It looks like a huge miss. The stock is in absolute free fall, down more than 30 percent. The stock was down more than 40 percent at one point.
The social gaming giant was once one of the hottest IPOs of 2011, but has lost a lot of ground over the past several quarters. It relied predominantly on revenue from games played on Facebook, while games in general are now played on mobile devices.
A lightly-edited transcript of the call can be found below. But first, here's the scorecard:
Zynga cut its forecast to a full-year EPS forecast of $0.09 to $0.04. Wall Street expected 2012 EPS of $0.27.
It lowered its outcome thanks to reduced expectations for Draw Something, a game it paid more than $200 million to acquire, and a faster-than-expected decline in existing web games.
Zynga posted EPS of $0.01 in the second quarter this year, compared to $0.06 EPS estimates from Wall Street.
It also missed on revenue in Q2 at $332.5 million, compared to consensus estimates of $344 million.
Another important metric, daily bookings per average daily player, fell from $0.051 to $0.046 year-over-year in the second quarter. Zynga's players are essentially paying less to play Zynga's games.
Zynga now has 33 million daily active users on mobile, CEO Mark Pincus said in a prepared statement with the earnings release.
It released a bunch of new games that have taken off, like The Ville and Bubble Safari, which both have more than 6 million daily players.
But there's still no sign as to whether Zynga will begin to incorporate real-world gambling into its arsenal.
Zynga's stock is down from a high of $14.69 this year.
4:59 PM | The conference call is going to start any minute now.
In the mean time, Zynga's stock seems to be floating around the $3.00 mark, down 40 percent from close.
5:03 PM | Here we go!
COO John Schappert, CEO Mark Pincus and CFO David Wehner are on the call.
5:04 PM | Zynga is going over the safe harbor statements.
Once again, it's stressing its important relationship with Facebook.
5:06 PM | Some perspective from Mark Pincus...
Zynga's advertising business showed strong growth, games reached record audiences, and its mobile footprint grew 5x.
Zynga is still optimistic about near-term prospects on Facebook, long-term prospects on network and medium-term prospets for Mobile.
Drop in bookings was due to changes on Facebook's end, Pincus says.
Draw Something underperformed and Zynga launched The Ville with a few delays.
5:07 PM | Zynga is still investing in the Draw Something franchise.
It's going to build on the brand for future games, Pincus says.
Keep in mind Zynga bought OMGPOP, the developer behind Draw Something, for more than $200 million.
5:08 PM | In Q2 Zynga proved the power of its mobile network.
Mobile bookings excluding Draw Something grew three-fold, Pincus says.
21 percent of Zynga's mobile audience is now playing games on both web and mobile.
5:09 PM | Zynga's greatest growth opportunity is Zynga With Friends.
It's a mobile platform for gamers for discovering new games and finding other players.
Think of it like the iPhone's Game Center. Zynga With Friends is coming out later this year.
5:10 PM | Zynga expects to launch its first real money gaming products in international markets in the first half of 2013.
It's talking about introducing online gambling games like its Casino franchise games.
5:11 PM | Facebook changed its platform to focus on new game discovery, not live games.
That's what led to a big decline. Live games users declined 34 percent for the quarter year-over-year.
CityVille and CastleVille DAUs were impacted by weak feature performance, too.
5:12 PM | Zynga currently has 7 of the top 10 games on Facebook.
Doesn't mean much any more, though, because its top games only have around 6 million DAUs.
FarmVille used to have tens of millions of DAUs.
5:17 PM | Without Draw Something, Zynga's sequential DAU growth would have been down, Wehner says.
5:18 PM | Mixed shift to mobile and more casual games hurt average bookings per user.
Mobile is lower because of the games mix. Words With Friends monetizes lower than its other games.
Zynga Poker monetizes as well on mobile as it does on the web, Wehner said.
Arcade games monetize at a lower rate.
5:19 PM | Zynga has 4.1 million unique payers, growth driven entirely by Draw Something.
5:23 PM | Zynga has $1.6 billion in cash and marketable securities.
5:24 PM | Again: Zynga is lowering its outlook due to delays in games, decline in web games and reduced outlook of Draw Something.
5:25 PM | The Q&A is starting.
