Feb 5, 2013
Executives
Krista Bessinger – Senior Director-Investor Relations Mark Pincus – Chairman, Chief Executive and Product Officer David Ko - COO Mark Vranesh - CFO
Analysts
James Cakmak – Telsey Advisory Group John Egbert – Morgan Stanley Neil Doshi – Citigroup Arvind Bhatia – Sterne Agee Brian Pitts – Jefferies (Greg Roshar) – Robert W Baird Kaizad Gotla – JPMorgan Nat Brogadir – Stifel Nicolaus Ryan Gee – Bank of America Ken Sena – Evercore Partners Ben Schachter - Macquarie
Operator
Good day, ladies and gentlemen, and welcome to the Zynga fourth quarter 2012 results conference call. [Operator instructions.]
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 fourth quarter 2012 earnings conference call. 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 Q1 in 2013, our plans to enter into new game categories, our plans for our game network, the growth of the social games market including mobile and advertising growth, our share repurchase program, 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. Our ability to launch new games in a timely manner, our ability to control expenses, the changing interests of players, regulatory or licensing issues, litigation, 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 October 26, 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 will 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 from, 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. Thanks everyone for joining us today.
I have with me David Ko, our COO, and Mark Vranesh, our CFO. Over the past two years, David has successfully built our mobile division, and he recently leveled up to manage our day to day operations.
Mark Vranesh has been with Zynga for almost five years, and he built out our accounting controls organization. I want to start today by highlighting our Q4 performance.
I’m proud of the way the team executed in the fourth quarter. First of all, FarmVille 2 was our most successful launch in the past two years.
It showed what our company and social gaming can deliver when we combine our best brand and IP with the industry’s best team and distribution. We continued to grow our ad sales in the quarter.
We reduced our operating expenses by $23 million from the third quarter. As a result, we exceeded our own top line bookings forecast by $48 million, and our adjusted EBITDA forecast by $51 million.
We made good progress in the quarter realigning the company around our best growth opportunities, and I want to highlight five actions that we took. First, at the beginning, in the third quarter, we realigned our company to a mobile-first focus.
We ended the year with more of our new game teams focused on mobile than web. Second, we rationalized product lines and closed some game studios, like Boston and Japan.
Third, at the exec level, we promoted four leaders to round out our senior long term management team. Fourth, we realigned our studios around the four leading social game categories, which are invest and express, social casino, casual, and mid-core, and we promoted four proven product leaders to run them.
And fifth, we continued to invest in our talent, with more than 550 people leveling up in the quarter, meaning they took on greater roles and responsibilities with our company. We’re encouraged by this better performance, and we’re excited about the opportunities ahead.
We’ve always been a learning company, learning from our successes and our failures. With every feature and game we’ve released, we focus on getting better, so we can deliver more fun and social experiences for our players.
FarmVille 2’s success was driven by our team’s focus on finding the fun early, through frequent player testing and embracing a new platform in Flash 3D. That’s the same approach we’re taking to execute in developing our new IP for mobile.
We’re funding this mobile investment from the profits from our web game franchises. We’re confident that these investments in 2013 will position Zynga for long term growth, and we have the right team in place to execute on this strategy.
Today, Zynga is the best-positioned company to lead in building the future of social gaming on the web and mobile. We have the largest total audience, with 298 million monthly average players, and specifically, 72 million on mobile alone.
In December, our mobile game players in the U.S. spent more time in our game than the next five game companies combined.
And we’ve got the best bench in social gaming, with more talent against this opportunity than any other company, and our culture of learning and leveling up means that every quarter we’re generating more great product makers. This year we’re focused on three strategic objectives to support our web business while growing on mobile.
First, more franchises. We plan to expand our industry-leading franchises and establish new ones.
Second, our network. Our focus is to leverage these franchises to create the leading gaming network.
And third, profitability, so we can continue to invest in the best franchise and network. Zynga’s core strength has been our ability to invest in, and sustain, leading franchises.
These games, like FarmVille, poker, and Words With Friends, have become lasting daily habits for millions of our players, generating significant revenues over long periods of time. Today, we’re the only company with leading franchises in three of the top four social game categories.
