Zynga CEO Frank Gibeau has been doing some victory laps in recent quarterly earnings calls . The maker of social mobile games like FarmVille, Merge Dragons, and Empires & Puzzles is back to strong growth.
For the third quarter ended September 30, Zynga reported its highest quarterly revenue and bookings in history ($345 million and $395 million, respectively), with mobile revenue up 54% from a year ago and mobile bookings up 64%. Profits took a small dip, but that was because Zynga had to pay out bigger bonuses to its acquired companies — Small Giant Games and Gram Games — because they hit their incentive targets for growth.
If Q4 goes as expected, then “it will be the biggest year in the history of Zynga in terms of revenue and bookings since the IPO” in 2011, Gibeau said. The company’s market value is now $5.9 billion, compared to a third of that five years ago.
That’s a pretty good record, considering Zynga has been losing a lot of its users on the web, where its Facebook desktop business was once the engine driving the company. Now, 96% of revenue comes from mobile users. The loss of users has stabilized on the web and Zynga is growing its user base on mobile.
“For the first time in my career I feel like we don’t have time pressure to make a quarter with a game, and that feels pretty good,” Gibeau said.
I spoke with Gibeau last week about the company’s earnings and the prospects for the future.
Here’s an edited transcript of our interview.
Above: Frank Gibeau, CEO of Zynga.
Image Credit: Zynga
Frank Gibeau:We had a good Q3. We actually hit a record in terms of our revenue and bookings, the highest in our history from a quarterly standpoint. We delivered numbers that were above guidance and above consensus on the top and the bottom. It’s a quarter that’s been so strong, and with so much momentum in the business, that we’ve raised our guidance for the full year. If that comes through, it’ll be the biggest year in the history of Zynga in terms of revenue and bookings, since the IPO. Pretty exciting financial performance and momentum.
It’s been a live services quarter. Merge Dragons, Empires and Puzzles, as well as CSR and Words With Friends. Poker is delivering. We’re also starting to see contributions from Merge Magic, which is off to a good start. Game of Thrones social casino has had its first full quarter, and it’s the fastest start we’ve ever had for a casino game. It feels good to see the new product pipeline starting to pay off.
We still have FarmVille 3 and Puzzle Combat in soft launch and moving nicely. We’re getting a lot of good data and player feedback. We’re polishing those games up so they can be ready for release. All is well at Zynga.
Gibeau:Yeah, that’s related to the contingent consideration for Empires and Puzzles and Merge Dragons. As those games do better, we book up reserves against future payments against them. That’s part of it. The other issue is deferred revenue. As we book deferred revenue under GAAP accounting rules, which is money that we’ve already put in the bank account—it’s just that the accountants make us accrue it over the life of the player. That also has an impact on the GAAP net income. On a non-GAAP basis, it was a very strong profit quarter for us.
Gibeau:It’s about $230 million versus $250 million. That’s the expectation. There’s a $20 million slight miss there. That’s related to the contingent consideration booking up. It’s one of those bizarro-world kinds of effects. You buy a company and it’s well ahead of your deal model. That means you have to keep booking accruals against it. If it was going the other way, we would have had a different outcome.
Above: Words With Hope is a Zynga campaign to fight breast cancer.
Image Credit: Zynga
Gibeau:Essentially, yeah. When we announced both deals, we communicated that there was an up-front price, plus an earnout that was related to EBITDA (earnings before interest, tax, depreciation, and amortization) generation. The good news they’re generating a lot of EBITDA. The accounting treatment of that means you have to book more of a reserve against it.
Gibeau:It is. The license is really strong with that player base. In the real-world casinos out on the floor, that brand was very popular, and still is. The fact that they can play that game at home is a big win. In addition to that, the game has a lot of social gameplay mechanics that are pretty innovative. You’ll be able to pair up in a house with other players. There’s group quests. A lot of stuff you’d recognize from RPGs and those types of game genres, we’ve brought that over to slots, and it’s proving to be a strong component of the success of the game.
We’re very excited about the initial reaction to it. As a result, slots is up double digits year-over-year. When you look at Hit It Rich, Game of Thrones, Wizard of Oz, they’re all doing very well.
Gibeau:Year over year, DAU is roughly flat. We’re trading legacy mobile games and some of the chat players for the new audiences that we’re acquiring with Merge Dragons, Empires and Puzzles, Merge Magic, as well as our existing businesses. The softness is really related to that. But the good news, if you look at our yields, we’re actually generating more revenue on a player basis. That means we have more highly engaged players.