5:27 PM | On EPS drag...
Q: Can you walk through, order of magnitude, each drag on outlook?
Dave Wehner: We laid out the impacts in the orders of their size, we're not giving specificities. In terms of the year, the big impact is the decrease in bookings, there's no increase in spend in the year. It's really the decrease in bookings that's driving the EBITDA outlook.
5:29 PM | On mobile and real-money gaming...
Q: Is there more of an urgency to drive users toward mobile or Zynga.com?
Could you provide insight into real-money gaming?
Pincus: In the near term, we see positive opportunities to continue to grow in our existing categories on Facebook, especially with the pipeline of games. We see opportunities to grow bookings to move male-oriented games.
We see a bigger long-term growth opportunity being driven by mobile. We're seeing a lot of users, especially in the US. coming back to our network on mobile, leading us to believe getting beyond the Facebook web footprint through mobile is going to give us more growth opportunities.
On your second question, what we said is that we have our first products in development and we intend to release them in markets that are regulated and open subject to our getting licensing. The US is obviously an attractive market, but it's not open, regulated market.
5:32 PM | More on real-money gaming...
Q: Can you talk about the licensing, are you looking to pursue licensing on your own?
Looking at mobile quickly, can you comment on the monetization on mobile and compare that to what you're seeing on Facebook?
Pincus: We're not making more public announcements about how we'll enter those markets today. Obviously it is subject to us having a license.
Wehner: You can get some sense of that by looking at our bookings. I mentioned that approximately 80 percent of our bookings are related to the Facebook platform. The largest component that's not is the mobile business, that gives you some sense of the scale of that business. The DAUs, 33 million on mobile, if you work that math you can come up with a ratio. Mobile has less than half the monetization rate of the web. In some games we're seeing that it's comparable, like Poker. What we're seeing is a difference in mix. The largest impact is mix, and part of our strategy is to come out on mobile with higher-monetizing games as well as trying to continue to drive bookings.
Pincus: The biggest bookings growth driver on mobile is going to be getting to scale of distribution. We've found, whether it's in our slots and casino games or in our invest expess games, that mobile looks fine in terms of monetization. It's many of the same players that we saw previously on the web, but we need to drive significant scale of distribution to get to audience sizes we want.
5:35 PM | On Facebook changes...
Q: Can you help us understand in more detail what Facebook did in terms of the changes around game discovery and provide more detail on the timing?
Your cash balance excluding the restricted cash is around $1.6 billion, which is more than half the current market cap of the company, how are you thinking about cash?
Schappert: Facebook made a number of changes and we saw the cumulitive effect throughout the quarter. These changes favored new game installations over live game engagement. We saw the ecosystem decline 16 percent overall, the changes impacted the surfacing and discovery of games. Feeds and the like. Our users did not come back as often, instead new games were promoted. On the flip side we saw the launch of Bubble Safari and saw that rise quickly to the top. A week ago we turned on cross-promotion and marketing for The Ville and in one day we had 4.5 million installs in a single day. It's good for new games and it was challenging for existing games.
Wehner: On the cash, we don't have any specific plans we're announcing in terms of use of the cash at this time. Obviously Mark outlined the growth initiatives of the company.
5:38 PM | On headcount...
Q: How are you thinking about headcount levels given the underperformance of several titles?
Are you seeing any progress in stabilizing the legacy games?
Wehner: Consistent with the guidance we expect to have stable cost structure in the back half of the year. We'll be looking at discretionary expenditures, we continue to invest in the business and grow the business. We're focused on continuing to drive growth but we don't anticipate a significant ramp-up in expenses. Likewise on the CapEx front, we've been ramping down CapEx since we've completed the main phases of our zCloud buildout, we are decreasing expenses.
Schappert: Obviously we've just launched The Ville, we've seen nice pick-up since that launch. We have a joint mission of creating a healthy social gaming ecosystem. They're always making changes hopefully inclusive of games, if you look at Q1 we saw growth, in Q2 we saw decline. We are also seeing some uptick on new games. We have a great lineup of titles coming up.
5:40 PM | On Zynga.com...