First, in invest and express, I’m happy to announce that in 2012 FarmVille surpassed $1 billion in total player purchases, inclusive of partner fees. The successful launch of FarmVille 2 proved our ability to sustain a franchise into its fourth year, and in Q4, the franchise delivered its sixth quarter surpassing $100 million in gross bookings.
In 2013, we’ll make FarmVille 2 and other invest and express games available to our players on mobile as well. Second, in social casino, Zynga Poker, after six years, continues to lead across web, IOS, and Android platforms.
In the fourth quarter, we grew poker to 37 million monthly active players, which is up 8% for the year. In 2013, we’ll be introducing new games such as Elite Slots, which is currently available in beta.
In the first half of the year, we’ll also be launching a full suite of real money casino games in the U.K., through our previously announced partnership. Third, in casual, Words With Friends remains one of the most popular mobile games almost four years after launch, engaging players for 7.5 billion minutes in December alone.
In 2013, we’ll be launching more casual titles as well. Finally, in mid-core, mid-core represents our biggest opportunity to reach new audiences and drive growth across web and mobile.
At Zynga, our number-one value is to build games that we love to play. We’re seeing more heat and excitement around our company for mid-core games than anything we’ve seen before, and in 2013 our pipeline is heavily weighted to mid-core.
Now I want to talk about our network strategy. Our network offers the potential to magnify and multiply the value and power of our franchises.
On the web, the majority of our players rely on our Zynga Social Center, the lobby entrance to all our games, as the primary way they play together. Every day, our players send and receive more than 1 billion gifts, helps, and other messages.
Our channels now represent our most important distribution channel, delivering three times more installs than any non-Zynga channel for new game launches in the first few weeks. Mobile, however, remains a more-fragmented experience.
Despite the incredible growth in mobile gaming, it’s still hard for any of us to find people to actually play with. We’re amazed that the number-one way our Words With Friends players find new opponents in their game is through the “random” button.
We know we can offer them something more compelling than that. What they really want is an instant community, so on mobile, we’re creating a network that will make it easier for people to play together.
Similar to what we’ve achieved on the web, this network will offer a powerful distribution channel, so when we and our third-party partners build the best games, they’ll be guaranteed the biggest audiences. While we continue to invest in our network and new franchises, we remain focused on our profitability.
I’m proud that as a company, we’ve been operating cash flow positive since 2007. This focus has been a key part of our operating philosophy, and has driven a lot of hard decisions around the company.
As we transition to the mobile opportunity, we’re focused on three key areas to drive cost efficiencies and greater return on our investment. First, we’ve established guardrails and minimum expected returns for new IP investment.
Second, we’re challenging our game leaders to call the ball earlier on games, which means closing marginal projects. And third, we’re reducing the cost of operating live games by growing our development centers in India and China.
The number-one focus for our company this year is to deliver the best social games on mobile. With each successive game we launch, our objective is to achieve the highest quality ratings from our players and the leading chart positions.
2013 is a pivotal transition year for us here at Zynga. We’re realigning the company to capitalize on the $9 billion opportunity in social gaming, and we’re excited to deliver for our players a whole new class of mobile social games that make it easier and better to play together across mobile and web platforms.
With that, I’ll turn it over to David.
David Ko
Thanks, Mark, and good afternoon everyone. Since taking on my new role as COO, I’ve been laser-focused on execution, and I’m excited to speak with you today about our operational performance in Q4 and key focus areas going forward.
As Mark mentioned, our strategy centers around three areas: developing the leading franchises across web and mobile, leveraging them to build the world’s leading game network, and driving profitability. In Q4, we demonstrated the power of the franchise with the launch of FarmVille 2, which exceeded our expectations across bookings and DAU.
In fact, the game beat our bookings plan by more than 100%, and since launch it has maintained high levels of engagement, bookings, and demonstrates that when we deliver great content, our players engage and spend. In the social casino genre, we continue to propel Zynga Poker forward, with something we call bold beats.
Bold beats are a new dimension or innovation within a game that excites players and keeps them coming back. In Q4, we introduced multiplayer tournaments in Zynga Poker, a bold beat that brings together thousands of players simultaneously for massive online tournaments.
