Zynga Inc.
Q4 2014 Earnings Call Transcript

Published: 13 Feb 2015

[Operator:]

Good day, ladies and gentlemen. Welcome to the Zynga’s Fourth Quarter 2014 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Darren Yip, Senior Director of Finance and Investor Relations. Sir, you may begin.

[Darren Yip:]

Thank you, operator, and good afternoon. Welcome to all of you who are joining us today. On behalf of the Zynga management team, I would like to thank you for spending time with us this afternoon. We have with us our Chief Executive Officer, Don Mattrick; Chief Operating Officer, Clive Downie; and Chief Financial Officer, David Lee. Before we begin, please note that we are targeting a one-hour call. During the course of today's call, we will make forward-looking statements related to, among other things, strategy and expectations for future performance and outlook for Q1, our new game testing processes and our plans for our game slate and launches in 2015. Actual results may differ materially from the results predicted. Factors that could cause or contribute to such differences are detailed under the caption Risk Factors in our Form 10-Q and 10-K and elsewhere in our SEC filings. These include our ability to launch successful new games and features in 2015 and the ability of key games including our top franchises to sustain or grow audience and bookings. We will also discuss certain non-GAAP financial measures during the call. Reconciliations to the most directly comparable GAAP financial measures are provided in the press release and on our Investor Relations Web site. Be sure to look at these reconciliations as the non-GAAP measures are not intended to be a substitute for our GAAP results. This conference call is being webcast on the Internet and is available through Zynga's Investor Relations Web site. An audio replay of this call will also be available on our Web site in a few hours. With that, I would like to turn the call over to Don Mattrick, Zynga's Chief Executive Officer.

[Don Mattrick:]