Schappert: Zynga.com remains in open beta, we continue to take player feedback. We launched the multiplayer feature, we continue tot ake that learning and refine the system and refine the site to deliver the best social gaming experience you can. We haven't turned on meaningful cross-promotion or marketing for the site yet.
5:44 PM | On M&A...
Q: With the changing economics, there are going to be smaller game companies looking at strategic options. I'm curious to what degree you have the appetite for that, with your experience with OMGPOP.
How's the current environment impacted your view of the long-term margin structure?
Pincus: Our M&A strategy has always been much more focused on adding entrepreneurial high-performing development teams than whole product lines. As we said on the last quarterly call, the OMG acquisition, we saw is a rare instance for us. It's only the second time we've acquired a product line, we're committed to growing primarily through organic development. The two instances where we've bought product lines, in both cases we saw an opporutnity, a breakthrough mainstream brand we could continue to extend our product foot print with. You should expect to see us continue. In terms of looking at other small companies and teams, we stay actively engaged in the market, there's an incredible proliferation of entrepreneurial teams. We'll continue to look at them.
Schappert: You know the industry well, what you see is that there are a lot of folks out there. In addition to acquisitions as Mark spoke to. What we're also excited about is our publishing program. We launched that earlier this year on the web, we had four partners then, we have nine partners now. We just announced our web publishing program. That's another avenue by which we are interfacing with entrepreneurs.
Wehner: Obviously the margin structure has come down, we're investing in the mobile growth opportunity. The mobile cost structure will be slightly different given that there's a cost of goods component in the cost of sales line related to mobile since it's recognized on a gross basis, not a net basis. We're not at this point providing specifics around that.
5:47 PM | On sequels and Zynga.com...
Q: Can you talk about the relationship with Facebook, has that changed at all since you launched Zynga.com?
What did you learn from the Mafia Wars 2 launch for FarmVille 2, can you get the 31 million people back on FarmVille?
Pincus: On the first question, we continue to work closely together and collaborate on creating a better ecosystem. The launch of Zynga.com was envisioned in the agreement that we entered in to as companies. Both of us saw it as an opportunity for us to build a sandbox where we could move more quickly on innovating on the network around the game experience.
We were obviously disappointed with Mafia Wars 2, we think we didn't bring out a high quality enough game to serve that audience. Our belief is that we have audiences and game-playing audiences that are interested in certain genres and styles of play. Some of those games themselves can be evergreen like our poker game, we hope our more casual arcade games. In some cases we think the genre can be evergreen if we do a good enough job of bringing out next-generation sequels taht significantly move the production value of the series and deliver exciting new mechanics that re-engaged and re-excite people. At the peak we had 32 million DAUs for FarmVille, but there's several hundred million people that played the game. We're more excited about bringing the sequel out for the hundreds of millions that no longer play FarmVille.
5:54 PM | On excitement about the back half of the year...
Q:?You sold stock in March, and the company raised guidance in April, and now you've cut guidance by a large amount. Is there any reason for not pre-announcing?
Lastly, you said it wasn't your place to comment on how the market was valuing your stock, that was when it was at $5, now it's at $3, why should people buy your stock at $3?
Wehner: In terms of the full-year guidance and how it relates to what we experienced in the second quarter, we are factroing in the experience we had in the second quarter. All of those things are factoring into the full-year outlook in terms of bookings. That has a dramatic impact on EBITDA. That's what's leading to the change in guidance on EBITDA that is significant.
In terms of the pre-announcement, we do not provide quarterly guidance as a policy, we provide annual guidance, so we did not pre-announce on the basis of quarterly guidance. At the end of the quarter we go through a re-forecasting process. At that time, we establish new time for the year and we're providing that at this time.
The trends we're seeing on existing games that we experienced in the second quarter will persist into the back-half of the year. That's the largest impact on the guidance, we didn't expect those trends going in to Q2. That's the biggest impact on guidance.?We don't break out profitability on our existing games, but those games obviously are high-margin games.
