Mark Pincus insists Zynga doesn’t need an Activision-like sugardaddy to make a comeback

Social gaming company Zynga made Wall Street investors smile Wednesday as it reported better-than-expected earnings.

Zynga has now beaten estimates for three consecutive quarters — two of them since Mark Pincus returned as chief executive after the departure of Don Mattrick. Hits such as Words With Friends, Wizard of Oz Slots, and Empires & Allies are helping produce the better results.

The pleasant surprise prompted the stock to rise 4 percent in trading yesterday. But Zynga still has a lot of potential and a long way to go to make up with Wall Street. It is trading at $2.55 a share, giving it a market value of $2.3 billion, or about 17 percent of its peak five years ago. And the company had one setback as it announced that David Lee, its chief financial officer, had resigned, and it had delayed two key games from NaturalMotion — Dawn of Titans and CSR 2 — until 2016. Zynga is also losing a lot of users still, largely because of the decline of Facebook desktop players, with daily active users dropping in the quarter to 19 million, down 21 percent from a year ago.

Yet Pincus is encouraged by the stamina of the Zynga team and the improvements in the company’s mobile business, which now accounts for 82 percent of its bookings. While its rival King has agreed to be acquired by Activision Blizzard for $5.9 billion, Zynga is still going it alone. We caught up with Pincus on Wednesday to talk about the results and the company’s latest strategy.

Here’s an edited transcript of our conversation.

Above: Dawn of Titans is a mobile strategy game that Zynga had to delay until 2016.

Image Credit: Zynga

GamesBeat: It looks like a good quarter. Did anything in particular make it rise above expectations?

Mark Pincus: We’ve been seeing, for the last three quarters, a good strength in our live franchises, especially on FarmVille 2 web and Words with Friends mobile, as well as slots games on mobile like our new Wizard of Oz slots. We’ve seen a decent contribution from our new game Empires and Allies. But all three quarters, the live game team performance has exceeded our expectations. The level of advertiser demand and interest in our Words with Friends audience and other mobile audiences has continued to be a pleasant surprise for us.

On the operating expenses side, we’re seeing initial dividends from the narrowing and cutting and focusing we announced in May. Things like moving FarmVille 2 to India versus San Francisco—that significantly lowered operating expenses. We had a significantly better outcome on EBITDA than we were forecasting.

GamesBeat: Poker seems like it’s getting back to normal. Would that be a good way to characterize it?

Pincus: Yeah. The team is operating well. Their morale is high. They’re excited about new features. But they’ve done a good discipline job as far as hunkering down and focusing on quality and app store ratings and paying attention to near-term customer feedback. The way we’ve thought about it with Poker is to nail the quality this year and be positioned to grow the audience a lot more next year.

GamesBeat: Is there more detail you could give behind the delay of the NaturalMotion games? Is it just bug-squashing at this point, or is there more redesign in the works?

Pincus: It’s not either, really. There’s always bug-squashing. A couple of forces at play led us to move those game launches to next year. First, the learnings from Empires and Allies, at launch and post-launch—the number one learning we had come out of Empires and Allies was about the power of social, having social deeply integrated into the strategy and the elder gameplay.

The most player engagement and heat we’ve seen since the launch of Empires and Allies was around the social features. We launched leagues and alliance wars after launching the game. The number one feedback item we’ve heard from players is that they want easier ways to find each other and join alliances. We’ve always seen, as a company, that when we invest in social and community it over-delivers. Getting social in at launch is key.

Above: Empires & Allies is a mainstay of Zynga’s portfolio.

Image Credit: Zynga

In this market, when we see the potential to move our payer and player retention significantly, that impacts everything else in the trajectory of the game. That means LTV is higher. We can spend more on advertising. We can sustain the growth of that game. When we pencil out all the economics, it’s clear that the upside is worth the weight.

Philosophically, the way I approach this business is that—This is why we announced the reduction in our operating expense, the $100 million we announced in May. If we can manage our business off the profitability of our live games and invest those profits into funding future development, we can be in a position where we’re on offense, not defense. Even though there might be expectations from Wall Street or other outside pressure to launch a game, we can listen to our players and our game teams and focus on what we’ll be happy with doing in a year, not in a quarter.

GamesBeat: What did you think of the King deal with Activision? They’re unexpected partners in some ways, but they seem to be creating a more integrated cross-platform game company.