Thank you, Darren. Welcome to everyone joining us on our fourth quarter conference call. Today, we will be discussing our fourth quarter and full year performance as well as providing details on our new product slate and how we’re positioning Zynga for success in 2015. Looking at our quarterly financial performance in Q4, we reported bookings at $182.4 million, up 4% from the prior quarter and adjusted EBITDA at $9.4 million, which grew sequentially up from $2.2 million in Q3. These efforts were driven primarily by the outperformance of Hit It Rich! Slots, our advertising efforts in New Words With Friends and sequential bookings growth across Zynga’s core franchises in aggregate. Now, I’d like to spend a few minutes sharing our perspective on 2014. We recognize that transitions take time and I’m pleased with how our teams have focused on recalibrating our business and improving our execution. Last year, we prioritized the foundational work to align our teams against three strategic areas of focus; growing and sustaining our core franchises, enhancing our capabilities to create new hits and driving efficiencies across our organization. First, our ongoing work to grow and sustain Zynga’s core franchises, FarmVille, Casino and Words resulted in quarterly bookings growth of 35% year-over-year and several new high quality mobile launches this year such as the New Words With Friends. Second, in terms of creating new hits, in 2014, we built new capabilities to go after more evergreen content categories. We began the year with products in three categories, Ville, Casino and Words and preceded to double the breadth and diversity of our portfolio with the addition of NaturalMotion games in racing and people and our expansion into sports and runner categories. Third, we drove efficiencies by strengthening our financial discipline and more effectively managing our cost structure. As a result, we decreased our annual cash operating expenses by over $60 million for a reduction of 10% year-over-year. Over the last year, we used those savings to reinvest in the company including making significant investments in marketing to further support our products and audience growth. Now, I would like to recognize three key highlights that we delivered in 2014, which were critical milestones in our ongoing business transition. Most importantly, this year we became a leading mobile gaming company achieving record results across mobile bookings and mobile audience. Our mobile bookings now account for 60% of our bookings, up from only 27% since the time I joined the company. As a result of our recent launches such as New Words With Friends and Looney Tunes Dash!, our Q4 mobile audience is up 87% year-over-year. In February of 2014, we completed our acquisition of NaturalMotion and we’ve now fully integrated their world-class new IP, next generation technology and seasoned leaders within Zynga. We are pleased with the engagement and retention of their teams and have seen positive results from the impact Zynga and NaturalMotion have had on each other. We also grew headcount from 260 to 314 at the end of Q4, which was in line with our targeted recruiting plan to better resource their highest priority projects. Finally, this past year, we assembled our management team and recruited top technical talent who strengthened our creative and technical capabilities. These leaders developed new processes and set new quality standards that now drive our live service and game development. As a team, our goal is to create top hits that engage mainstream global audiences. Our winning aspiration is to be the app scale industry leader by delivering multiple number one hits across more categories than the competition. In 2014, we studied the market and decided to move into new addressable content categories where we believe we can compete and lead based on our expertise and scale. We’ve identified up to 15 evergreen categories that have persisted across entertainment and gaming as measured by consumer heat and longevity on the top grossing charts. We are in the process of funding and building capabilities in a number of these categories over the next year. We are pleased with our product choices and capabilities in the mobile space. We anticipate the decline of our Web business to slow in 2015 relative to 2014 in terms of audience and bookings. We’ve sunset approximately 10 products over the last year, partly because of legacy and partly because of changes within the Facebook platform. We are exploring taking some of our mobile first assets back onto the PC and we see that as a potential opportunity in 2015. The work we did last year coupled with our strong balance sheet of $1.1 billion in cash and marketable securities will allow us to take advantage of growth opportunities when we see them and effectively invest in our future. Beyond our mobile progress, NaturalMotion acquisition and building new capabilities inside our organization, there are a number of things that we could have done better this past year. First, we had a challenging time implementing our new Poker product and we learned the tough lesson that we needed more adequate testing across consumer segments, geographies and devices. Second, we have big aspirations for our sports brand, in view our NFL and Tiger Woods licenses as incredible assets. We moved quickly to release NFL Showdown to hit the season kickoff but by doing so, launched an experience with less features than is typical for a worldwide watch. We believe in the potential of sports and our ambition for the category is bigger than our first product is showing out of the gate. We look forward to beating consumers’ expectations as we continue to update NFL Showdown and ready our future sports pipeline. Finally, as a company, we’re committed to managing the performance of our products and related cost structure. Local products from Zynga China including the launch of FarmVillage at the end of Q4 have underperformed and have not met our expectations. As a result, we are narrowing our international footprint and we’ve decided to close our operations in China. David will go into more detail on this later in the call. Now let’s turn to 2015. Over the next year, we’ll be focused on three priorities; drive mobile growth, launch more products in more evergreen categories and build upon our social legacy. We expect to drive growth on mobile in 2015, as we bring more products to market and