Zynga beats Wall Street’s Q3 expectations — but also delays two major games

Social gaming company Zynga reported third quarter earnings and bookings today that beat Wall Street’s estimates, but it also delayed two major games — CSR2 and Dawn of Titans — until 2016.

The good news: The San Francisco company outperformed expectations in the second full quarter since Mark Pincus returned as chief executive after the departure of Don Mattrick. Games such as Words With Friends, Wizard of Oz Slots, and the new Empires & Allies title helped produce the better-than-expected results, said Pincus, in an interview with GamesBeat.

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The bad news: Zynga delayed the game launches from this year to next year in order to improve quality, and it announced the departure of chief financial officer David Lee.

Zynga’s performance will be closely watched, as it has struggled like King (which Activision Blizzard purchased for $5.9 billion yesterday) to recapture the allure that enabled it to stage a successful initial public offering back in 2011. The game industry is consolidating, as the market is concentrating in the hands of fewer players.

In some ways, Zynga and King have the same challenge of broadening out from a relatively narrow base of consumers and game categories. Zynga is still going it alone in its attempt to deliver much bigger growth, while King and Activision Blizzard have teamed up to become much broader together.

The social game publisher is still having trouble with its player base, as the number of Facebook desktop users continues to decline, even as mobile users increase. Overall daily active users were 19 million, down 21 percent in the quarter from a year ago.

In our interview, Pincus said the company is doing a better job getting more mobile users without spending a ton on advertising. He noted that FarmVille 2 desktop users are organically moving over to mobile, thanks to social hooks that are built into the game.

Zynga reported a non-GAAP break-even results of zero cents a share, on bookings of $176 million. Analysts had expected a non-GAAP net loss of 1 cent a share on bookings of $169 million.

“We are seeing some initial benefits from the cost-cutting that we did in May,” Pincus said. “We have significantly lower operating expenses.”

In addition, Pincus said the company’s goal is to manage its profitable games and fund development with that money.

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“Then we can be in a position where we can play offense rather than defense,” Pincus. “We can be in a position where we can deal with outside pressures or Wall Street. We can listen to our players and game developers about what is the right thing to do for a year from now, not just next quarter.”

In the previous second quarter, the company credited good performance to better-than-expected growth of its social casino games, including Hit It Rich! Slots and Wizard of Oz Slots. In the most recent quarter, Zynga Poker also performed well, with good response to customer feedback resulting in an improvement in quality, Pincus said.

“We are positioned to grow the audience more next year,” Pincus said.

During the quarter, Zynga doubled down on its social casino segment with its purchase of Rising Tide Games. But it also saw the departure of Mark Skaggs, the game designer who created hit games from FarmVille to Empires & Allies. That game isn’t quite living up to expectations, but Pincus said he was encouraged at how the development team is adding new features to make it more competitive.

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He noted that the delay of CSR2 and Dawn of Titans is partly due to the lessons that Zynga learned in launching Empires & Allies, a game more geared toward hardcore mobile strategy players. Pincus would like the games take more advantage of social features at the launch, not post-launch.

“The No. 1 learning we had from Empires & Allies was the power of social,” Pincus said. “In Dawn of Titans, we see a big upside in what we can deliver to players through social ease of use and integration of social into gameplay.”

Pincus took over the management of the company in April, returning to the top job of the company he founded after the departure of Mattrick, the former EA and Microsoft executive who had run Zynga for more than a year.

Pincus cut back the staff by 18 percent and withdrew from a couple of categories: sports and endless runner games. In his statement today, Pincus said that Zynga was able to make the tough decision of delaying the NaturalMotion games because it had cut $100 million from its annual expenses.

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Zynga has been in the middle of a turnaround and transition to mobile for a few years now. Zynga said it will repurchase about $200 million in stock. Adjusted earnings before income taxes, depreciation, and amortization.

The company also said it appointed Michelle Quejado as its chief accounting officer and interim CFO.

Pincus said that slots, Words With Friends, and Zynga Poker grew 61 percent from a year ago. Words with Friends is up 28 percent from a year ago.

In mobile, Zynga’s bookings are up 26 percent compared to a year ago. Mobile gaming now accounts for 69 percent of total bookings, compared to 66 percent in Q2. Pincus said average bookings per user were up 27 percent from a year ago and up 10 percent from the previous quarter.

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“Given our belief in the social gaming opportunity, our talent, and our IP, we believe this is in our shareholders’ interests,” said Pincus in a statement.

Pincus said that NaturalMotion is working to improve monetization by increasing retention for existing games.

“We are able to make these hard decisions because of the cost reduction program that we put in place earlier this year,” said Pincus.

Pincus said that ad revenue and other bookings were up 39 percent compared to a year ago, and they were up 17 percent sequentially. Zynga has $1.1 billion is cash.

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“I believe Zynga is in a much stronger position today than it was when I joined the company, and I want to thank Mark for his partnership,” said Lee, the outgoing CFO. “We’ve moved the majority of our business to mobile and are focused on growing our new intellectual property and existing franchises,
while significantly reducing our cost structure.”

Quejado, who has 25 years of experience, joined Zynga in March 2015 as vice president of finance and corporate controller.