The team also launched Poker Genius, a tool designed to help many of our players who are not poker experts but want to feel like one. Have you ever wanted to go all-in on pocket threes?
Well, our poker game is the only one to tell you how to do it, and our players love it, with 80% adoption shortly after launch. Our players like to know that playing our poker game makes them better.
And finally, Words With Friends, which remains our most popular mobile franchise after nearly four years after launching, grew by more than 13% year after year in DAU in Q4. This contributed to our strong mobile business, which now represents 21% of our bookings, up from 8% a year ago.
We’re coming up the learning curve, and increasing revenue for DAU with each new launch in the With Friends portfolio. We’re also diversifying our games portfolio, making bigger bets on higher-monetizing genres, including mid-core and invest and express.
We launched Ayakashi, a card-battling game, in Q4, and it’s now our highest-monetizing mobile game on a per-user basis. And we’re planning to launch several more mid-core and invest express titles on mobile in 2013.
Additionally, we’re getting better at cross-promotion, especially in mobile. When we launch a new game on IOS or Android, we’re leveraging our audience of 72 million monthly active users.
While it’s still early, we already have our mobile games at the top of the app charts. Zynga Poker has been a top-20 grossing app for more than 18 months, and Words With Friends was number three on the 25 most downloaded App Store apps of all time for both the iPad and the iPhone.
According to comScore, Zynga now has the fifth-largest daily audience in mobile in the U.S., behind companies like Google and Facebook. We likewise rank fifth in overall time spent on mobile, with 10.7 billion minutes in December 2012.
And we rank third in time spent per user per month, with an average of 5 hours and 52 minutes in the U.S. This is largely because we have three of the top five mobile game titles by reach and time spent.
In terms of game launches in the quarter, we launched four new mobile games: Ayakashi, Bubble Safari, Ruby Blast, and Party Place, as well as four new web games: CoasterVille, CityVille 2, the Frame Game, and Bubble Safari Ocean. While we successfully expanded our game portfolio, not every launch was a success.
CityVille 2 missed our expectations, despite pushing the envelope on 3D gaming. And both the Frame Game and Party Place failed to achieve the mass-market appeal that Zynga franchises are known for.
As a result, we are closing CityVille 2, the Frame Game, and Party Place. Going forward, my number-one priority is to ensure increasing our hit rate for our games.
As part of that, we are taking a more disciplined approach to managing our game portfolio. We’re revamping our game development process to improve game quality.
For example, we learned from Mafia Wars 2 that we needed to get market feedback earlier in the process. With FarmVille 2, we did a public beta in the Philippines to help us get early feedback and tune the game six months before launch.
The two biggest changes on our pipeline from last quarter are that one, you should expect to see the shift move more to mobile. And two, with our efforts to call the ball earlier on games and focus on franchises, we’re doubling down on games with the biggest potential, and we’ll probably ship less games overall.
On the network, we saw positive traction this quarter as we worked to become the leading games network. As Mark mentioned, our network effects have become our most distribution channel.
In Q4, our own network drove 71% of all installs to new game launches during the first few weeks, and over the course of the entire quarter, drove a total of 92 million installs to all of our games. After only a few weeks of cross-promotion to CoasterVille, we already have generated over 15 million installs from our network.
With regard to profitability, we’re making progress on both revenue and expenses. On the revenue side, we’re building strong new revenue streams in advertising and mobile.
Q4 ad revenue was strong at $37 million, up 35% year over year and 19% quarter-over-quarter. Our direct sales team onboarded new world-class brand advertisers like Progressive Insurance and LG Electronics while securing renewals from McDonalds, Honda, and NBC Universal, just to name a few.
We believe there is significant upside in our advertising business over the next few years as we continue to innovate on ad targeting and inventory optimization and build strong relationships with large brand advertisers that resonate with both our players and our partners. On the cost side in Q4, we reduced our cash operating expense by $23 million quarter-over-quarter, exceeding the $15-20 million cost savings range we laid out in Q3.