continue to increase our mobile bookings mix to represent a larger share of our business. This year, we will deliver 100% mobile first new product slate featuring new games from both Zynga and NaturalMotion studios. Our goal is to end 2015 with more than 75% of our Q4 bookings coming from mobile. I’m excited by the boldness of our 2015 product aspirations. This year, we expect to launch between 6 to 10 new games in several of the highest monetizing evergreen mobile categories, many of which will be entirely new to Zynga. As a company, we built our legacy on social games that gave consumers a way to have fun, build community and find friends. Over the past year, we’ve been adding capabilities in more gaming styles like player versus player, strategy and competition. These new categories reflect where we see industry-leading levels of monetization and audience size. Today, we’re pleased to announce that we’ll be launching three new products in two of the most popular and highest monetizing categories, Match 3 and Action Strategy and I’d like to spend a minute on each of those. Starting with Match 3, as many of you know, this category is one of the most accessible gaming categories in the world fitting easily into the lives of consumers. We’re expanding our efforts into Match 3 by bringing our blockbuster FarmVille brand, which has been installed nearly 700 million times since 2009 to the genre with the new title called FarmVille Harvest Swap. Leveraging the world of FarmVille, the new game introduces an entirely new connected rewards economy that will engage fans who play multiple games across the franchise. I am proud of the teams’ commitment to the visual appeal, which features great looking 3D graphics and a FarmVille progression map to unlock new strategic elements of game play. In December of 2014, FarmVille Harvest Swap entered geo-lock testing across Canada, Australia and the Philippines and we expect to launch worldwide as a cross-platform mobile and Web game later this year. In addition to Match 3, this year will mark our entry into the mobile Action Strategy category with investments in two new mobile titles. Our first new entry in the category is a modern military game called Empires & Allies. This new game was developed out of our San Francisco office with a team led by Mark Skaggs, the game industry veteran in real-time strategy having produced such titles as Command & Conquer and a true social gaming pioneer Zynga having led in scale some of the most successful games in our company’s history, products such as FarmVille and CityVille. Empires & Allies gives players the weapons of modern wall along with a choice to control and manage their armies and navigate them into battle. Yesterday, we released the game in geo-lock in Canada and additional testing is already underway in Australia, New Zealand and India. The team is collecting feedback from consumers and we will continue to tune and iterate as we approach worldwide launch in the coming months. Our next Action Strategy game is the first new product in NaturalMotion’s 2015 pipeline. Today, I’m pleased to share details on the coming release of their new title Dawn of Titans. I’m proud of NaturalMotion’s commitment to build a breathtaking entertainment experience that is a paradigm shift in mobile gaming. As we have said, NaturalMotion’s industry-leading technology and toolset has been relied upon by some of the biggest theatrical blockbusters and console video games over the last decade. On mobile, Zynga and NaturalMotion have put their proprietary technology to work to build a completely new entertainment experience. Throughout the creative development phases, the team has been testing the boundaries of what is possible on a mobile device by pushing the edge on visual fidelity. Dawn of Titans is set in a beautiful world where players have the opportunity to build and battle as they command armies of thousands trained Titans and lead their alliance to victory. Leveraging their propriety mobile technology and engine, the team was able to create unprecedented visuals as well as animation and the depth of game play that supersedes anything found today on mobile. In the coming weeks, Dawn of Titans will enter its first of many geo-lock phases and we will be listening to the consumer feedback as we slowly ramp our testing across geographies and devices. We expect Dawn of Titans to launch globally later this year and we will look forward to sharing more details with you as we get closer to our worldwide launch. In terms of our product launch timing for the year, in the first half of 2015, we will continue to focus on nurturing our new titles through longer, more in-depth geo-lock testing. Last year, we learned a number of lessons about our optimal game testing processes and as a result this year we’ll be tuning our new mobile products with as many consumers, devices and platforms as possible before global launch. This approach will help us deliver feature complete and performance products as well as improve the consumer experience and the long-term potential of our games. As a result of our testing and investment in Q1 and Q2, you shouldn’t expect an accelerated launch cadence and a bigger marketing push from us in the back half of 2015. Later on the call, David will provide a summary of our Q1 financial expectations and frame how we’re thinking about investing in our growth during the first half of the year. Finally, we have the unique opportunity to further differentiate our products by building on our heritage in social. Since the company’s inception, the mission we have been pursuing is to connect the world through games. Social has been and will always be at the heart of who we are and what we do. Our experience show us that when done right, social has the ability to elevate a game to something more distinct and significant to consumers. We want to create the most connected and social experiences for our consumers and believe that we can deliver it better than anyone else in our industry. This will show up in our games through more unique social features that promote competition, collaboration and content creation. We look forward to pursuing that opportunity as one of our key priorities in 2015. With that, I would now like to turn the call over to our Chief Operating Officer, Clive Downie, to go deeper on our progress this past quarter and some of the early results we are seeing across our new products.

