Oct 24, 2012
Executives
Krista Bessinger – Senior Director-Investor Relations Mark J. Pincus – Chairman, Chief Executive and Product Officer David M.
Wehner – Chief Financial Officer
Analysts
Atul Bagga – Lazard Capital Markets LLC Scott W. Devitt – Morgan Stanley & Co.
LLC Neil A. Doshi – Citigroup Global Markets Mark Alan May – Barclays Capital, Inc.
Colin A. Sebastian – Robert W.
Baird & Co. Douglas Anmuth – JPMorgan Securities LLC Heath Patrick Terry – Goldman Sachs & Co.
Justin Post – Bank of America/Merrill Lynch Doug Creutz – Cowen & Co. Arvind Bhatia – Sterne, Agee & Leach, Inc.
Ben Schachter – Macquarie Capital, Inc. Nat G.
Brogadir – Stifel, Nicolaus & Co., Inc.
Operator
Good day, ladies and gentlemen, and welcome to the Zynga Third Quarter 2012 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 call may be recorded.
I would now like to introduce your host for today’s conference, Krista Bessinger, Senior Director of Investor Relations. Ma’am you may begin.
Krista Bessinger
Good afternoon, everyone, and welcome to Zynga’s third quarter 2012 earnings conference call. With us are Mark Pincus, Chief Executive Officer and Dave Wehner, Chief Financial Officer.
Before we begin, I would like to remind you that during the course of today’s call, we will make forward-looking statements, which are subject to various risks and uncertainties. These include statements related to, among other things, our outlook for 2012, our cost reduction plans, our proposed share repurchase program, our plans to explore real money gaming, our launch of successful new games, the growth of the social games market including mobile and advertising growth, and our operational plans and strategy.
Actual results may differ materially from the results predicted. Factors that could cause or contribute to such differences include our relationship with Facebook or changes in the Facebook platform or in our agreements with Facebook; our ability to launch new games in a timely manner, our ability to control and reduce expenses, our ability to anticipate and address technical challenges that may arise, the changing interests of players, our ability to enter the real money gaming market, regulatory or licensing issues, litigation, our ability to retain key employees, acquisitions by us, and possible changes in management or corporate strategy.
More information about factors that could affect our results is included under the captions: Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Quarterly Report on Form 10-Q, filed with the SEC on June 30, 2012. Also in our registration statement on Form S-1, as amended, filed with the SEC on March 23, 2012 and in our Annual Report on Form 10-K for the year ended December 31, 2011.
Also I’d like to remind you that during the course of this call, we’ll discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release and on our Investor Relations website.
These non-GAAP measures are not intended to be considered in isolation or as a substitute for our GAAP results. This conference call is being webcast on the Internet and is available through Zynga’s Investor Relations website, investor.zynga.com.
An audio replay of this call will also be available on our Investor Relations website in a few hours. And with that, I’ll turn the call over to Mark.
Mark J. Pincus
Thanks, Krista. I want to thank everybody for joining us on our call today.
The last several months have obviously been challenging for us. We announced yesterday that we are implementing a series of steps to drive long-term growth and profitability.
Zynga remains well positioned to capitalize on social gaming and the overall worldwide movement to free-to-play gaming. I want to address three topics with you today.
First, the performance of our core business on the web; second, how we are driving new growth on mobile; and third, how we are pursuing additional revenue opportunities. Social gaming has grown to a large scale audience and business on Facebook, which has already grown to 1 billion users, with 235 million of them playing games.
Total game bookings are projected to exceed $2 billion this year on Facebook alone. Despite this, we’ve failed to meet our own growth expectations.
This is primarily due to two factors. First, our game execution.
For our live games, such as CityVille and CastleVille, we found it more challenging to maintain the historical levels of player engagement, and consequently we experienced faster declines in bookings than we had expected. We didn’t create enough new heat for our players by innovating on content and features, and we weren’t able to bring new games to market fast enough to offset these declines.
The second factor contributing to our web performance was faster than expected player adoption of mobile, smartphones and tablets. This increase the competition for our players’ time and attention.
Despite this weakness, we remain confident that we’ll drive growth and profitability in our core web business. We have great games, a powerful network, and we recently announced a cost reduction program.
We know that when we launch great games, our players engage. We just saw this with our third quarter launches of FarmVille 2 and ChefVille.
They are now ranked number one and three on Facebook, and played by over 88 million monthly active users. Our teams created two of the games that represent the state of the art, not just in social gaming, not just in free gaming, but in all gaming.
In its first month since its launch, FarmVille 2 has already grown to 61 million monthly active players. It’s converted 500,000 unique buyers, and just this Sunday marked its first day exceeding $950,000 in player purchase volume, including the amount retained by Facebook.
That was in a single day. And we’ve got more great games coming.
Our near-term pipeline includes two new web and four new mobile game launches per quarter throughout next year. These games go deeper into genres with higher engagement and monetization, like casino and player versus player, where we’ve historically led with Zynga Poker and Mafia Wars.
Additionally, with the acquisition of A Bit Lucky, we’re excited to introduce our first mid-core game early next year, which is another exciting category. We continue to leverage the power of our network of 311 million monthly active users to bring our great games to the largest gaming audience on the web.
The power of our network truly lies in our player engagement. 70% of our daily active web users engage with each other every day on our network.
They generate 700 million social interactions. If we think about that for a minute, that’s more than the total ad clicks on Google in a single day.