We decreased spend in a number of areas, including marketing acquisition, data hosting, and outside services. We also closed several remote studios, reduced the size of our workforce, and rationalized our product pipeline.
Lastly, another revenue stream we’re focused on building is real money gaming, an area we’ve made significant progress in over the past few months. In Q4, we signed a partnership with bwin.party to offer real money gaming in the U.K.
We believe this is a great opportunity to offer our players a high-quality real money gaming experience. We remain on track to deliver our first real money gaming products in the U.K.
in the first half of 2013. Together with bwin.party, we’ll offer poker and casino games under the Zynga Plus Casino and Zynga Plus Poker brands, and we’ll be rolling out these products in multiple phases across a range of platforms in the U.K., namely via web, download, Facebook, and if we choose, mobile.
In addition, we filed an application for a preliminary finding of suitability with the Nevada Gaming Control Board in December, a small first step toward participating in the U.S. online real money gaming market.
These are all steps that are moving us toward our long term vision in real money games. So in summary, 2013 will be a year of mobilization for Zynga.
This means building and sustaining leading game franchises, leveraging those franchises to build the world’s leading game network, and improving profitability so that we can continue to deliver the best social gaming experiences for our players and value to our shareholders and employees. With that, I’ll hand it over to Mark Vranesh to discuss our financial performance and outlook.
Mark Vranesh
Thanks, David. Good afternoon everyone.
I’m very excited about returning to my role as CFO and working with the high-caliber management team that Zynga has assembled over the past few years. I’ve met many of you in the past, and look forward to working with you all in the future.
I’m pleased to report that we saw strong signs of progress in Q4. We grew adjusted EBITDA by 179% quarter-over-quarter on bookings that were slightly up quarter-over-quarter by implementing the cost measures that we discussed in October.
We generated $30 million of free cash flow this past quarter, $119 million for the full year, excluding the purchase of our building. Among the key initiatives we took to achieve this was completing the transition to our cloud infrastructure, reducing headcount, and putting up guardrails for development.
We’re happy with the progress that we made on this front, and more importantly, this will enable us to invest in the long game as Mark and David have described. Now let me take you through the details.
I’ll begin by covering our 2012 results, and then discuss our outlook for 2013. I would 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 non-GAAP measures to the comparable GAAP metrics. In 2012, we delivered bookings of $1.1 billion, down approximately 1% year over year, largely driven by a decline in web user pay within existing games.
Adjusted EBITDA was $213 million, down from $303 million in the prior year due primarily to higher R&D expense, resulting in non-GAAP net income of $58 million, or $0.07 per share. I’ll now turn to Q4 results.
Q4 bookings were $261 million, down 15% year over year, but up 2% quarter-over-quarter. Year over year declines was driven primarily by lower web user pay with the largest declines in CityVille, FarmVille, and FrontierVille.
Our quarter-over-quarter improvement was largely driven by the successful launch of FarmVille 2. Our Facebook related bookings represented 79% of our bookings.
Substantially, all of our non-Facebook bookings were on mobile platforms. Mobile bookings grew from 8% of bookings a year ago to 21% of bookings in the fourth quarter.
On a year over year basis, MUUs grew 9% to $167 million, MAUs grew 24% to $298 million, including $72 million MAUs from mobile, and DAUs grew 3% to $56 million, including $20 million DAUs from mobile. On a consecutive quarter basis, MUUs and DAUs were down 6%, and MAUs were down 4%.
In Q4, sequential declines in mobile DAUs from $22 million to $20 million and MAUs from $79 million to $72 million were largely due to declines in Draw Something. On the monetization front, average bookings for DAU, or ABPU, was $0.051 in Q4, down 17% year over year due to a mix shift from older, higher-monetizing games to newer, lower-monetizing games.
However, ABPU was up 8% quarter-over-quarter due to strength across mobile and web, led by better advertising pricing and inventory optimization. Next, monthly unique payers, or MUPs, were 2.9 million, down 1% year over year and down 2% quarter-over-quarter while payer conversions, or MUPs as a percentage of MUUs, was up 3.5% to 1.7% versus the prior quarter.