Pincus: We are the most opportunistic long-term believer in social gaming and play. It can be an even bigger business in the future. We think we have, consistently, if you look back at our history, invested more than any other company in this opportunity and in where the opportunity was headed. I think we've executed over the past well in growing the market for social gaming and today we have the leading position on web and mobile. We will continue to pursue that strategy and keep investing in building the best social game mechanics that drive the next generation and engagement. Beyond that we want to bring the market the leading network and platform that enables everyone on mobile first to participate in social gaming both at a consumer level and even enable other developers to have better market opportunities. We really believe that's a very big opportunity in the future. Gaming is the number one activity people do on mobile, we think social gaming is just starting to grow quickly on mobile. It has the potential to be the most important part of the gaming experience on mobile. If you are optimistic about that future and you believe in our approach to the market, we think you should continue to buy our stock.
Q: Any level where you could buy stock with the company's cash?
Wehner: We've discussed that with our board but have nothing new to discuss.
5:56 PM | More on Facebook impact...
Q: How have Facebook changes affected high-paying users and non-paying users?
This time we didn't hear about the international opportunity, is there any change?
Wehner: We saw that impact some of our higher-monetizing games such as CityVille, that was an impact the changes had in terms of impacting engagement for those players. It did impact some of our higher-monetizing games and did have an impact on some of our more valuable players.
Schappert: We did, with respect to Japan and China, we launched two new apps in Japan in the quarter. We also launched Draw Something in China. We also localized Draw Something in a number of languages. We remain pretty early on in our Japan and China pursuits.
6:00 PM | On cross-promotion...
Q: What's the competitive advantage to cross promotion on mobile?
On advertising, what kind of growth should we expect to see?
Pincus: On mobile, it's a different platform and it's a different approach to growing your footprint because there aren't any prevalent distribution channels outside fo the App Store outside of advertising. The mobile ecosystem remains highly fragmented, you see some single product companies rise and fall on the charts. Our approach on mobile is, we need to build out the kinds of channels that have been key, not just to distribution for us but key to enabling it to be a highly-social experience, which is also key to driving ongoing engagement for people. We're making the deep investment to build that on mobile and we think it'll enhance the experience for all mobile players. We're starting to see the beginnings of that if you look at our With Friends games, you see very good cross-over between our With Friends titles and you see people starting to play more of our With Friends games, moving game to game with the same friends and people. It was through seeing the succes there of the With Friends game approach, turn-based, that we saw the mobile opporunity to grow that experience into the kind of network that we think people are going to need to experience social gaming.
Wehner: We're not providing breakout on mobile versus web advertising, but advertising is a larger component of our mobile bookings given the importance of advertising to our larger titles. We're seeing good year-over-year performance on both the web and mobile.
6:04 PM | On Facebook changes...
Q: The changes on Facebook went into place fairly late in the quarter, so wondering how that is then the biggest impact for the guidance?
Wehner: The largest reason for our guidance decrease has to do with the performance of our existing games. That is in part due to changes made on the Facebook ecosystem, but we're not saying that's the only reason. We saw challenges to those existing games early in the quarter, not at the end, and they persisted through the quarter.
Q: Do you think the changes that Facebook has made, do you think longer-term that will be a net positive or do you think at the end of the day this creates a more competitive environment.
Schappert: Facebook is always fine tuning, tweaking, testing its platform just like we do. I think the new game discovery is a good thing for everyone, it's great when people make great social games and people play social games. Part of the reason we saw softness this quarter is that we delayed the launch of The Ville. We certainly hope future launches will be well-received by players and will grow our ecosystem and grow the Facebook ecosystem. What they're doing is positive today. We are certainly happy we have a network of 72 million DAUs and 300 million MAUs, which does give us an advantage when we launch a game like The Ville.
6:04 PM | On growth in monthly unique payers..
Q: Outside of Draw Something, what was the trend for monthly unique payers?
Wehner: They would have been down if not for the acquisition of Draw Something. We're not giving more specifics than that.
6:05 PM | On The Ville...
Q: Can you talk about the early monetization trends for The Ville relative to others, is it following the same early-stage life cycle trends?
Schappert: We don't break out the individual monetization of the single game. While I am encouraged to see 4.5 million installs on a single day, and it has over 6 million DAUs, it's still very early for The Ville. This is something we're gonna continue to tweak and tune. I can tell you that it's early days and I'm encouraged by the early days and installs.
Source: http://www.businessinsider.com/live-zynga-earnings-2012-7
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