[Clive Downie:]

Thank you, Don, and hello, everyone. As Don mentioned, this year we expect to launch the most diversified game slate in Zynga’s history. By focusing our new product bets across the highest monetizing evergreen categories, we have the opportunity to appeal to a broader audience and take advantage of our industry’s growth trajectory. For the first time ever in 2015, mobile games are predicted to surpass console games in terms of annual revenues, generating an estimated $30.3 billion worldwide. By 2017 that number is expected to reach approximately $40 billion. More importantly than the dollars people are spending is the time they are spending on mobile games compared to other forms of entertainment. Our industry’s engagement is at record levels. In just the last two years, engagement has grown 50% with U.S. mobile consumers now spending two hours per day playing games. Specifically for Zynga, in December, our U.S. players spent a staggering 13.8 billion minutes in our mobile games. As we move to capitalize on the market opportunity, we have focused on growing and sustaining our core franchises while finding innovative ways to engage more consumers and evolve our products for its growing mobile audience. In 2014, we launched a number of mobile first games and new content that extended the reach and relevance of our franchises. While much of this work contributed to our overall progress and mobile audience games, we did fall short in some areas, which I will detail later in the call. Starting with our Casino franchise, our Hit It Rich! Slots product continues to expand our category footprint with more branded slots offerings than any other competitor in the social casino genre. Last quarter, the team again delivered double-digit percentage bookings growth, up 27% sequentially. Hit It Rich! is currently the number three top grossing casino game on iPhone and is consistently ranked in the top 15 grossing for all iPhone games. We are proud of the product and the team and continue to believe in free to play social slots. In terms of Poker, as we previously discussed, the new Zynga Poker faced challenges after its worldwide launch in September. We missed the mark in terms of the game’s overall performance and our players’ expectations. In Q4, Poker saw a 7% sequential decline in bookings as our teams continued to focus on stabilizing the game and improving the experience for our loyal consumers. We are taking key learnings from this launch as it relates to multi-device and expanded platform testing and applying them to our go-forward processes. As we move into 2015, we continue to be committed to Poker and believe we can restore the product’s momentum through several key initiatives including the expansion of Zynga Poker Elite into our highest priority international markets of the UK, Australia, Canada, France and Germany. Looking at our Words franchise, in Q4 we launched the New Words With Friends and in terms of audience grew monthly active users by 35% quarter-over-quarter. In Q4, the game also saw sequential growth in ad bookings, which I will discuss later on the call. The New Words With Friends is an example of our newer approach to game testing and tuning. Last year, we made the decision to delay the launch of the game in order to give our team more time to nurture the product. As a result, we added a number of key social and competitive features that were requested by players during our geo-lock phase. These new features had a positive impact on overall player retention with a 36% increase in moves played and served to illustrate how we are taking time to incorporate player feedback into our games to drive meaningful results. The team is now preparing to expand New Words With Friends into more geographies with localized versions of the game launching in select languages in the spring. In January, we launched Words On Tour, our first adjacent product in the franchise, which has enabled us to broaden the reach of our Words With Friends brand to new consumers. Words On Tour challenges players to solve word-based puzzles as they embark on a theme journey through some of the world’s most iconic cities. The game is resonating with our words community and has received strong player ratings with an average 4.5 stars in the app store and 4.2 stars on Google Play. In FarmVille 2 Country Escape, we delivered a number of in-game events including participating in the inaugural Apps for Red campaign giving our players the opportunity to make a difference in the movement towards achieving an AIDS free generation. We were proud to partner with Apple in raising awareness and funds for this very important cause and thanks to the generosity of our players in both FarmVille 2 Country Escape and CSR Racing, we were able to make an impact in the critical fight against AIDS proving that games and those who play them can make the world a better place. To deepen affinity and engagement across our FarmVille properties in 2015, we are creating a connected reward system for the first time in Zynga products. Our expansion into the Match 3 genre with FarmVille Harvest Swap will introduce this functionality into FarmVille 2 on the Web and FarmVille 2 Country Escape on mobile and will elevate the cross-game engagement and value propositions we can deliver consumers in the FarmVille franchise. In addition to growing and sustaining our core franchises, our teams are also focused on developing new games in the top mainstream mobile categories that we know consumers love. Last year, we announced our expansion in the Runner category through a multiyear agreement with Warner Brothers Interactive Entertainment for Looney Tunes Dash!, which we launched worldwide in December. In less than two months, the game has been downloaded over 30 million times. What makes that metric meaningful is that 86% of those downloads or approximately 26 million in-stores are players who are completely new to Zynga games increasing our network size and cross-promotion power. This demonstrates the value of coupling the Looney Tunes brand with the progression based Runner dynamic. At launch, the game chartered as the number one overall iPad app in 94 countries, the number one overall iPhone app in 39 countries and received Apple App Store Editors’ Choice featuring in 144 countries. Turning to sports, we believe that the long-term potential for this category on mobile is incredibly promising. In 2014, we moved into the category with our first game NFL Showdown and announced our plans to launch a second game Tiger Woods Golf in 2015. We entered into a multiyear partnership with the NFL and NFL Players Incorporated and launched our NFL Showdown game after a short period of time in development. Admittedly, we made some tradeoffs in that process. On one hand, we wanted to get our game to market in time for the NFL season kickoff in order to capitalize on the consumer heat surrounding football. On the other hand, to do that we compressed the development cycle and launched the game that was incomplete relative to the market opportunity and was more in line with the soft launch product. We have continued to update the product by layering in new features and customer satisfaction has improved as we are now achieving 4 star ratings on both the app store and Google Play, and we believe that we are well placed to continue evolving the game during the offseason and being in a position for a great start of the 2015 football season in September. Turning to Golf, we remain excited about our partnership with global icon Tiger Woods. Our team has focused on developing a truly unique mobile game that delivers casual gamers and golf fans an experience that will capture the exciting social competition of golf in new ways. Our Tiger Woods golf game will be entering into geo-lock later this year. In addition to our work on our game slate and product launches, as a company, we have evolved our advertising strategy over the last year to more effectively monetize the time consumers are spending in our games. As I detailed earlier in my comments, we know consumers are spending more time today in mobile games than ever before. According to comScore, the average unique Zynga mobile user plays 460 minutes a month. As we grow our business, our goal is to create free to play app-supported experiences that bring more value to the precious minutes our players are spending with us. To do that, we have refined our advertising strategy to offer players more meaningful brand content through video ads that we believe fit the overall gaming experience. In-game video ads bring advertising to life to create unique brand interactions during natural pauses in a game. As a result of our team’s focus on delivering high quality video ads in our games, we have seen a double-digit increase year-over-year in our video ad revenues, and in Q4 we achieved record advertising results with a 41% sequential increase in ad bookings excluding licensing and developer payments. We are proud of our partnerships with advertisers such as Ford Motor Company, FOX Broadcasting and Progressive Insurance and look forward to bringing more brands closer to consumer mobile play patents throughout this year. In summary, as we move into 2015, as Don said, we are focused on the following priorities. Number one, drive mobile growth; number two, launch more product in more evergreen categories and number three; build on our social legacy. From a go-to-market standpoint, we will achieve those priorities through activation of new audiences and the reactivation of existing audiences within our growing network, as well as by making targeted investments, offering new relationships with new consumer segments and by connecting more of the world through our games that include the most meaningful social features. With that, I will turn it over to our Chief Financial Officer, David Lee, to go deeper on our financial details.