Revenue in the fourth quarter was $311 million, approximately flat year over year. Online game revenue was $274 million, down 3% year over year, and advertising revenue was $37 million, up 35% year over year.
In the U.S., revenue reached $184 million, or 59% of total revenue. This was down 6% year over year.
International revenue reached $127 million, or 41%, of total revenue. This was up 11% year over year.
Our top revenue generating games for the fourth quarter were Zynga Poker, FarmVille, and CastleVille, which comprised 20%, 18%, and 12% of our online game revenue respectively. No other game generated more than 10% of online game revenue in the quarter.
In the fourth quarter, we delivered EBITDA of $45 million, which was down 34% versus the year ago period, due to lower bookings, but up 179% from the third quarter, reflecting planned expense reductions and better-than-expected performance on the top line. This resulted in a 17% adjusted EBITDA to bookings margin in the quarter.
In Q4, our non-GAAP effective tax rate was 58%, which included a $28 million expense related to taxes associated with the establishment of our international tax structure. Excluding the expenses associated with the structure, our Q4 non-GAAP tax rate from normal operations was approximately 25%.
Note that in Q4 we accelerated the remaining implementation of our international structure originally scheduled to be completed at the end of 2014. The $54 million in taxes associated with this acceleration have been treated as a non-GAAP adjustment in the quarter and are not reflected in our Q4 non-GAAP effective tax rate.
This resulted in non-GAAP net income of $7 million, or $0.01 per share. Our non-GAAP diluted weighted average share count was 821 million in Q4, above the 775 million in our outlook, which was based on the assumption that we would report a GAAP net loss for the quarter.
Shifting to operating expenses, we were pleased with the progress we made in implementing our cost reduction plan in the quarter, exceeding the $15-20 million cost savings range we laid out in Q3. Cash operating expenses, excluding restructuring expenses, were down $23 million quarter-over-quarter, primarily driven by lower marketing, technology, outside services, and labor costs.
Despite the progress, we remain focused on improving our cost structure and we see incremental opportunities to drive further savings in 2013. Note that the amounts I’m about to mention exclude stock-based expense of $15 million, but include $8 million of restructuring charges.
In Q4, cost of revenue was $76 million, down 14% year over year, driven primarily by lower technology, amortization, and labor expense. R&D expense in Q4 was $116 million, up 5% year over year, largely due to $6 million of restructuring charges.
Sales and marketing expense was $29 million, down 29% year over year, as decreased marketing spend was partially offset by $1 million of restructuring charges, and G&A expense was $37 million, up 32% year over year, driven primarily by higher legal expenses and includes $1 million of restructuring charges. Overall, headcount was 3,058 heads in Q4, down 251 people quarter-over-quarter.
With regard to our GAAP results for Q4, note that our net income includes stock-based expenses of $15 million, down from $38 million in the prior quarter, due to the forfeitures associated with employee attrition and restructuring. In addition, GAAP results include a restructuring charge of approximately $8 million.
However, after the impact from stock-based expense reversals, total restructuring charges were only $1 million for the quarter. With regard to cash flow, cash flow from operations was $20 million, down 88% year over year, due to lower booking and a large partnership deposit in the year ago period.
Capex was $6 million in Q4, down 88% year over year. And overall, we delivered positive free cash flow of $30 million in the quarter.
In Q4, we spent $12 million of our previously announced $200 million share repurchase authorization to buy back 5 million shares at an average price of $2.36. Our repurchases were modest in the quarter, in part because we did not begin the share repurchase program until late in Q4.
The buyback remains an important component of our strategy to drive shareholder value. Turning to our balance sheet, we ended Q4 in a strong position, with cash and marketable securities of approximately $1.65 billion, up $4 million from Q3.
Before I turn to the outlook, let me provide you with some perspective on the year. This year, Zynga is in the midst of a platform transition and it will take some time to complete.
And, we’re also entering new game categories. While the transformative steps we are taking make full year visibility somewhat challenging, ultimately we believe we’re making the right decisions and investments necessary to better position Zynga to be successful in the future.
By investing in only the best games and the best network, we drive value for shareholders and our players. Let me now turn to our outlook.
