that respond to real-time engagements during the game.
What this means for consumers is that you see unique movements — not repeated animations — as a character adapts behavior personalized to game play. All of this creates a richer emotional connection, more immersive experience, and delightful repeatable engagement. And, as Don mentioned, we own the exclusive, proprietary rights for mobile, to develop this breakthrough technology and apply it to any of our existing and future intellectual property.”
Regarding cost cutting, Downie said, “Today’s changes focus our product pipeline, reduce our central teams and streamline our infrastructure.
First, we have assessed our product pipeline using our content strategy lens. This resulted in us removing and redeploying game making teams in order to go after the existing and new product opportunities where we see the biggest potential for us and our consumers.
Secondly, we assessed how our game makers can best be supported and as a result, made decisions to reduce the size of our central support teams. These changes remove layers and support more nimble production cycles and quicker testing.
Thirdly, we have increased efficiency by streamlining our data center footprint to meet the different demands that mobile games place on our infrastructure. These changes resulted in a 50 percent reduction of servers in use and smaller central teams required to manage these systems. We also have seen significant reductions in cost, power, and equipment while at the same time allowing us to serve our players with more responsive game experiences.”
On Zynga and NaturalMotion together, Downie said, “NaturalMotion’s strengths lie in the breakthrough technologies used to create delightful hit mobile games. Zynga’s strengths are our ability to develop breakthrough social features while sustaining live games over time.
Let me tell you what I mean by that. Our experience has taught us that the social dynamics of a game will directly influence the engagement, retention and long-term sustainability of the audience. Our teams have spent years tuning this expertise and marrying it with richer levels of data and analytics in order to create a more sustainable game over time. Both CSR Racing and Clumsy Ninja are early days in their social development and we look forward to working with the NaturalMotion team to leverage our unique skillset.
In addition to the social benefit, we are committed to nurturing and growing CSR Racing and Clumsy Ninja and believe we can create even stronger consumer traction by leveraging another of Zynga’s greatest strengths — live game operations at scale.
Our teams, more than any in our industry, have proven their ability to sustain hit games not just for a few quarters but for years. Our anchor games in the FarmVille, Words With Friends and Casino franchises — have all been sustaining brands for more than five years each. I look forward to applying this tremendous expertise of managing live games at scale to NaturalMotion’s products.”