[David Lee:]

Thank you, Clive, and good afternoon, everyone. I’m going to spend some time discussing our financial results for Q4 and 2014 as well as discuss how we are positioning Zynga for growth in 2015. Before I get into the reporting details of Q4, there are several critical milestones we achieved in 2014 that I would like to reiterate. First, in 2014 we grew mobile bookings 80% year-over-year from $196 million in 2013 to $353 million in 2014. As a result, we exited the year with 60% of our Q4 bookings coming from mobile. The majority of our audience now engages with us in our mobile products and we believe we can continue to drive mobile growth in both bookings and audience. Second, last year we continued to reduce our cash OpEx decreasing full year expenses by 10% year-over-year. This savings has allowed us to further support our mobile growth and as Clive detailed earlier, enabled us to strategically reinvest in the company. Finally, while we made important investments across a number of areas of our business, we still maintained a healthy balance sheet with $1.1 billion in cash and marketable securities. This balance sheet allows us to take advantage of growth opportunities when we see them and invest in the future of our business. We believe the work we did in 2014 has set us on the right path for 2015. As Don mentioned, over the next year, we’re going to be focused on three key priorities. One, to drive mobile growth; two, launch more products in more evergreen categories and three; build on our social legacy. The leadership team and I will discuss our progress against these priorities throughout 2015. As a company, we are committed to making the tough decisions needed to set us up for long-term growth. Later on the call, I’ll provide more details around how you should think about 2015 through the lens of our new approach through game testing and tuning and the impact this will have in our guidance. Now, I would like to take you through the details of the quarter and year but before I begin, please note that many financial measures herein are expressed on a non-GAAP basis. Q4 total bookings were $182 million in the fourth quarter, up 4% quarter-over-quarter. The Q4 performance was driven by strong results from advertising, which was bolstered by seasonality and the successful launch of New Words With Friends. In addition, we saw continued growth in our slots category driven by the success of Hit It Rich! Slots and the launch of the Wizard of Oz Slots. This performance fell short of our expectations at the low end of our outlook range primarily as a result of delays and a slower than expected recovery in Zynga Poker. Looney Tunes Dash! launched later than expected in Q4 and we also made the strategic decision to delay marketing for NFL Showdown to further add new game play features. We did see meaningful progress in a number of other areas in our business in Q4. In terms of our commitment to mobile growth, Q4 mobile bookings were up 120% year-over-year and 14% quarter-over-quarter to $110 million. Web bookings were down 26% year-over-year and 8% quarter-over-quarter to $71 million. Looking at our efforts to grow and sustain; words, casino, racing and sports all grew bookings sequentially in Q4. The words franchise grew bookings 35% sequentially benefiting from the refresh of the franchise with the launch of New Words With Friends and the advertising seasonality noted previously. Casino grew bookings 8% quarter-over-quarter led by a 27% increase from Hit It Rich! Slots, which more than offset the underperformance we saw in Zynga Poker. We also saw a 12% sequential bookings growth in our Racing franchise driven by a 17% quarter-over-quarter improvement from CSR Racing. In Q4 advertising bookings excluding licensing and developer payments grew by 41% quarter-over-quarter and 59% year-over-year. As a result of our rigorous optimization initiatives, advertising bookings per DAU in Q4 excluding licensing and developer payments grew by 46% quarter-over-quarter and 68% year-over-year. In terms of platform mix, mobile bookings grew from 55% of total in Q3 to 60% in Q4. Facebook-related bookings mix decreased from 41% of total in Q3 to 36% in Q4. For the full year, total bookings were $694 million, down 3% year-over-year driven by declines in Zynga’s legacy Web games. These declines were partially offset by mobile growth led by FarmVille 2 Country Escape and Hit It Rich! Slots. In total, our words and casino categories drove Zynga’s core franchises up 10% year-over-year excluding the franchises we acquired with NaturalMotion. Turning to Q4 operating expenses, marketing expense decreased 9% quarter-over-quarter in Q4. People-related spend decreased 1% quarter-over-quarter with seasonal declines in benefits and employer taxes, partially offset by an increase in headcount. Zynga ended the quarter with 1,974 full-time employees, up 45 quarter-over-quarter. Headcount was up primarily as planned in our NaturalMotion studio. These cost reductions were partially offset by a technology spend increase of 19% quarter-over-quarter in Q4 primarily due to our migration to outside cloud hosting. Overall, Zynga’s cash OpEx spend decreased 2% sequentially in Q4. For the full year, cash cost and operating expenses were down by over $60 million year-over-year excluding restructuring charges. We reduced labor expenses by 17%, lowered technology expenses by a third and cut facilities cost by 30%. As a result, adjusted EBITDA was $9 million in Q4 or a 5% adjusted EBITDA to bookings margin for the quarter. On a full year basis, adjusted EBITDA came in at $40 million or a 6% adjusted EBITDA to bookings margin. Factoring in depreciation, amortization, interest, other income and tax results in a non-GAAP net loss of $2 million or breakeven non-GAAP EPS. For 2014, Zynga recognized a non-GAAP net loss of $13 million or $0.01 per share. Turning to our balance sheet and cash flow, we continued to have a healthy balance sheet with more than $1.1 billion in cash and marketable securities as of the end of the year. As I mentioned earlier, our balance sheet is an important area of strength for Zynga. It provides us the ability to go after growth opportunities and make strategic decisions that deliver long-term value to our shareholders. During the quarter, cash flow from operations was $4 million. Factoring in capital expenditures of $2 million, free cash flow was $2 million in Q4. This brings Zynga’s full year 2014 operating cash flow to negative 5 million and free cash flow to negative 14 million. 2014 was a year of transition and investment for Zynga. As a leadership team, we remain committed to managing our costs to drive positive free cash flow in 2015 and beyond. Now let’s turn to our outlook. To echo Don’s earlier sentiments, I want to be clear that Q1 and Q2 are investment quarters for Zynga and we are making the deliberate decision not to optimize for short-term financial gains. In 2015, we expect to launch between 6 and 10 games across several of the highest monetizing evergreen mobile categories and are embodying a more thoughtful approach to game testing and tuning. In 2015, you will see us spend more time nurturing our new products in Q1 and Q2. We are also making strategic investments in our tools and technology to support best-in-class live game operations across mobile and Web platforms. These strategic investments will allow our teams to more efficiently build, manage and scale our games over time. In terms of guidance, given the second half of 2015, we will be determined by the timing and performance of significant new launches. We decided it would not be meaningful to issue an outlook for the full year at this time. Our Q1 guidance range is reflective of the investments we are making in the first half of the year with bookings expected to be between $140 million and $150 million and adjusted EBITDA to be between minus $25 million and minus $15 million. The sequential decline in bookings is driven primarily by a decline in our Web products inclusive of accelerated sunsets as well as expected seasonal declines we see in advertising in Q1 post the holiday season. We have made the strategic decision to not upgrade 10 of our existing Web games to Facebook API 2.0 and we’ll be shutting them down. While this decision will pull forward, some of the Web declines we were expecting in 2015, it allows us to apply more resources towards higher growth opportunities. As the year progresses, we expect the declines from our legacy Web games to level off each quarter as we progress through 2015. We also expect our mobile results to improve sequentially through the year from our new diversified product slate. This will put us in a strong position to ramp bookings and adjusted EBITDA in the back half of the year creating strong profitability and cash flow by year end. As a company, we are committed to prudently managing our cost structure globally. We will make the tough calls when necessarily. This week, we made the decision to close Zynga China studio as its recent launches of FarmVillage along with the ongoing product globalization initiatives are not meeting our expectations. This closure will affect all 71 employees in our Beijing facility and will result in an annualized cost savings of $7 million. We expect Q1 non-GAAP earnings per share to be between negative $0.03 and negative $0.02 based on a projected basic share count of approximately 896 million. On a GAAP basis, we expect Q1 revenue to be between $155 million and $165 million, net loss between $60 million and $52 million, and GAAP loss per share of between $0.07 and $0.06 using a projected basic share count of approximately 896 million shares. In closing, we are confident in our product slate and dedicated to making smart, strategic investments in order to support our product slate while looking for ways to invest in our future. We believe we are making the right decisions for the long term. As we progress through the year, we will keep you updated as we achieve meaningful results against our key priorities for 2015. With that, I would like to turn the call back over to Don.

