Zynga hit its peak in stock price and revenues a while ago. But the San Francisco company is still a force in mobile and social gaming. Under the leadership of Frank Gibeau, a former Electronic Arts executive, Zynga has begun to turn the corner.
This week, the company reported its second consecutive quarter of net income, the first time it has done so since going public in 2011. That’s no easy task for a company that has more than 1,500 employees. Zynga also used part of its big cash cushion to acquire the casual mobile card games of Turkey’s Peak Games for $100 million. And Zynga also launched its Words With Friends 2 game for fans who want to take advantage of new features, all the while keeping the original for fans who want to keep playing that one.
Overall, that’s a pretty good week. I spoke with Gibeau this week about Zynga’s progress, its deal with Peak Games, its continuing investment in games like Dawn of Titans, and the company’s growing interest in emerging platforms such as messenger games and augmented reality.
Here’s an edited transcript of our interview.
Frank Gibeau: We had a pretty good quarter. The turnaround is chugging along. We had a good Q3. We beat on revenues and bookings. In fact, it was our best performance in four years. Our fifth consecutive quarter of growth across bookings, seventh consecutive quarter of EBITDA growth. The finance department was really excited that for the first time since going public, Zynga has delivered two consecutive quarters of net income. We’re seeing strong cash generation. Cash flow was $35 million for the quarter, up $14 million year over year. On a bookings, profitability, and cash generation standpoint, we did really well against consensus. We feel good about the momentum.
In particular, mobile was way up. It was up 33 percent year over year. In terms of our total take, it’s now 87 percent. We’re closing in on becoming purely mobile, which is good. Audience was up almost 20 percent at 19 million DAU. We hit an all-time high in terms of our mobile user pay, which was up 20 percent year over year. The momentum keeps going in our mobile business. It’s largely driven by Zynga Poker, CSR 2, and Words with Friends.
Poker had its highest quarterly mobile performance in the history of the franchise. Revenue was 78 percent up year over year. Bookings were up 81 percent year over year. The challenges and leagues–we keep adding features to those two beats, and they’re really working well. We’ve just introduced jackpots as another feature in the mix. We’re pleased with the performance on Zynga Poker so far.
CSR 2 had a great quarter. We launched it a year ago that quarter, and we’re starting to see it grow. Mobile revenues were up eight percent. Mobile bookings were up 12 percent. Performance was driven by the business we’ve been doing with Fast and Furious. We released the Dodge Demon in the quarter, a really popular car for our fans. We did a 70th anniversary event with Ferrari where we put about six of their cars in the game. It was huge in terms of engagement and reactivation.
Words with Friends had its eighth anniversary in September. It was up nine percent sequentially. The first part of the year, we had a little softness in the ad business. We had good engagement and player metrics, but from a monetization standpoint it was softer. That’s starting to bounce back. It’s up nine percent sequentially and up 10 percent in mobile bookings. One thing that drove that is we released a social dictionary, which includes 50,000 new words. They’ve been played 33 million times since we introduced them. It had a really positive impact on player engagement.
If you look at the story of the quarter, it was the continued performance of our forever franchises, strong momentum in mobile, and then beating consensus and guidance. We’re very excited about where we’re at. We do have some additional news. We’re actively trying to grow the company, and we’re pushing live ops really hard. We’re also introducing new games.
This week we’re excited to announce that we’re releasing Words with Friends 2, a full sequel. It’s adding new modes and new ways to play. We’ve added a single-player challenge mode that allows to take on AI through a series of quest challenges. It’s a chance to continue to play the game while you’re waiting for your friends to make their moves, which was a big part of player feedback. We’ve also added a new team versus team mode, where two players can take on two other players in a kind of lightning round. It appeals to the really hardcore players that are looking for the ultimate challenge there.
You’ll still be able to play the original game. One thing that I’m very much making clear to the teams it that if it isn’t broke, don’t fix it. There’s a lot in the sequel that will feel familiar to our fans, but feel improved. The game offers a new user interface that we’ve modernized. We’ve increased the accessibility of it. We’ve made sure that people that are playing new Words with Friends will be able to play people in Words with Friends 2. It’s like backwards compatibility on console. The games are compatible and that allows us to keep the community intact.
Slowly, people will migrate over to the new game. Some of those folks that are really happy with the current one, they’ll see the new features. We feel like that’s the right way to sequel in mobile, as opposed to being too abrupt or shutting off what people are currently happy with. We think we have the right strategy there.
The next piece of news is we’ve entered into an agreement with Peak Games to acquire their card and board game group. It’s part of our strategy that you’ve seen us do with poker and solitaire. We see a real opportunity in casual card-based games on mobile. These are global franchises. They’re evergreen. People have been playing these games for centuries. As you look at how they cross over and how the audience works, there’s a lot of people that play spades and rummy as well as solitaire and poker. Given the strengths we’ve seen with our poker and solitaire titles, we felt like there was an opportunity to work with Peak to bring their products into our portfolio.