For Q1 2013, we expect bookings between $200 million and $210 million, down sequentially from Q4, because we expect Q1 to have a light slate of new releases as we are taking a more disciplined approach to managing our game portfolio. I would note that we expect to see more game launches in future quarters, with an emphasis on games that could be franchise contenders.
We see Q1 adjusted EBITDA between negative $10 million and breakeven, and non-GAAP loss per share between $0.04 and $0.05, based on a diluted share count of approximately 780 million to 790 million shares. On a GAAP basis, we expect revenue between $255 million and $265 million, net loss between $12 million and $32 million, and GAAP loss per share of between $0.02 and $0.04, based on the same share count of 780 million to 790 million shares.
For the full year 2013, we are targeting adjusted EBITDA margins to be in the range of 0% to 10%. A few other notes: stock-based expense for Q1 is expected to be between $35 million and $45 million, and capex for 2013 is expected to be $12 million in each quarter on the average.
With respect to taxes, we expect to pay foreign and state cash taxes of $3 million to $5 million in 2013, but otherwise we do not expect to be a cash tax payer. We expect to begin paying federal cash taxes in the U.S.
within the next three years, after we deplete our stock based compensation deductions. We expect our long term normal operating tax rate to be approximately 25%.
In summary, the second half of 2012 was challenging for Zynga. However, we have seen progress in Q4 as we have begun to lower our cost structure and rationalize our product pipeline while investing in our network and growing our core franchises.
We earned $213 million in adjusted EBITDA, and excluding the purchase of our building, we generated $119 million in free cash flow in 2012. We also continue to launch some of the most popular social games of the year on web and mobile.
As we roll into 2013, we are focused on better execution and a disciplined but more flexible approach to deploying resources. With a solid balance sheet, the best game developer talent, strong core franchises, and the largest community of players, Zynga remains well-positioned to continue to be the leader in social gaming across platforms.
With that, operator, I’d like to open the call for questions.
Operator
(Operator Instructions) Your first question comes from the line of James Cakmak – Telsey Advisory Group.
James Cakmak – Telsey Advisory Group
You talked about the transitions that you’re making or the steps that you’re going to take on your mobile platform to expand the network there and you talk about how it’s so fragmented right now. Can you talk about what those steps are and what gives you confidence that people will utilize the network rather than the random opponents that you talked about?
And then secondly, can you just give us some clarity on what the ABPU profile is of some of the target categories that you’re going after like the mid core relative to where ABPU stands today?
David Ko
So in terms of your question around what steps are we taking to expand the network and why will we essentially win in this category, it really comes down to a couple of things. We do feel we have a competitive advantage today in mobile because of our people, our products and our network.
And I’ll break each of them down for you. On the people side, two years ago, we had about 20 people focused on mobile.
Today, most of the company is focused on the mobile opportunity as more and more of our players are coming to us from mobile. On the products, we’ve already started to lay a foundation with games like Words With Friends, for example, and also Zynga Poker, just to name a few, which are already leading the charts in their categories in terms of engagement and bookings.
And lastly on the network, we have 72 million mobile MAUs coming to us every month, which really helps to set the foundation that when we deliver games that are engaging we know we have games that we could offer our players that we think they’ll enjoy and want to play that fall into the social category.
Mark Vranesh
Just on the question about ABPU and mid core, we do expect those – the monetization rates to be higher in mid core, probably in the low-single digit sense per DAU.
Operator
Your next question comes from the line of Scott Devitt – Morgan Stanley.
John Egbert – Morgan Stanley
I just have two quick questions. In the past it seemed like you spaced out the launches of some of your key games to avoid cannibalizing audiences.
Do you think the success of FarmVille 2 might have made it difficult for CityVille 2 to grow its user base since they were launched about two years apart and would you try to avoid this happening in the future? And just second, it seems like you found some really good publishing partners on mobile.
Is revenue generated from these partners so far a material portion of the 21% you were in for mobile overall?
David Ko
So in terms of spacing them out, we are learning from every launch in terms of – and trying to get better with every successful launch of our product. Again, we are focused on franchises, so our goal is to create franchise in the upcoming year.