For FarmVille 2, our network generated 17 million installs in the first 21 days alone of cross-promotion. We’ve recently opened this network to third-party game developers, adding eight partners in the third quarter for a total of 18 games available on Zynga.com.
These partners chose our network in order to bring their games to millions of people who love to play. But we’re also focused on driving profitability and growth in our core web business.
And yesterday, we announced a cost reduction program aimed at driving $60 million to $80 million in annualized savings, some of which we’ll invest in future growth. This plan reduces spending across advertising, data hosting, labor, and outside services.
As part of this effort, we also announced several studio closures and a reduction in our full-time workforce of around 5%. We also announced a plan to rationalize our product line, sunsetting 13 underperforming older games.
Going forward, we’re implementing a more stringent budget and resource allocation program for new and live games. One recent example of this is the Ville.
That game missed our expectations, but we moved quickly to reduce and redeploy that team. Please turn now to mobile, which is the next major growth opportunity for Zynga.
In the past few quarters, we’ve all seen mobile become the fastest growing platform for gaming. Social gaming has emerged as the most engaging type of game experience across all mobile platforms, and Zynga’s games are leading the way.
Our mobile game network now ranks number four in the U.S. of all mobile apps, not just games, by time spent.
We have three of the five most popular mobile games in the U.S. today, three of the five top.
Our network reaches 30% of all U.S. smartphone users, who play with us for more than 10 billion minutes a month.
And in the past year, we’ve generated a large player audience and significant business on mobile, which now represents 20% of our total bookings. We’ve more than doubled our average quarterly daily active users, and we’ve grown our quarterly bookings 172% year-over-year.
But the real opportunity in mobile is still ahead of us. To drive mobile bookings growth, we’re focused on developing more high-engagement and monetizing games like Zynga Poker, which has already been a top 20 grossing app for more than 18 months.
To that end, we’ve reorganized our game teams in the third quarter to unite web and mobile development. As a result, all new game starts in this past quarter included a mobile or a tablet offering.
And that’s a huge change for our company. Our mobile pipeline, which now averages four games a quarter through next year, includes existing and new IP across our own Invest and Express category, as well as casino and PVP.
We plan to bring these games to our entire mobile audience, as we’ve done effectively on the web. We’re doing that by launching our With Friends social gaming network on mobile, which will begin beta testing this quarter.
Finally, I want to talk about two new businesses we’ve been developing to further grow our revenue base. Those are advertising and real money gaming.
We’re growing our ad business by serving and selling new kinds of ad units across web and mobile. In the past quarter, we added 12 new sales team members and invested in technology that improves our optimization and our targeting.
Reward-based advertising like [watch turn] video has already proven highly appealing to our users, and video advertising has emerged as our fastest growing segment. It increased 142% just from the second to third quarters.
With regards to real-money gaming, you saw probably an announcement from us earlier today. We selected bwin.party, the leading international RMG operator, as our partner.
The partnership is exclusive to the U.K. and it will offer a full suite of casino and poker RMG products.
We expect these to be available in the first half of next year. We also are excited that in the third quarter we welcomed Maytal Olsha.
Maytal brings great domain knowledge and operating experience and is building our partnership an RMG offering inside Zynga. The world is adopting free-to-play and social gaming.
Zynga pioneered social gaming for the mass market. And we continue to ship the best games to the largest network of players in the western world.
We’re the biggest believers in this future opportunity. And to that end, we’re also announcing today that our Board of Directors has authorized a $200 million share repurchase program.
With that, I’ll turn it over to Dave, who will go into more details on the quarter.
David M. Wehner
Thanks, Mark. Good afternoon, everyone.
I’ll begin by covering our Q3 results, followed by an update on the actions we’re taking in Q4 to reduce expenses, and we’ll conclude with our outlook for the remainder of 2012. First, on reach and engagement in Q3.
On a year-over-year basis, MUUs grew 17% to 177 million, MAUs grew 37% to 311 million, and DAUs grew 10% to 60 million, including 22 million DAUs from mobile. On a consecutive quarter basis MUUs were down 8%, MAUs were up 2% and DAUs were down 17%.
Note that the sequential decline in mobile DAUs from 33 million in Q2 to 22 million in Q3 was largely due to declines in Draw Something. On the monetization front, average bookings per DAU, or ABPU, was $0.047, down 19% year-over-year due to a decrease in ABPU driven by a mix shift from older higher-monetizing games to newer lower-monetizing games on the web.
ABPU was up 1% quarter-over-quarter, however, due to a sequential increase in mobile ABPU driven by better monetization in a number of games in our With Friends franchise. Next, monthly unique payers, or MUPs, were 3 million, up 15% year-over-year, but down 28% quarter-over-quarter.
Payer conversion was 1.7%, down from the 2.1% in the prior quarter. Sequential declines in monthly unique payers and payer conversion were largely driven by fewer Draw Something payers.
On the game front, we launched two web games and two mobile games in Q3. On the website, we launched ChefVille and FarmVille 2, and we’ve been pleased with their performance to date.
On the mobile side, we launched Montopia and Gems With Friends, our newest offering in the successful With Friends series, and the best monetizing game in that family to date. I will now turn to our financial performance.
Note that many financial measures herein are expressed on a non-GAAP basis. Be sure to look at our earnings release, issued this afternoon, for a reconciliation of the historical non-GAAP measures discussed on this call to the comparable GAAP metrics.
Q3 bookings were $256 million, down 11% year-over-year and 15% quarter-over-quarter. Year-over-year declines were driven primarily by lower Facebook user pay, with the largest declines in FarmVille and CityVille.