[Don Mattrick:]

Thank you, David. In summary, 2014 was a year of progress for Zynga and NaturalMotion. As a company, we’ve transitioned to become a mobile-centric business by shifting our bookings from the Web to the majority on mobile. Over the next year, we’ll be focused on three priorities; drive mobile growth, launch more products in more evergreen categories and build upon our social legacy. This year, we’ll launch between 6 to 10 new games in important categories, many of which will be new to Zynga like Match 3 and mobile Action Strategy. We are spending more time in geo-lock testing and tuning our new games because our goal is to have products in markets for multiple years. We are continuing to build on the past successes at Zynga and refine our culture and our craft. While we’d like to go faster, we are being methodical and purposeful about our decisions. We have a healthy balance sheet with $1.1 billion in cash and marketable securities, which gives us staying power and the ability to invest in our future growth. There is no question that our teams are making progress and moving as quickly as possible to transform our business. For us, every moment matters and we remain relentless in our pursuit of creative excellence. With that, operator, we’d like to open up the call for questions.

[Operator:]

Thank you, sir. [Operator Instructions]. Our first question comes from Eric Sheridan of UBS. Your line is now opened.

[Eric Sheridan:]

Thanks for taking the questions. I guess first question maybe for Don and Clive, I was intrigued by the comment that some of the mobile first games could also be deployed in the Web environment as you move through 2015. Maybe you can help us understand a little bit of what kind of games you think could qualify to also be Web as well as mobile that started as mobile first, and how you’ll sort of arrive at those decisions? And then if I can do a second one, maybe David, when we look out to the Q4 '15 targets for booking mix, I’m kind of curious what that means for long-term EBITDA margin targets or how do you think about a mobile booking versus a Web booking and what that might mean for incremental profitability for the company long term? Thanks so much guys.

[Don Mattrick:]

Thank you, Eric. This is Don. Let me give you an example of a product where we know that there’s consumer interest both in mobile and on the Web, that would be FarmVille. So as we shared earlier in the call, we have approximately 700 million installs since 2009. We’ve built a product that we think is fun, accessible and simple in FarmVille Harvest Swap and that would be an example of a product that we think would be appropriate to come to life on the mobile space as well as having optimization and tuning for the Web.

[David Lee:]

Eric, with regard to your second question, it’s one that’s important because we are now a mobile business. We see no structural cause to believe our mobile growth will be less profitable than our Web business. In fact, existing products we have today particularly in our casino division, we’ve talked in the past about how they monetized just as well on mobile versus Web. And we’ve also noted that our peer set who are strong mobile performers are benefiting from margins of 25% to 40%. There’s no reason why Zynga cannot have that same level of P&L benefit as we grow in our mobile space.

[Darren Yip:]

Thanks. Next question, please.

[Operator:]

Thank you. Our next question comes from Tim O'Shea of Jefferies. Your line is now opened.

[Timothy O'Shea:]

Yes. Hi. Thank you for taking my question. So looking at the 6 to 10 new games you guys will launch in 2015, just hoping you can give a sense for what scenario you might launch all 10 games, maybe what scenario results in only six game launches? So just what are the gating factors that will determine how many titles you launch in 2015? Thanks.

