Zynga reported one of its strongest revenue quarters in years today as it hit $207 million in bookings, up 14 percent form a year ago. The drivers were growth in mobile games, improved live operations for existing games, and better operating expense efficiency. Earnings weren’t quite as good, but they beat Zynga’s own expectations, and the stock price is up in after-hours trading.
I talked with Frank Gibeau, CEO of Zynga, in an interview today about how things are going. The company has been through a lot of ups and downs, and its mobile revenue and user growth is finally starting to compensate for its continuous decline of Facebook desktop games.
But Gibeau is particularly excited about games that are embedded in the feeds of messaging systems. He said, “The most vibrant, largest, most social audiences on mobile are in messaging apps. You’ve seen us start to invest development dollars and talent into building games there, because we think there’s an opportunity to entertain people in chat.” A variety of other companies are also pursuing the opportunity, including Blackstorm Labs, Big Viking Games, and Spil Games.
Here’s an edited transcript of our interview.
GamesBeat: It turned out to be a pretty good quarter.
Frank Gibeau: It did. There are all different ways to look at it, but from a financial standpoint, we beat guidance on all the measures. We delivered some of the best results we’ve seen in years. We hit some records – highest revenue in years in mobile, incredible mobile growth. That’s the story of the quarter. When we refocused our efforts around growing our mobile live services, it’s paid off. The reinvestment in our players, adding new features—it’s been a great growth engine for us.
We’re up 27 percent in mobile bookings. Our audience in mobile grew to 18 million daily active users, which is the highest in two years. The in-app purchasing number was up 40 percent year-over-year. That means we’re putting way more value in front of our players, a lot more features and content that they’re loving. It feels like we’re hitting our stride there. We have so much more room to grow in live services.
Poker is the one that stands out in the company right now. That’s off to a blistering start in 2017. It’s up 76 percent year-over-year in mobile. DAU is up 78 percent. This is a 10-year-old game in a very competitive category. That anchored our live ops performance.
CSR 2 is also doing great. We had a strong holiday. We’re doing a lot of the stuff that helps keep it in the position of number one racing game. We’re adding new content from Lamborghini, Porsche, McLaren. New modes. We just did an integration with Fate of the Furious, which has been terrific. We’ve added the characters and the cars and the storyline. Fans are responding well to it.
GamesBeat: I get the analyst reports from Adam Krejcik. He measures all of social casino gaming. It seemed for a while that Zynga was losing share in that category, but are you at a point where you’re regaining share, bouncing back compared to other competitors?
Gibeau: Social casino is kind of in two segments. One is poker, which is going extremely well for us. We’re growing share there. Slots is the other part of our business — Wonka, Wizard of Oz, Spin It Rich, Black Diamond. We’ve focused our efforts in that business to get to a place where we’re able to grow the games over the long term effectively. The games needed more investment, in the elder games and the mid-range retention features we wanted to have. We spent the last few months focusing in on that. We’re very pleased with the results there. I feel like, in social casino—depending on how you count it we’re either the number two or number three company, when you put slots and poker together. We feel like we have a strong position there. Slots is in a position to grow profitably.
GamesBeat: It seems like, with mergers and acquisitions, that’s been a very active space.
Gibeau: No kidding. It’s consolidating like crazy. Between Double Down and Caesar’s—it’s a very active category, a very exciting category. It’s one where Zynga has, over the years, built up a very strong position. It’s pro ball. You have to be able to compete. I feel good about our poker and slots business together.
GamesBeat: With Dawn of Titans, I guess you don’t really break that out. I don’t know how good this data is, but Sensor Tower has Dawn of Titans grossing about $21 million to date. How are you feeling about that title?
Gibeau: It’s going well. We had a good launch. We’re trying to get the game into position for growth. It’s a big focus right now. We’re looking at the elder game, the PvP, the retention curve, how to make the Titans even more valuable and important to the gameplay. I feel like Dawn of Titans is going well, but we have more work to do there before we get it to a place where it’s reaching its full potential. Much like you’ve seen us do in Poker and CSR 2.
When you’re in live ops and you really understand what players enjoy and don’t enjoy, it makes your decision-making so much better. I feel like the Dawn of Titans team is so much faster and effective at building those things out now that they’re live compared to when we were in development. I feel very good about Dawn of Titans over the long term. I just don’t think it’s reached its full potential right now. We’ll keep building.
GamesBeat: Where are you on employees right now?
Gibeau: We’re a little over 1,600 employees. It’s a bit down from the last quarter, down a lot from last year. We’re constantly looking at our teams and our deployments. We feel good about the talent base we have.
GamesBeat: On a GAAP basis, you guys have been just barely short of profitability. Is there something that makes sense as far as operating the company here? Do you have some goals to boost it and get well above profitability?