Quarter-over-quarter declines were also driven primarily by lower Facebook user pay, with the largest declines in CastleVille, CityVille and FarmVille. Declines were partially offset by growth in Bubble Safari and ChefVille, and with the launch of Farm 2 occurring too late in the quarter to have an impact.
Our Facebook-related bookings represented 80% of our bookings; substantially all of our non-Facebook bookings were on mobile platforms. These bookings grew from 6% of bookings a year ago to 20% of bookings in the third quarter.
Revenue in the third quarter was $317 million, up 3% year-over-year. Online game revenue was $286 million, flat year-over-year.
Advertising revenue was $31 million, up 64% year-over-year. In the U.S., revenue reached $178 million, or 56% of total revenue.
This was down 9% year-over-year. International revenue reached $139 million, or 44% of total revenue, and this was up 24% year-over-year.
In the third quarter, we delivered adjusted EBITDA of $16 million, which was down 72% versus the year-ago period, and down 75% from the second quarter due to lower-than-expected bookings and a relatively fixed cost base in Q3. This resulted in a 6% EBITDA to booking margin in the quarter.
As we mentioned in our October 4th press release, we are implementing targeted cost reductions in the fourth quarter, and I’ll speak to that in more detail in a few minutes. Moving to taxes, we had a tax benefit on a non-GAAP basis of approximately $9 million, because of our pre-tax loss in the quarter.
The non-GAAP effective tax rate related to normal operations was 27% through Q3. This resulted in a non-GAAP net loss of $400,000, which rounds to $0.00 per share.
I’ll now turn to operating expenses. Note that the amounts I’m about to mention exclude stock-based expense.
Cost of revenue in Q3 was $89 million, up 12% year-over-year, driven by fees related to increased mobile transactions, depreciation associated with the build-out of our zCloud infrastructure, and amortization of intangibles related to the OMGPOP acquisition. R&D expense in Q3 was $114 million, up 16% year-over-year driven primarily by increased game development head count.
Sales and marketing expense was $41 million, down 2% year-over-year, driven primarily by decreased marketing spend. G&A expense was $36 million, up 9% year-over-year, due to an increase in depreciation associated with the purchase of our corporate headquarters and higher legal expenses.
Overall, head count reached 3,309 heads in Q3, up 107 people quarter-over-quarter, with the vast majority of new employees added in R&D. With regards to our GAAP results for Q3, note that our net loss includes a charge of $95 million related to the impairment of the OMGPOP acquisition, as well as stock-based expense of $38 million; that was down from $95 million in the prior quarter due to forfeitures associated with attrition.
Stock-based expense for Q3 also includes grants of approximately 30 million stock options granted to employees in the third quarter. Turning to cash flow, cash flow from operations was $30 million, down 37% year-over-year, due to an 11% increase in operating expenses, excluding stock-based expense, versus an 11% decrease in bookings over the same period.
CapEx was $14 million in Q3, down 78% year-over-year, due to reduced data center spend as we’ve largely completed the build out of our zCloud infrastructure. This resulted in positive free cash flow of $17 million.
Turning to our balance sheet, we ended Q3 in a strong position, with cash and marketable securities of approximately $1.6 billion, in line with Q2. We are not satisfied with our recent performance and we’re taking immediate action with a cost reduction plan.
This is expected to generate $15 million to $20 million of pre-tax savings in the fourth quarter versus the third quarter. This amount excludes an expected pre-tax restructuring charge in the range of $8 million to $12 million, which will be reflected in our GAAP results for the fourth quarter and the full fiscal year.
As part of the cost reduction plan, we expect to reduce marketing and technology expenditures; complete a reduction in force of approximately 150 people, or 5% of our current workforce; rationalize our product pipeline, including the sunsetting of 13 games; and consolidate certain facilities. While some of these actions are difficult, they are necessary to better align our cost structure to drive long-term growth and profitability.
Let me now turn to our outlook for the remainder of 2012. We are adjusting our 2012 outlook to account for our actual Q3 results.
For the full year, we now expect to deliver bookings between $1.09 billion and $1.1 billion, adjusted EBITDA between $152 million and $162 million, non-GAAP EPS between $0.02 and $0.03, based on a full-year share account of approximately 830 million shares. Stock based expense is expected between $310 million and $325 million, lower than previously forecast due to forfeitures associated with attrition.
The effective non-GAAP tax rate for the year is between 65% and 75%, of which approximately 25% is related to the effective tax rate on normal operations, and the remainder on the implementation of our international tax structure. CapEx for the year between $338 million and $343 million, including the purchase of the company’s headquarters for $234 million in Q2.
Note that $326 million of CapEx was spent in the first three quarters of 2012, and the remaining $12 million to $17 million will be spent in the fourth quarter. Also note, in the fourth quarter we expect non-GAAP weighted average diluted shares outstanding of approximately 775 million shares, lower than previously forecast due to a projected non-GAAP net loss in the fourth quarter.
In addition, as Mark outlined, our Board has authorized a share repurchase program. Under the program we are authorized to repurchase up to $200 million of outstanding shares of Class A common stock.
The timing and amount of any share repurchases will be determined based on market conditions, share price and other factors. With that, operator, I’d like to open up the call for questions.
Operator
Thank you. (Operator Instructions) Our first question comes from Atul Bagga of Lazard Capital.
Your line is now open.
Atul Bagga – Lazard Capital Markets LLC
Hey, guys, thanks for taking my question. I have actually two questions.