[Don Mattrick:]

Thank you. This is Don. So what we’re doing is spending more time in geo-lock, more time in testing and really looking at how our products are performing. And if we see opportunities where we can incorporate a new feature inside of the core loop or a new feature in relation to social connectivity, we’re weighing out whether we should incorporate that before we go live globally or as we launch the product, can we build it in and achieve the goals that we want. What we want is leadership in multiple categories. So, we’re paying attention to what consumers are telling us and how the competition is performing. We’ve purposefully invested throughout 2014 to create all of those products to create the teams to get in position to be at this point in time. So we’re going to use our best judgment per product and we can see a range on the low end 6 and up to 10 new products coming to market in 2015, and it will be made on a per product decision with all the data we have at the appropriate time.

[Darren Yip:]

Next question, please, Sam.

[Operator:]

Our next question comes from Sean McGowan of Needham & Company. Your line is now opened.

[Sean McGowan:]

Yes. I was hoping you could talk a little bit more about the video ads and what the interaction is with the consumer. Does the consumer get rewarded in any particular way? And just on your guidance, do you expect at some point this year to give full year 2015 guidance? Thank you.

[Clive Downie:]

Hi, Sean. This is Clive. Let me cover off the advertising question first. As I iterated on the call, we view advertising as one of the business models for us in our product. And as we enter new categories, we believe we can bring new advertising frames to our products and to our consumers, which is a new way to increase relevance, interaction and performance. From a video ad perspective, we’re excited about the opportunities that we have to allow people to participate in exciting new ways with the video ads and also where appropriate in the categories that we’re entering, specifically in Action Strategy, we’re excited to enable people to participate and what to earn, which we have found can prolong engagement and prolong retention within the play space.

[David Lee:]

Sean, with regard to your question on annual guidance, as we mentioned, 2015 is a critical year as we developed and launched 6 to 10 key new categories and products. And we have learned in 2014 that more time is spent in geo-lock with disciplined stage gates benefits our consumer experience and the long-term performance of the products. Now this results in variability in launch timing, which makes at this point providing annual guidance less meaningful for all of us. Our overall philosophy on guidance continues, however, to take into account our current pipeline, our operating plan and market conditions based on the data that we have at the time we issue it.

[Darren Yip:]

Thanks. Next question, please, Sam.

[Operator:]

Our next question comes from Chris Merwin of Barclays. Your line is now opened.

[Christopher Merwin:]

Great. Thank you. So you talked about entering into the Match 3 category with FarmVille Harvest Swap. Obviously, it’s a pretty competitive category. There were some big titles within it. Why enter this particular category? Is it just due to the nature of the IP and how you thought it would be best positioned? And what’s the plan from a marketing perspective for that title? And then just secondly a follow up on the advertising question. Do you anticipate using more of an advertising model going forward? I mean obviously only 1% to 2% of users are actually making ad purchases. So to the extent that you can integrate more ads and it is more reward based, is that going to be a bigger piece of the revenue pie going forward? Thanks.

[Don Mattrick:]

Thanks, Chris. This is Don. So we have an awesome group of people in San Diego that have spent time experimenting with Match 3 thinking about what works inside of the category and they also had a bunch of ideas on areas of innovation and how to put that product together. So, first off, I think we’ve got a really valid idea in creative implementation with it. What we’ve learnt from consumers is a lot of consumers who have played other Match 3 products have also played FarmVille and they would really love to have the simplicity on ease of use of Match 3, and be able to earn rewards inside of the FarmVille ecosystem. So we’ve talked to consumers. We’ve tested. We got a very positive response from people about that concept. And we know that there is stiff competition and we believe that our team can compete and that we can grow a viable business against the work that they’ve done creatively inside of the product, just brand awareness of FarmVille and we really see it as an exciting opportunity to expand our FarmVille ecosystem and give people a way to play Match 3 products plus get rewarded inside of our core game. In relation to the other part, Clive?

[Clive Downie:]

Chris, in relation to the advertising question, we do view advertising as a very viable business model. It depends on the category. You take something like Looney Tunes. Looney Tunes is participating in a category that is traditionally low LTV. Look at the comps in that category and you’ll see that. But it’s a high scale category and you’ll see that as born out by our 30 million installs in Looney Tunes since launch two months ago. We participate in advertising because we are in the categories and looking for leadership position in the categories where advertising is important. And as we move forward into 2015, within the two areas of advertising that we are specialist in both network and direct, we are creating new innovative properties and go-to-market systems within them to extend our advertising leadership.

[Darren Yip:]

Thank you. Next question, please, Sam.

[Operator:]

Our next question comes from Stephen Ju of Credit Suisse. Your line is now opened.

[Nick Bertolotti:]

Hi, guys. This is Nick on for Stephen. Kind of sticking with the advertising theme, I was wondering if you could comment on what you expect the mix of advertising versus online game bookings to be for 2015? Is it more dependent on the categories of games you’re releasing and any incremental color you can provide there would be helpful? Thanks.