Gibeau: There’s obviously GAAP and non-GAAP. Let me start with non-GAAP. The key difference is going to be stock-based compensation. On the non-GAAP basis, we’re really driving hard to get that EBITDA to as high a percentage as possible. I said in my first call when I took this job, I want Zynga to be in the same conversation as Activision and EA and the rest of the top game companies. Their EBITDA percentages are up in the 30s. This last quarter, if you looked at the measurement, we hit 14.5 percent, which is the highest it’s been in years. That’s up from two percent in 2015.
We measure that pretty carefully and make a lot of decisions to make sure we get to a profitable growing business. The best game companies in the world, and the best games in the world, are profitable, whether it’s Clash of Clans or Overwatch or Battlefield. You tend to reach big audiences and you can be in a good position. So it’s a signal of a healthy, high-quality game company to be profitable.
In this phase of the turnaround, where we’re fixing our fundamentals, what I’m talking about and driving the team to do is get to a level where our EBITDA percentages are in line with our peers. Right now we’re at about 14.5 percent. I’d love for us to crest 20 percent some time in 2018, and I’d like to get into the long-term conversation with other game companies after that.
On a GAP level, what we have to do is get our stock-based compensation more in line with what we can afford and what other game companies have. Traditionally, Zynga has had very high stock-based compensation, but it’s down 40-odd percent year-over-year. We’re starting to clean that up. Our GAP EBITDA was—last year we lost $26.6 million in Q1. This year we narrowed that down to $9.5 million. I’d like to see that go to a positive number, obviously. I’m confident we’ll get that into the positive pretty soon.
GamesBeat: Facebook desktop, this is always some kind of moving target, right? It’s in decline. Is that making harder to continually post better numbers there?
Gibeau: In any turnaround you come into, there are always legacy titles, older titles, things like the web that are just in descent. You try to manage your way through. The good news is that, this last quarter, we hit 85 percent of our revenues on mobile. We’re closer to the end of the web story than at any time in our history. I feel like we have a good handle on it. But it’s still a downward pressure on the business.
There’s a positive on Facebook, though, which is what’s happening in Messenger. If you look at some of the investments and announcements that were made recently as it relates to Words with Friends, the most vibrant, largest, most social audiences on mobile are in messaging apps. You’ve seen us start to invest development dollars and talent into building games there, because we think there’s an opportunity to entertain people in chat. Our brands lend themselves well to that environment.
Facebook is powerful. It’s a great partner for us. If the web business is starting to ebb away, we’ll start to focus more on Messenger and opportunities like that.
GamesBeat: That does feel pretty exciting. It almost seems like a return to virality.
Gibeau: Absolutely. If you look at those chat channels, they can be tremendous organic customer opportunities. You’re talking about a billion users on some of these apps. From my perspective, that’s truly the mass-market, most social part of the phone. It would be great to have an awesome Words with Friends experience there, or Poker, or some of the other brands we’ve built out that people love. They’re turn-based PvP, which lends itself to that context.
It’s very early days. We like the opportunity to innovate. It feels good to our studios. When you’re in fix-it mode, in a turnaround, it’s tough work. But we’re going to quickly transition from fix-it to growth. That’s where we’re at right now. As we start to put double-digit EBITDA percentages out there and start to stabilize the business, you’ll see a lot more innovation and growth coming from Zynga.
GamesBeat: Is iMessage the same story?
Gibeau: I think of them as platforms. They’re platforms within platforms. As you know, platform transitions—you want to think of it as your friend. You want to look for opportunities to break out onto new platforms. I want to make sure Zynga is in position for what’s next and not get caught out.
GamesBeat: At some point, does it seem likely that if the users come into messaging games, revenues will get there as well?
Gibeau: Where we’re focused right now is building an audience. Apple and Facebook have made comments—certainly Facebook at their last earnings call talked about what those opportunities could be like. From my perspective, job one is making a high-quality experience that builds a big audience. The monetization will come from there.
GamesBeat: As far as the new games that have launched, you’ve been on a pretty regular schedule. Are you seeing promising results from anything in particular?
Gibeau: It takes a little time for mobile games to establish themselves in this market, as far as new titles. I’m excited about how CSR 2 is doing. That was a big release for us last year. We launched Crosswords with Friends today. That’s moving up the free charts. We’re excited to see how Words with Friends and Crosswords with Friends can start—we love our position in the words category. With the release of Boggle not too long ago, we’re in a mode where we’re starting to build more experiences in the words category. We want to build out that portfolio of products and give our fans more ways to play word games with us.
GamesBeat: Is there anything else you’d like to add?
Gibeau: We’re having fun. It feels like Zynga’s been in the doghouse for a while. Now, with this strong Q1 beat, the momentum internally is very positive. If you look at what we have in the marketplace in terms of live ops, the mobile numbers are great for us. We still have a lot of opportunities to grow there. It’s a lot of fun at Zynga right now.