A) Mark, if you can talk a little bit about the partnership with bwin.party gaming. What will be your expectation and what is bwin looking forward in this partnership from Zynga?
And my second question is about mobile. You talk about the network effect, about – with the large user base you have, can you talk about how much of network effect we could expect to see on mobile?
Do you expect it to have similar advantage as we saw on Facebook? Thank you.
David M. Wehner
Atul, it’s Dave. I’ll take the first question on bwin, and then Mark can add color on that as well as on mobile.
On bwin, we view this as a first step into real money gaming, and we believe that it’s a good first step but only a first step towards what we think is a large opportunity for Zynga.
Mark J. Pincus
So Atul, on your second question, I think you’re asking, how do we see the opportunity on mobile to create similar network effects like we have on our Facebook network?
Atul Bagga – Lazard Capital Markets LLC
That’s right.
David M. Wehner
Okay. So our strategy that we executed on to build a leadership position on Facebook and web boil down to three things.
First, we built the best social games and that drove the largest audience. Second, we built a network around that audience that enabled us to drive network conversion and basically through cross promotion, like you are seeing with FarmVille 2 and ChefVille, so that we could consistently take any great game to an audience of 6 million to 8 million DAUs.
And third, we focused on buyer conversion, both increasing the game quality, as you’ve seen us do with 3D gaming recently, FarmVille 2, and going into categories like casino and PVP that traditionally have higher conversion levels. We’re following that same three point strategy on mobile.
So on mobile, we’ve already built the largest audience of any gaming network in the western world by both users and engagement. With the launch of our With Friends network, we are wrapping a network around that user base so that we can drive the same kind of network conversion and cross promotion to drive distribution network effects on mobile.
We all know mobile is fragmented and there is no company or network that today has the kind of network effects to drive large scale distribution, and we believe we’re the best positioned to do that. And then the third thing, as we mentioned, we’re launching more games on mobile that are focused on higher-monetizing and higher-engagement areas.
Atul Bagga – Lazard Capital Markets LLC
Thank you.
David M. Wehner
Sam, you can go to the next question.
Operator
Thank you. Our next question comes from Scott Devitt of Morgan Stanley.
Your line is now opened.
Scott Devitt – Morgan Stanley & Co. LLC
Okay, thanks. One for Dave and one for Mark.
First, Dave, from a modeling standpoint, can you talk about how we should think about 2013, and I know it may be difficult or too early at this point, but just given the trajectory changes in the business, anything would help us as we try to build a longer-term model. And then secondly, Mark, could you talk a little bit about the – your views on adding more depth to games and other genres that you may enter?
There was a comment yesterday on the Facebook call regarding your business on Facebook last quarter being down 20% and competitors being up 40%. And I think the original indication around the difficulties on Facebook were related to an algorithmic change which seems to have now been reversed.
So I was wondering, is that just product driven or are there other things that it could actually work back to your favor, given that the algorithm was reversed shortly after it was put in place? Thanks.
David M. Wehner
Thanks, Scott. I’ll take the first part of your first question.
We’re not providing 2013 guidance, but let me give some color. In terms of cost structure we’ve outlined the $15 million to $20 million of sequential improvement in operating expense that we expect in Q4 versus Q3.
We expect that those cost savings will improve profitability for Q4, but also will carry into 2013. We’ll be investing – we’ll be continuing to invest in growth.
We’ll get the benefit of those savings into 2013. In terms of the top line, Mark outlined the game launch cadence in 2013, which is on average two web games per quarter and four mobile games per quarter.
And we are, as part of these cost and focused initiatives, rationalizing products, locations and teams, really focusing on executing against delivering those games on time and on budget. So we feel we’re well positioned in terms of delivering against the game launches we need to drive the top line as well as cost structure going into 2013.
Mark J. Pincus
And on your second question Scott, I believe that what Facebook referred to yesterday was they said that our share of the ecosystem revenues in the last year was down 20%, and the rest of the ecosystem was up 40%, not the last quarter. But either way, we’re focused on building great games that continue to drive deeper engagement and consumer value, and we’re doing it in some of our core areas, like Invest and Express.
And I think we had a major breakthrough with FarmVille 2, I think that we showed that we could bring a terrific 3D game to market – to a mass market in a browser for free with a terrific design around it, and we’re seeing great engagement and results. We have a similar 3D game coming out very soon with CityVille 2, and so we’ll continue the cadence on our Invest and Express, but we’ll continue to up the quality engagement and hopefully the buyer conversion in those games.
On top of that, we’ll be bringing out more games in categories like casino and PVP, and even core gaming with A Bit Lucky, because we’ve seen that those categories, not just in Asia but now in the West on web and mobile are driving a much higher buyer conversion rates and overall ARPUs. And we have terrific talent inside this company from a long industry – a long amount of – deep amount of industry experience in areas like RTS and RPG and other game – traditional game areas.
And we’re excited to make those categories much more broadly accessible and social. And we think that we can grow our share on Facebook, on the web, and in mobile.
Scott Devitt – Morgan Stanley & Co. LLC
Thanks, and if I could follow up. Just to reconcile the algorithmic change, and this is going back in time a little bit, but the – when they made the change to service new games, they reversed it.
And I know that when you start deemphasizing your games potentially in terms of being fed to Facebook users, that that has an effect. But to the extent, Mark, that you can walk through that in terms of change in the algorithm and then when they did reverse it, how come that didn’t then benefit the business more?