Gibeau:Advertising did well. Another good quarter for it. Last year we had a bunch of deals that we announced, and one of the goals of those deals was to even out the seasonality of advertising. We brought some of the revenue forward. This is the first time we’re comping those deals, but overall, advertising did well. We’re seeing more moves per DAU in Words With Friends, which is really driving that.
Above: Zynga Poker has higher stakes now with Spin and Win.
Image Credit: Zynga
Gibeau:We’re seeing really positive community sentiment, and a lot of pickup in the broader media around that. Our fanbase, it’s a very important issue for them. It’s been a big positive for how people are socializing and talking and engaging with the game. We’ve seen nice engagement pickups.
Gibeau:From a bookings standpoint we’re going to guide to $415 million, which is an all-time high for us. When we’re looking at the EBITDA basis, we’re communicating that we have some marketing that we’ll be investing in. We’re looking at investments around scaling Merge Magic and Merge Dragons and the other hit products. You’ll see the margins the 18 percent range.
Overall, when we look at that guidance, we’re not putting any money in against FarmVille 3 or Puzzle Combat. That’s strictly a live services forecast. That would be 55 percent up year-over-year, which is a pretty good result. We’re feeling like we can finish the year in position to deliver $1.55 billion in bookings for the full year. We’re raising our guidance by about $46 million, which puts us at nearly 60 percent year-over-year.
Our guidance is above the Street consensus right now. Street consensus is roughly $397 million. We’re guiding to $415 million. We’re pretty excited.
Gibeau:We’re not really signaling specific dates for games. What we’ve communicated is that FarmVille 3 and Puzzle Combat are both in soft launch. People in different parts of the world can play them. We’re actively in development on two Star Wars games still, as well as Harry Potter. We’re in active development on CityVille. We also have a slate of titles we’re experimenting with that are more casual-oriented, that we think can start to fill out our portfolio as it relates to casual word games and puzzle games.
Above: Empires & Puzzles
Image Credit: Zynga
We’re not going to slow down in terms of our product velocity. It kind of segments, though, into what’s in soft launch and what’s in development for future years. The beauty of having a live services business that’s performing as well as it has been, and the contributions that Game of Thrones and Merge Magic will have next year—it gives us a lot of flexibility where we don’t have to rush a game to market. As you know, it’s hard in this industry to get new games out successfully. For the first time in my career I feel like we don’t have time pressure to make a quarter with a game, and that feels pretty good.
Gibeau:It’s still in decline, but it’s declining slower than it has in the past. We’ve reached a level of fanbase there that I think is pretty predictable at this point. But it’s still something we have to manage in terms of it being down. Right now I think we’re 95 or 96 percent mobile, so only four percent of our total revenue comes from web. As an impact on the total enterprise, it’s pretty small. But we’re operating FarmVille, FarmVille 2. They’re still deployed with updates out of our India office. We continue to service those fans.
Gibeau:We really like Snapchat as a partner and as a platform. Our Tiny Royale game has gotten a great response. It’s very early days. We’re experimenting with them on the types of games and things like discovery and how they want to become a gaming platform. If you heard their call, they’re definitely thinking about it as an important growth driver. We love the fact that we’re in there partnering with them.
As far as the other chat platforms, we’ve de-prioritized Facebook Messenger for Snap. I think we can get to some pretty interesting experiences on Snap. They have such an engaged fanbase and their growth is very good.
Above: Merge Magic
Image Credit: Zynga
Gibeau:It hasn’t changed too much. It’s about 1,874. That’s down about 144 people year-over-year.
Gibeau:That’s just the acquisitions and staffing out our offices in India. We’ve grown a bit in Toronto and Austin.
Gibeau:We’re looking forward to finishing off 2019 and getting rolling on 2020. The only thing I would add is that when we raised the guidance this year to $1.55 billion, we started the year at $1.3 billion. We’ve a couple hundred million dollars in raises over the last couple of quarters, which is exciting to see in the business. We’re still holding to our forecast and guidance that in 2020, you should expect double-digit growth on the top and the bottom, even off the raised guidance.
We’re in growth mode. We’re not in fix-it mode anymore. It feels like our multi-year strategy is unfolding. As the new game pipeline continues to work, that’s a growth driver. We’re still in a position with $1.45 billion on the balance sheet. We’re still very interested in acquisitions. We’ll look for the right teams and the right types of franchises to bring into the company. That would be another growth driver for us.