We’ve bought the spades game they have, the largest spades game in the world, as well as rummy, which is also the largest rummy game. They also have a franchise called Okey, which is a top franchise in their part of the world. The team is based in Istanbul. They’ve been together for seven years. They make high quality experiences and we’re excited to bring them into the card-based division here with poker and solitaire. It gives us the world’s largest card-based game portfolio on mobile, which we think is a real opportunity in the long term.
GamesBeat: Do you think of this as a category, like casual mobile card games?
Gibeau: We do. When we look at crossover between solitaire players and some of other franchises with rummy and spades, we see an opportunity there. The acquisition is accretive, day one. From a financial standpoint it’s very positive for us. We expect to close the deal in late Q4.
GamesBeat: They’re staying as an independent company with two games they’re going to keep on making?
Gibeau: Right. Sidar Sahin, who founded the company, is going to move on with Toy Blast, and we’ll take the card and board game piece with his partner, who will join Zynga.
GamesBeat: In that respect, I guess you didn’t see the point of acquiring the whole company?
Gibeau: The opportunity was to acquire this piece of the company, so that’s how we looked at it. The third piece of news—as you know, we’ve been looking at platform transitions in mobile and new places to invest. We’ve been investing in chat-based games, as you know. But we’ve also been very intrigued by augmented reality, given the news out of Apple with ARKit and the stuff Google is doing with AR Core.
We’ve built, on ARKit, a new bold beat in CSR 2, which will come out later this quarter. That allows you to take the cars you’ve collected in the game and then put them in real-world environments. When I was over at NaturalMotion we went out to Trafalgar Square, pulled out our phones, and dropped a McLaren right in the middle of the square. We walked around, got in it, looked at it. It was really fun. It’s just the earliest ideas we have in this category, but long term, we’re intrigued by the excitement people have for AR globally. We think it can be a killer app for mobile gaming.
GamesBeat: On earnings, did employment stay stable in the quarter?
Gibeau: In terms of the work force numbers, our headcount is down to 1,524, which is down a bit over the quarter. It’s significantly tighter over last year.
GamesBeat: This improvement is more through the growth that’s happening, then, as opposed to cutting?
Gibeau: We’re going to constantly be sharpening the operating model, which is how our CFO likes to discuss it. We continually see improvements there. But really, our orientation is to grow the company in four ways. First, continue to drive our live operations. The approach we take there with bold beats, the combination of art and science, we’re continually fleshing out our capabilities there. That’s been driving the company’s success over these last seven or so quarters, that focus on live ops.
The second piece—those live ops will generate recurring profitable revenues. Now we want to layer in new games on top of it, like Words with Friends 2. But we’ll also be releasing some new games in the second half of 2018 in action strategy as well as the casual categories. You’re going to start to see new games this management team has built from scratch. It’ll be a combination of new IP, Zynga brands we’ve revitalized, and new strategic licenses we’ll add to our portfolio. That new game component, we’re really excited about it and investing in it hard.
The third piece is to invest in those new platforms, like chat and augmented reality, and invest in new business models. The final piece is—look, mobile is really dynamic. We’re always on the hunt for talented teams and franchises we can add to Zynga. We’ll use our balance sheet to go out and acquire opportunities, much like we did with Peak Games. If you look at our opportunity going forward, look at those four avenues of growth, we’re bullish about Zynga.
GamesBeat: What’s your view of Dawn of Titans now? I’m still playing, but there aren’t too many people around me.
Gibeau: The way I describe Dawn of Titans, we’re committed to that franchise. We have active development underway on a more robust set of features that we believe can build the audience again. We believe in the alliance versus alliance PvP. It just needs more depth and more features. That’s what the team is actively building right now, in conjunction with the fans. We’re constantly testing ideas with the fan base.
The good news about mobile is that a game can come out, have some level of success, maybe fall back a bit, but you can invest in new features, new content, new ways to play, and it can come roaring back. There are lots of examples of that in mobile. We’re committed to Dawn of Titans. We believe that in the long term, we will make that a forever franchise for us. It just needs more time to get the right set of features.
GamesBeat: That category of games, is that what you are targeting with some of the games that are coming in the future?
Gibeau: NaturalMotion is the place that’s building our action strategy games. That includes CSR 2 as well as Dawn of Titans. That category of games, we consider those together. On that front, we’re encouraged by the performance of CSR 2. As we look at those games, they’re on the same floor in the same building. There’s a lot of sharing and brainstorming about how we can get Dawn of Titans more to that level of performance. That’s why we’re optimistic.
GamesBeat: Is there some crossover between the casual titles you’re picking up and the casino titles? They’re all card games, but some are categorized under casino and some aren’t.
Gibeau: It actually occupies a space between casual games and social casino to a degree. Any of the Peak games are more casual than casino-oriented. But you see crossover between poker players and spades and rummy. You do see crossover with our Words with Friends and Crosswords with Friends into the card-based area. Solitaire is a big feeder of players into these other franchises as well.
GamesBeat: Do you think you’re picking up games that have more new audiences for you? Or are they games your audience is already playing?
Gibeau: We believe it’s new. The acquisition will actually add several million DAU to our overall mobile business. A lot of those will be incrementally new.
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