Zynga keeps chipping away at its turnaround under Frank Gibeau

Zynga has had a long march over the past five years as it has tried to recapture a position in mobile games that mirrors what it once had in Facebook social games. As Facebook desktop games have declined, the company has launched new games in its CSR, FarmVille, and social casino slots franchises on mobile.

And under new CEO Frank Gibeau, Zynga is making progress, based on an earnings report yesterday. It has remade its management team and launched new versions of its big franchises, such as FarmVille: Tropic Escape. To show confidence in the turnaround, Zynga pledged to buy $200 million in stock back from investors over the next couple of years.

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But I got the sense that Zynga won’t really achieve its turnaround until we see how its Dawn of Titans game does. The game has been in development at Zynga’s Natural Motion division in the United Kingdom for years. The title is in soft launch, and it should finally debut more broadly by the end of the year, Gibeau said.

I talked with Gibeau about Dawn of Titans and the company’s latest earnings yesterday. Here’s an edited transcript of our conversation.

Frank Gibeau: The quarter was a good one. We executed well. We’re gaining some momentum in our turnaround. We beat on the top and the bottom for the third quarter in a row. We’re excited about getting products out and seeing the market reaction to them.

CSR 2 continues to do well for us. We were a little worried there when we released it the same week as Pokemon Go, but it’s performed well in the face of crazy competition. We have a million five-star reviews. It’s the number one racing game in 50 countries. As it settles in and we head into Christmas, we have a lot of updates planned. Tropic Escape is doing well. It was released in Q3, late in the quarter, but its weekly run rates are improving. It’s moving from strength to strength.

We’re pleased at how people are responding to our title plan, and we have one last game to go, a little game called Dawn of Titans. That’s coming out late in the quarter. We’re still in soft launch, making some tweaks, but we’re trying to get in position for a Q4 release. It shouldn’t have a big financial impact on the business because it’s late in the quarter, but it’ll be great to finally release that game and get it to the audience.

One thing that surprised us was how well our existing live services performed year over year. If you look at Words with Friends, Social Slots, and Zynga Poker on mobile, they’re up 33 percent, 26 percent, 16 percent. The redoubling of our efforts in existing live services at scale is paying off. We’re showing some product innovation there, too, by releasing Words with Friends in iMessage during the quarter. That was an organic growth effort on our part and we’re excited to see the potential there in the long term.

We brought in Gerard about five or six weeks ago, after having brought Matt Bernard on board. I feel good about where our management team is. Almost immediately, when Gerard came on board, he said we should be buying back our shares. We have a good long-term outlook in front of us. We announced a $200 million share buyback. I feel good about having these guys on board, because they’ll help this organization continue its emphasis on quality games and a sharp operation so we can generate more profits than we ever have. We’re not done yet, but it does feel good.

GamesBeat: I saw you clearly beat on bookings. What about net income?

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Gibeau: Our EBITDA for this quarter was $17.9 million. Consensus was about $16.7 million. Our guidance was $12-16 million on EBITDA. We were slightly under on earnings per share, primarily due to the fact that we took a non-cash writeoff in the quarter relating to an impairment against some acquisitions we’d taken in the past that didn’t perform up to expectations. That dipped us slightly below on our GAAP net loss. That was up to $41.7 million, as opposed the low end of our guidance. But we generated more cash in the quarter, so it was an intangible non-cash writedown. We generated operating cash flow in the quarter of $21 million. From an operational point of view it was a strong performance, but taking into consideration some balance-sheet actions, it depressed the net loss.

GamesBeat: Does that still come out to a non-GAAP beat?

Gibeau: Yes, on a non-GAAP basis.

GamesBeat: I wondered how CSR2 was comparing to the launch of the original game. Is it taking off faster?

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Gibeau: It’s off to a much faster start, yes. Sequels always benefit from that existing audience. The original CSR and CSR Classic continue to be in live ops, serving an audience. CSR 2 is a lot more technically advanced, a bunch of new features. It’s a nice set of products to be working against an overall market where you have a lot of advanced phones and some more legacy phones.

GamesBeat: It seems like you’re stable on staffing at around 1,800 people. Is that going to continue?

Gibeau: We’re closer to 1,700. I came on board in March, and as Matt and Gerard and some of these studio leaders come on board—we’re constantly looking at ways to sharpen up our operating model, looking at our deployments and teams to make sure we’re in the most optimal place. We don’t look at total number of heads, necessarily, because heads in India versus San Francisco versus parts of Europe and other higher-cost locations—we’re looking more at operating expenses. If you look at that on a forward basis, we’re guiding to lower operating expenses in Q4 versus Q3, for example.

GamesBeat: For the quarter ahead, is there anything changing as far as outlook?

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Gibeau: We gave a range, from 185 to 195. Dawn of Titans is coming late in the quarter, so as I said, it’s not a huge financial impact. But getting it out and into the marketing window for the holiday is a positive. Our advertising business is doing pretty good. We saw slight growth quarter over quarter. If you look at the seasonality of an ad business, November and December still have a lot of business to go.

We’re still managing the legacy Facebook and web business. We’re still trying to understand how that’s going to continue, even as it’s obviously in secular decline. It’s a nice contributor to our business, but overall we have to make sure we’re constantly monitoring how that drops.

The larger issue to think about is we’re not prioritizing bookings number one. Our number one priority is shipping high-quality games, followed by generating EBITDA, profitability. Bookings come after that. If you look at our marketing expenditures and some of our other expenditures, we’re trying to drive toward higher quality bookings. By that I mean bookings that are sustainable and profitable.

That hasn’t always been the case at Zynga. There have been times where there have been very high levels of marketing spend – Q4 last year is a good example – but it didn’t lead anywhere. It didn’t generate revenues that sustained. We’re taking a more aggressive look at—when we put a dollar out in the marketplace on an ad, on paid acquisition, what’s the ROI? What’s the audience? We’ve increased a lot of talent and capability there.

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GamesBeat: Any other views on the mobile gaming market overall?

Gibeau: I’m a bull. You know me. I used to work on console and PC, and I’ll never go back. I love the mobile business. The audiences you can reach, the geographic distribution—you have huge markets in Asia and emerging markets. When people say the charts are never going to change, I don’t agree. It’s a dynamic time in mobile. There’s a lot of consolidation happening, a lot of new products coming, new ways to engage customers, whether it’s subscription or AR or VR. It’s exciting.

I love where our company is positioned. Our focus on mass-market social is far from its full potential. When I look at what Zynga’s capable of and how that vision is more relevant now than it’s ever been in the company’s history, I’m excited about where we’re at as a company and as a market.