Because the change happened I think within a matter of weeks.
David M. Wehner
Hey, Scott, it’s Dave. Facebook make changes to their algorithms all the time.
So there is no – there is no set, firm way in which Facebook operates. So there’s changes all the time; we navigate those changes.
So we’ve been focused on operating successfully on the Facebook platform, feel like we are continuing to do that, the launch of FarmVille 2 and ChefVille, the two successful launches I think showing that we continue to execute very well on Facebook. We’ve seen some declines in our existing Invest and Express games; those persisted in Q3, I think we called that out.
But we’re feeling good about the launches that we’ve made in that category continuing to be successful.
Scott Devitt – Morgan Stanley & Co. LLC
Thanks a lot.
David M. Wehner
Sam, we can take the next question please.
Operator
Thank you. Our next question comes from Neil Doshi of Citi.
Your line is now open.
Neil Doshi – Citigroup Global Markets
...question. Mark, can you talk a little bit about the Zynga platform and what type of traction you are making there?
It seems like you’re getting more headway with third-party developers. What’s kind of the long-term goal there?
Is it to both be a platform for third-party developers and also bring players on to that platform and develop games for that platform or is it mainly to kind of become a distribution center for developers? Thanks.
Mark J. Pincus
Sure. So we have started to bring more third party games on to our web network, primarily on Zynga.com, and we’ve even started launching a few such as Horn on mobile in the last quarter.
Our number one goal at a platform level is to increase the – for that first strategy of bringing the best social games to our players, we think that we can get more leverage, get to more genres and more game types faster by working with the rest of the industry and letting them leverage not just our large audience, but the rest of our network features that drive higher engagement, and other services that we help them with on things like monetization and improving the retention in their games. Our focus is first to bring more great games to our audience, and second to build that out as an additional revenue stream and business opportunity.
I think the most important thing you should expect to see our platform do in the next year is continue to drive this network conversion on mobile. It’s going to do a lot of things in the next year, but the biggest single thing you should look for is turning on that level of network conversion on mobile, so that we can consistently bring mobile games, whether they’re ours or third parties’, to very large audiences.
Neil Doshi – Citigroup Global Markets
Thank you, Mark.
David M. Wehner
Sam, we can take the next question please.
Operator
Thank you. Our next question comes from Mark May of Barclays.
Your line is now opened.
Mark May – Barclays Capital, Inc.
Thanks for taking my questions. We’re sort of in this interim period where you have – you’re sunsetting several games.
There is a cohort of older games that are falling off. The question is, it would be great if we could segment out that group of games and then look at another cohort that’s some of your newer games and get a sense of revenue growth on that basis.
I guess ultimately the question is, when you take into account these various dynamics, should we expect to see continued kind of sequential revenue growth for how many quarters? I’m just trying to get a sense of how much of a headwind you have from this first segment of sunsetted and older cohort games.
And then a second question, I think on the last conference call Dave mentioned the expectation to be free cash flow positive in the second half of the year. Given the newer news, even when you strip out the one time restructuring charges in Q4, do you expect that to still be the case?
Thanks.
David M. Wehner
Thanks Mark. And I think when you think about the older games, it’s important that you don’t bucket everything together.
I would just note that for instance Poker continues to be a very strong game for us, it’s not experiencing the same trends that the Invest and Express – the older Invest and Express games are experiencing. So it’s a – it’s different from those older Invest and Express games.
We’ll put in the Q that – and revenue’s not – doesn’t exactly track bookings, but revenue for FarmVille will be 20% in Q3 versus 29% in Q2. Poker will be 21% in Q3 versus 18% in Q2.
You’ll get some additional color on that; again revenues and bookings don’t precisely correlate in time, but that gives you some color. And then I would also point out that – the stat that we cited about the non-Facebook bookings really being mobile bookings, 20% in this quarter versus 6% a year ago.
So we’ve got some positive developments. Obviously, we’ve got some of those larger Invest and Express games that are – experienced declines, but Farm 2 has been a real success in re-energizing the Farm category.
We think of Farm 2 as really being an extension of that category for us. And we see that really coming back strong with the launch of that, showing that we can really rejuvenate these categories.
And I’d say the same thing, we think of ChefVille as being a rejuvenation of our Café World franchise, which was what we call our cooking category, that’s really turned that back into a growth category for us. So we think there’s real opportunities to rejuvenate these categories, as well as seeing stability in games like Poker.
Mafia Wars even had a slight amount of growth in the quarter. So we think there’s reasons to be optimistic, but we recognize we’re facing challenges.
On the free cash flow question, yeah, I don’t think I can make that statement today, that we’re going to be free cash flow positive, given the guidance in the second half of the year, I think it will be close. We’re obviously going to be disciplined about CapEx in the fourth quarter.
But I think if you add it up in the mid-point, I don’t think we’ll be quite free cash flow positive. But obviously we’re focused on making the right disciplined choices around operating cost and capital expenditures, in the fourth quarter and going forward.
Mark May – Barclays Capital, Inc.
And on bwin, we can all try to come up with our own revenue forecast, but can you give us at least some sense of the financial arrangement in terms of revenue share and other components on the cost side?
David M. Wehner
Yeah, there is a revenue share with bwin on this, and we’re not going to be providing specific guidance on this at this time. Again it’s a first step, we think this is a big long-term opportunity, but we’re not providing any specific guidance around the impact.
Mark May – Barclays Capital, Inc.
Okay, thanks.
David M. Wehner
Thanks Mark. Sam, you can go to the next question please.