Pincus: My take relates to the strategy and investments we’ve been making as a company. Over the next arc of a couple of years in our industry, we’re going to start to see a few different kinds of companies emerge, different from what we’ve seen historically. There’s going to be companies that are multi-category. They’ll be able to sustain growth over longer periods of time.

You’ll have companies that are build around singular, amazing franchises. They may be more limited on growth versus a company—we’re focusing on and making multi-year investments in three areas to enable future growth, what I think are the right areas to create potential for broad-based growth. Number one, a player network that spans all important audiences, from geographies to genders to age ranges to genres. Number two, being multi-category in terms of game development capability, building strength and talent and domain expertise in terms of the game engines you have and your IP. Number three, maintaining, owning, generating, and growing leading mobile franchises.

We’ve been investing in those across social casino, across casual with Words with Friends, and best expressed in action strategy with the launch of Empires and Allies and the acquisition of NaturalMotion. When you look at the Activision-King deal, I think it makes a lot of sense for all those reasons. Bobby [Kotick] is adding key pieces of the puzzle. In one fell swoop he gets mobile, casual, Asia, and women players. He’s positioning his company well.

Above: New Words With Friends

Image Credit: Zynga

GamesBeat: Do you feel like you have all the genres and intellectual property that you’re interested in right now? Or do you feel like there are pieces missing from the puzzle?

Pincus: There are always missing pieces. I wish we further along on invest and express in mobile than we are. I’m happy with the strength of our Words with Friends franchise and the continued valuable audience that loves that game, the quality level of that game. I’m happy with where we are in slots – the growth we’ve had and the depth of our engines. With our acquisition of Rising Tide, we continue to add to a strong story there. I’m excited about the opportunity in action strategy.

Poker, I wish it was in a stronger place than where it is, but it’s come back. This has been a good year for Poker, but it’s been a comeback story instead of a growth story. Poker should be further along in the mobile market than it is.

Given that it’s been a couple of years since the NaturalMotion deal, I think we all wish we were further along in that market than we are. But I feel good about the categories. We’re in the right categories right now. We might have been in a few too many before. Sports is exciting, but unproven. I’m glad we narrowed our focus a bit. I think that was one too many.

There are some interesting emergent areas that we’re not in yet. They don’t perfectly make sense for our casual, mass market focus — things like esports. But they’re interesting and emergent and on the horizon.

GamesBeat: As far as where the user numbers are now and where they’re going, are you reaching a point where the fall-off from Facebook on the desktop is balanced out by what you’ve gained in mobile?

Pincus: We’re getting close. Our mobile bookings have grown enough and are growing enough to replace the declines in our Web bookings. We’re getting closer in terms of audience. But mobile is a different audience story than web. On web, through Facebook, it was much easier for us to more easily get to a broader, more casual audience than we can reach on mobile.

We have a lot power and resilience around the organics of the web audience finding us on mobile. With FarmVille Country Escape, we’ve substantially reduced the ad spend on mobile, but we’ve seen installs maintain. That’s a testament to the organic brand power. Games like Words with Friends and Poker don’t rely much on ad spend for audience. We see some healthy organics there.

Not just with us, but with other leading mobile players, you see a trend toward a more casual audience in these games bleeding off more quickly. We’re holding on to the more committed, more engaged audience that’s more closely grouped around your payers. All that is to say it’s not as easy a casual audience play on mobile as it was on web. It’s more focused on mobile.

GamesBeat: What lies ahead for Empires and Allies? Are you changing the approach there?

Pincus: I’m happy to see the way the team is kicking into motion. In retrospect I’d say that we launched that game earlier than we should. We should have gotten the rest of the social features in before launch. We had to play catch-up post-launch, and it took us too long after launch to start bringing out the features we knew users wanted.

Once we did that, we’ve seen a lot of heat around it. Under the direction of Pete Hawley and Katherine De Leon, both of whom have great backgrounds and teams with some of our experienced product managers, we’ve seen some really good cadence of innovation and feature launch. They brought leagues out. They brought alliances out. They just brought out War Factory. My own personal favorite is, I really think there’s a missed opportunity in that game around the base defense. We just ran our first heat test around players competing in base defense and it was well-received. It had a large jump in revenues on the day, which is a good sign of interest.

We’ll continue to see a good cadence on that game now. We’re cautiously optimistic. It doesn’t look like it’s in a place where—Realistically we don’t think it’s going to be a top 10 hit, although I’d like to see the team prove that wrong. But we think we can deliver steady growth.