[Don Mattrick:]

Great. Thank you for the question. Nick, as you think about the business we’re building, the appropriate business model whether it be more in-game app purchase or advertising as Clive just covered is unique to the category and the game. And at this point, we’re not providing game-specific forecast on mix. That being said, as we go our audience in mobile, we’ve noted in our disclosures that it’s valuable and that we’ve seen sequential improvement in the performance of our advertising business as a result. So I would expect us over the course of this next year with our 6 to 10 launches in new categories to see benefit to the bottom line from our advertising business.

[Darren Yip:]

Next question, please.

[Operator:]

Our next question comes from Mike Hickey of the Benchmark Company. Your line is now opened.

[Mike Hickey:]

Hi, guys. Thanks for taking my questions. Two questions. One, looking at your fiscal '15 pipeline, 6 to 10 titles here. It seems a little on the lower side considering the amount of development resources you have. Can you help us better understand kind of disconnect there? And the second question, we are curious if you’d considered any strategic alternatives for your desktop business or Facebook games segment, I guess, the – you see that segment continue deterioration and I think it creates realistic concern or questions around its long-term value, I think you would probably not argue that it’s less strategic clearly to your future growth opportunities that has been historically, so any insight on that would be helpful? Thank you.

[Don Mattrick:]

Thanks, Mike. This is Don. I’m going to start with your end question, which is what we’re trying to do is build capabilities that align with what consumers are doing. So consumers are obviously using their mobile phones, their tablets. They’re also still using PCs and Facebook. So, I really think we’re appropriate. There’s an opportunity for us to give experiences that stand all of those devices. In relation to the people, we are building people capabilities that touch two parts; our legacy businesses which have run for a long time and new products that are coming to market in 2015 and also in 2016 and beyond. So we are investing to be an app scale leader. We are competing with great competitors. We are paying attention to what they are doing and we think we’re going to bring something unique to the equation and build our business to be excellent in multiple product categories to compete and to sustain. So, we’ve got a lot of people and I think it’s a great asset for us applied in that frame.

[Darren Yip:]

Next question, please.

[Operator:]

Thank you. Our next question comes from Tony Wible of Janney Capital Markets. Your line is now opened.

[Tony Wible:]

Thank you. What percentage of your ad inventory do you think will move over to video ads? And is there anything more around advertising that you think can be out there to amply the returns you’re getting on the non-payers, anything from either like a structural change in the ads to just how the ads are actually sold?

[Don Mattrick:]

Hi, Tony. We don’t provide breakouts in terms of the percentages of our ad inventory that we apportion to either video or other kinds of inventory. But suffice it to say that Words With Friends as an example if you just look up the opportunities that we’ve created in that product over this year since New Words With Friends came out with 34% more moves being played that translates directly down to additional opportunities and impressions. And then advertisers realize that we have a very, very targetable audience because of the scale of our audience and the growing scale of our mobile active users. So, we just expect to see an increased range of video ads through the year because of the richness and growth of our mobile audience. And when we move into new categories, which we’re particularly excited about talking today about Match 3, which is a highly scaled category, we should expect that to unlock another set of impressions, which we believe we can adapt and bring new video advertising rights to convert. Similarly on Action Strategy, I’ve already talked on the call about what to earn and we believe there are other innovative ways that we’re working on, but we’re not going to be disclosing today that can bring new advertising business frames to our consumers.

[Darren Yip:]

Sam, I think we have time for one more question.

[Operator:]

Thank you. Our final question comes from Ben Schachter of Macquarie. Your line is now opened.

[Benjamin Schachter:]

Hi, guys. I was wondering if you could just talk a little bit about the other side of advertising, which is you guys going out and buying ads. So two questions and just high level. If you could just discuss how you think about advertising on mobile versus desktop versus television to drive [indiscernible]? And then specifically, can you give any discussion around competitive environment for mobile ad and pricing as being there? Thanks.

[Clive Downie:]

Hi, Ben. Let me just talk briefly about our marketing strategy and how it relates to our spend for buying ads. Our marketing spend increased year-over-year as we shifted our bookings from Web to the majority on mobile. It fueled our mobile growth. We invested in this specifically. And our investment in marketing is planned on a game-by-game basis dependent on where they are in their lifecycle either live and growing or new and starting on what we believe should be multiyear lives. We expect our grow and sustain portfolio of games to attract new consumers organically through existing and new social features and we augment that organic power with the targeted consumer acquisition and in some cases brand marketing spend that is invested using a payback policy linked to lifetime value. So the specific cost for install also relates to the lifetime value potency of the product. For new products, we build our marketing plans in advance of launch that deliver us test data on live time value and then new user ramp to drive organic growth and then an investment save to inflect the product growth curve. That’s how we think about our buying strategy.

[Don Mattrick:]

Thanks, Clive. This is Don. I want to thank everyone for dialing in to the call today and I encourage you if possible to play our new products in the geo-lock territories that we spoke about, form your own opinions about the work that we’re doing. And as I close off the call, I want to thank our teams. I know you’ve been purposeful, you’ve been deliberately investing and building these products over 2014 and we’re excited about 2015 and the great work that you’re doing. Thank you for today’s call.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.