Operator
Thank you, our next question comes from Colin Sebastian of Robert W. Baird.
Your line is now opened.
Colin Sebastian – Robert W. Baird & Co.
Thank you. I have a couple of questions, first on mobile and more specifically the roll-out of iOS 6.
I was curious if you’re seeing any changes there in terms of game discovery, if it’s perhaps easier or more difficult to promote Zynga titles. And then secondly in mobile, are you able to carry over users from the Facebook game network over to the mobile platforms to drive growth there, or do those markets remain somewhat segmented?
And then my second question is just a follow-up on bwin and Mark’s question on the economics. I know you can’t provide details there, but can you clarify if this is just a brand licensing deal where the economics might be pretty modest, or are there more layers here under the onion such as game development or integration that might make the economics more robust?
Thank you.
David M. Wehner
I’ll answer the first question on mobile. I think it’s early for us to be able to report back any metrics on the impact of iOS 6, but we think that all the metrics will be positive because – primarily because they’re reducing the amount of friction that people have to access the app store and download and install apps.
In terms of a carryover from Facebook users to mobile, it’s again a little tough to measure. We’ve definitely seen, and we reported on our last quarterly call that we’ve seen amongst the Facebook audience – Facebook-connected audience we have on mobile, a huge proportion of those players, well more than half our players that have either reactivated to our network because of mobile or are also playing our games in both web and mobile.
And the biggest game we see that with is our Poker game, which leads the charts on both Facebook and iOS. In terms of seeing other Facebook mobile channels driving – web channels driving mobile usage, we’re excited about some of the changes that Facebook is testing and implementing in the market, like their new Sponsored Stories, and we’re very actively testing those things with them and we’re excited to see what the future brings.
Mark J. Pincus
Yeah, Colin, on bwin, this is a – just in the U.K. market, it’s a first step.
So we’re not talking any more details around the economics at this time.
Colin Sebastian – Robert W. Baird & Co.
Thank you.
Mark J. Pincus
Sam, you can go to the next question please.
Operator
Thank you. (Operator Instructions) Our next question comes from Doug Anmuth of JPMorgan.
Your line is now opened.
Doug Anmuth – JPMorgan Securities LLC
Great. Thanks for taking the questions.
Just wanted to ask two things. One more on bwin, not about the economics, however, but can you just clarify what sites and platforms the real-money games will be available on?
And then secondly, just wanted to get your thoughts on how you’re thinking about other genres in terms of mid-core or hard-core games, potentially some other areas that might monetize better on a per-user basis, but of course over a smaller overall base of users, how you think about those areas of gaming? Thanks.
David M. Wehner
So, thanks Doug. We’re not giving a lot of details around bwin at this time.
In terms of genres, Mark, you might want to speak to the mid core efforts that we’re making. That was a big part of our acquisition of A Bit Lucky.
Mark J. Pincus
Sure. So, on bwin, within the press release, what we’ve announced is that [Phil] will be exclusively focused together to start with in the U.K., where they have a suite of casino products that we’re both excited to test against our network.
On the genres, there’s a number of genres that we’ve all seen have higher buyer conversions and higher ARPUs, but like you said against smaller user bases than we’ve generated on our games traditionally. And we’re actively working in our upcoming pipeline and beyond on games for those genres.
And the acquisition of A Bit Lucky was part of that that goes even further into mid-core gaming with their upcoming pipeline. And then we see genres that we’re already in like casino, which have other game categories that we have not been yet that do monetize more with somewhat small audiences.
And then we’ve seen great success on mobile and Facebook with some more narrowly focused PVP game offerings. We of course were the first major PVP game on Facebook with Mafia Wars, which still maintains a sizeable audience and revenue base today.
So I think the way to think about this is that we’ve built a large audience on web and mobile and we need to do a better job segmenting that audience and bringing some more games to them that may be somewhat narrower parts of the audience, but achieve higher ARPUs.
Doug Anmuth – JPMorgan Securities LLC
Thank you.
David M. Wehner
All right, Sam, you can go to the next question please.
Operator
Thank you. Our next question comes from Heath Terry of Goldman Sachs.
Your line is now opened.
Heath Terry – Goldman Sachs & Co.
Great, thanks. Dave, what kind of costs related to the restructuring should we expect to see beyond this quarter, if any, and will the reduction in head count bring costs in line with your expectations for revenue beyond this quarter?
David M. Wehner
Yeah, thanks Heath. We’re obviously – as I mentioned, we’re not providing guidance but we took these cost actions to align our cost structure with where we think the business is, and we’re making choices to rationalize the product pipeline to focus on the highest ROI opportunities to continue to drive growth.
So, we think that we’re going to have the right cost structure in Q4 and going forward. As far as the additional charges, we expect that there is the restructuring charge that we are taking in Q4, not commenting beyond that, but that really is the main charge related to this restructuring plan.
Heath Terry – Goldman Sachs & Co.
And fair to say that that charge will be largely cash?
David M. Wehner
No, that’s going to have both a cash and a stock component to it.
Heath Terry – Goldman Sachs & Co.
Okay. Do you have a sense of what that breakdown is going to look like?
David M. Wehner
It’s going to be mainly a cash component, a smaller stock component.
Heath Terry – Goldman Sachs & Co.
Great. Thank you.
David M. Wehner
Sam, we can go to the next question please.
Operator
Thank you. Our next question comes from Justin Post of Bank of America.
Your line is now opened.
Justin Post – Bank of America/Merrill Lynch
Thank you. Two quick ones.
I think Facebook highlighted last night in the DAU data, why do you think Zynga is losing share on Facebook, and what timeframe could you maybe start to reverse that, if that’s one of your goals? And then secondly, you do have $2 a share of cash which is – almost $2 I guess, which is quite an interesting asset.
Can you use that to help you start growing again down the road? And then I have one maybe follow-up on Poker, just the profitability of that game if you can help us at all, because it is $200 million run rate; it seems pretty stable?
Mark J. Pincus
Sure, Justin, I’ll answer the first part of that. In terms of our overall market share on Facebook, we believe that our position on Facebook has been largely driven by our own execution.
And as we’ve said, we haven’t been happy with our execution across the board. I mean, we have been happy in some places, but we haven’t been consistently executing as we had hoped to for this whole year.
And we’re encouraged – in some of our core areas, we’re encouraged that we’ve done a great job maintaining our market position and even growing our market position in the Poker category this year on web and mobile. We’ve really gained some good share on Android even on mobile.
In Invest and Express, we would have liked to execute better this year in the Invest and Express category. Obviously the Ville missed our – both our dates and expectations for the game, but then FarmVille 2 and Chef, we think, did a great job.
And we see a lot of growth opportunity for us on Facebook by innovating in some genres that obviously have gained a lot in the last year, but we haven’t maintained our pace of share in those genres. And I’ll let Dave answer the other two parts.
David M. Wehner
Yeah, when we think about capital allocation, we’ve benefited from the fact that we’ve largely completed our zCloud infrastructure build. So that use of cash has come down.
We are still looking at M&A on occasion. We’re very disciplined; we see a lot of opportunities come our way but we’ve been highly selective.
Mark mentioned A Bit Lucky, which is an important part of getting into the mid core category. So we’ll use our cash for acquisitions when highly strategic.
Most importantly we’re continuing to invest in our core business on mobile and web. And we’re being very disciplined about that as well, looking at the 12-month cash on cash returns that we get from our game investments.
We’re keeping very tight guardrails on budgets, but we’re continuing to invest, and we’re continuing to invest for growth. And we see that growth opportunity on the web and on mobile.
And then obviously we’ve got the share repurchase authorization as well. So that’s something else in our toolkit on capital allocation.
Justin Post – Bank of America/Merrill Lynch
Great. And then on Poker, it seems like it’s a really interesting asset; I guess you’re around a $200 million run rate.
How profitable is that game and can that grow as you look out in the future?
David M. Wehner
Yeah, we aren’t breaking out profitability by game. That is a great game for us; it’s been stable.
Poker has been a great extension on to the mobile platform for us. Poker is a great asset on mobile.
And so that has been a very good business and a very stable business and a growth business on mobile for us. So we like Poker a lot.
Justin Post – Bank of America/Merrill Lynch
Thank you.
David M. Wehner
Thanks Justin. Sam, we can take the next question, please.
Operator
Thank you. Our next question comes from Doug Creutz of Cowen.
Your line is now opened.
Doug Creutz – Cowen & Co.
Thanks. You’ve been growing ad revenue sequentially pretty consistently for the last two years or so, and it went down in Q3 sequentially.
I wonder if you could talk about what drove that and do you expect it to start growing again in Q4? Thank you.
David M. Wehner
Yeah, ads – yeah, thanks. Ads is very much in a secular growth trend.
There’s some timing of different deals in individual quarters that can affect sequential, but ads on whole is growing for us and we’re monetizing better and better through – on advertising. Mark outlined some of the new products that we’re launching in advertising on the video side; that’s been a good growth driver for us.
In the quarter we did have a sequential decline in DAU, so obviously that does impact our advertising revenue. But overall as a percentage we’re continuing to see that grow faster than user pay.
Doug Creutz – Cowen & Co.
All right, thank you.
David M. Wehner
Sam, you can go to the next question please.
Operator
Thank you. Our next question comes from Arvind Bhatia of Sterne, Agee.
Your line is now opened.
Arvind Bhatia – Sterne, Agee & Leach, Inc.
Yeah, thanks for taking my question. My main question is on FarmVille 2 and how you want us to think about that versus FarmVille.
You obviously are having good success there. Is it largely incremental; is it somewhat incremental?
I just want to understand as we get the fourth quarter – I think you said 20% of third quarter was from FarmVille. How is that going to play out?
Are most of the payers shifting to FarmVille 2, or do you still have some payers over there; just how you want us to think about that?
David M. Wehner
Yes, so, I mean we are seeing primarily – the majority of the payers that we’re seeing in FarmVille 2 are either new to network or reactivations, and we define reactivations as people who haven’t paid with us as payers in the last 30 days. We’re also seeing people who have paid with us in the last 30 days playing FarmVille – paying in FarmVille 2.
For those people who are paying in FarmVille 2 it’s incrementally positive to the amount that they’re paying, when they do pay in FarmVille 2. So we’re seeing kind of an across the board positive effect.
We will see some decline in bookings from other games, but overall the net positive from reactivating players, bringing new-to-network payers, and then also even getting more spend out of the people who are paying for us recently is all a net positive.
Arvind Bhatia – Sterne, Agee & Leach, Inc.
I guess I want to be clear, because I think Mark had mentioned that you guys saw almost like $1 million a day with FarmVille 2, which would put the run rate for the quarter, say about $90 million or $360 million for the year, versus $200 million or so for FarmVille. I just want to understand, is that basically just an offset or how much of that do you feel like is going to be incremental?
David M. Wehner
Sure, let me make sure we clarify the numbers as well. I think the key thing is that that was a number that Mark cited that included the amounts retained by Facebook.
So that’s – our bookings as reported are net of the amount retained by Facebook, so it’s about 70% of that. So that gives you a more accurate compare to bookings and revenues numbers.
Mark J. Pincus
And I also want to add that, while I think that was an important and exciting milestone for the game to hit so early after launch, I don’t think that you should take from that that is the average daily numbers that we’re seeing and play that out for 90 days or a whole year. I think it’s more of just showing that we’re growing that game to great numbers pretty early in its lifecycle.
Arvind Bhatia – Sterne, Agee & Leach, Inc.
Understood, and just one other question if I could. You announced the cost reduction plan, and what I’m wondering is, exiting the fourth quarter your bookings run rate is implied to be something north of $200 million based on your guidance.
Mark J. Pincus
Right.
Arvind Bhatia – Sterne, Agee & Leach, Inc.
If we take that or – and grow that sum for 2013 you’ll be in the $800 million, $900 million run rate, and your head count I think as of the end of third quarter was something close to 3,000. Back in 2011, you were at $1 billion run rate and 1,900 head count.
I just want to understand, when you comment that your reduction here – cost reduction is aligned with the growth you’re looking forward to, are we talking about massive amount of change in the revenue trajectory here in the coming quarters?
Mark J. Pincus
I don’t think we’re giving guidance on the coming quarters, Arvind. I think what we’re saying is that we think the actions that we’re taking, reducing OpEx sequentially by $15 million to $20 million will bring our cost structure down and put it in the right place exiting Q4 and into 2013.
We’re going to continue to invest in growth to drive growth, but we’re not giving specific guidance on what that growth is going to look like in 2013.
David M. Wehner
And I would just add, Arvind, that if you compare us today to a couple of years ago, we’re investing in more growth businesses today than we were then. So we’re investing in the growth of mobile and we’re investing in the growth of network and platform and advertising, so – and now R&D as well, so we are pursuing more growth businesses.
Arvind Bhatia – Sterne, Agee & Leach, Inc.
Understood, thanks guys.
David M. Wehner
Next question please, Sam.
Operator
Thank you, our next question comes from Edward Williams of BMO Capital Markets. Your line is now opened.
Mr. Williams, please check your mute button.
All right, we’ll move on to the next question. Our next question comes from Ben Schachter of Macquarie.
Your line is now opened.
Ben Schachter – Macquarie Capital, Inc.
Hey, guys. a couple of somewhat high level questions.
When you think about the limited investment needed to create a decent mobile game versus a console game, what really are the key sustainable competitive advantages that you think Zynga brings to the mobile game marketplace? Is it the network or is there something else structural at Zynga that you think gives you an advantage over competitors?
And then going into the mobile a little more, it’s clear that you want to have those network effects on mobile that you saw on Facebook, but what are the structural differences between mobile and Facebook in terms of really driving those network effects? Thanks.
David M. Wehner
Sure. Mobile is in a lot of ways in a much earlier stage than the web opportunity.
So you can – as a developer you can make considerably smaller upfront investments in new games, and we’re also doing that and benefiting from that. I think that we do have a few structural advantages.
Our approach with layering on more With Friends games consistently drives higher engagement and retention both in the game and across the different games. And then I think you’ll see us bring more of our web IP to mobile in the coming quarters as well.
So I think that you’ll see continued leverage of known brands and audiences that are already built up around those games. So – and then to your second question, which relates to your first one, of what are the factors in mobile that may or may not allow us to get network effects and advantages?
It is different in a lot of ways from web. It’s more fragmented.
The distribution is much more limited today, but we have by far the biggest market position in the West on mobile by daily active users and engagement. So we’re in a position that we can cross-promote our new games to our large audience.
And we just haven’t executed on that yet and that’s why you’re seeing us launch our With Friends network. And that’s why – I come back to the three things that we’re focused on doing well are driving the best games in the market that drive the biggest audiences, driving network conversions on mobile like we’re doing on the web, and driving buyer conversion, and that’s really what you should expect to see us do next year.
Krista Bessinger
Operator, I think we have time for just one last question.
Operator
Certainly. Our final question comes from Nat Brogadir of Stifel Nicolaus.
Your line is now opened.
Nat Brogadir – Stifel, Nicolaus & Co., Inc.
Hey guys. Most of mine have been answered, but just want to talk quickly on 2013 directionally.
I mean, given the initiatives, the new partnership, I mean do you guys expect internally that revenue or bookings could be up year-over-year versus your 2012 numbers or should we expect flat to down-ish kind of directional growth?
Mark J. Pincus
Yeah, thanks Nat. I think the color that I’ve given is really around the game launch cadence.
We’re obviously investing for growth but we’re not providing specific – we are not providing guidance at this point. So it’s really just the color that we’ve already given, which is the game launch cadence of two web games per quarter and four mobile games per quarter, and the fact that we’re bringing down the cost structure in Q4 and expect to retain that cost structure and some of those savings into 2013.
So we’re not at this point providing anything in terms of more detail on 2013.
Nat Brogadir – Stifel, Nicolaus & Co., Inc.
Fair enough, thanks.
Mark J. Pincus
All right. Thanks, Nat.
All right. well, thanks everyone for joining our call, and we will look forward to speaking with you next quarter.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program.
You may all disconnect. Everyone have a great day.