And I think what you’re going to see from us in terms of launching potentially less titles as we double down on franchise types of opportunities is they will ultimately be spaced out potentially a little bit farther apart. And so we’ll see that.
In terms of did it correlate to CityVille 2? It’s hard to say.
The reality is we did have a longer lead time where we did try to test and learn and I gave an example of how we did that in the Philippines, so there was a little bit of a longer lead cycle. And that was a key learning that we didn’t necessarily have in CityVille 2, so every successive launch we look to learn from that and try to stack our odds in the favor as we launch new titles going forward to become franchises.
Krista Bessinger
And I’m sorry, could you please repeat your second question?
John Egbert – Morgan Stanley
So I said it seems like you found some good publishing partners on mobile. I was just wondering if the revenues generated from the partners, is that a material portion of the 21% you earn from mobile or is it still too early?
Mark Vranesh
We’re very excited about the games we’re launching on the mobile platform. Currently we don’t plan for those games to have a meaningful contribution to 2013 revenues.
Operator
Your next question comes from the line of Neil Doshi – Citigroup.
Neil Doshi – Citigroup
Any thoughts on how we should think about games being launched over the course of 2013? I guess (when would be) a light quarter but should this be more in the back half or can it be more evenly split throughout the rest of the year?
And then any thoughts on the gross margin? It looks like it reached around 90% ex (inaudible).
That was a high that we’ve seen for a while. Is this sustainable and what drove this?
David Ko
So in terms of the first half of your question, in terms of the game pipeline for 2013 and spacing, our focus again is to focus on creating games that we believe have – a focus on games that we believe have franchise potential. And so the review process that we’re going to do going forward is one where we’re going to ensure that and continue to look at the quality for our games.
And it may force us to make some hard decisions along the way. Given this – we do have a lighter slate of games that we’ll launch in Q1 but we do believe what we’re trying to do is to increase our odds for franchises throughout the course of the year.
So we’re going to continue to have those hard tradeoffs throughout the course of the year and to be disciplined in our approach. It’s hard to say, well, we have more towards the back end of the year or will they be more spaced out.
What we are telling you is that for every launch that we do we will believe that it’ll have the highest chance for being a franchise and that’s what we’re focused on as a company.
Mark Vranesh
On gross margins and are they sustainable, as we move to mobile, more of our revenue will be accounted for on a gross basis, which means that we’ll have payment processor fees from companies like Apple and Google in our margin but we don’t expect that to meaningfully change the nature of the P&L. It’s just a gross up in the P&L overall.
Operator
Your next question comes from the line of Arvind Bhatia – Sterne Agee.
Arvind Bhatia – Sterne Agee
I have one housekeeping and then a broader question. The first one is on your 2012 advertising expense, typically you provide that in your filings but I wonder if you have that handy.
And then my second question is your EBITDA guidance range is obviously quite wide and I understand that. But just wondering if you could speak to the inputs into that.
Is it primarily just the revenue range that you haven’t shared with us but that you have in mind and the operating leverage as a result of that? Or is it dependent also on what cost savings you might end up getting, the restructuring that’s ongoing?
Just a little bit of help there would be great.
Mark Vranesh
On the 2012 ad spend, we don’t have that right now but that will be included in our 10-K when we file it later this month. And on the EBITDA range from 0% to 10%, that’s a range that we’re committed to delivering for 2013 and we feel like we’ve got much more visibility on Q1 and very confident in providing that guidance.
But the full year, just given that we’re in this platform transition is a little bit – makes visibility a little bit more limited.
Arvind Bhatia – Sterne Agee
Well, maybe you can speak to – I understand the light slate argument for the first quarter but obviously your first quarter guidance is very similar to what you were thinking for the fourth quarter and you ended up doing better. Could you help us bridge this decline sequentially from the $260 million in bookings?
I’m not sure if I quite understand why it should drop so much because I think in the past you’ve indicated that your new launches do take a little bit of time for you to monetize, et cetera. So maybe help us what’s going on there.
Mark Vranesh
I think what we’re going to highlight there is that we are looking for more franchise contenders in our game launches as David Ko had mentioned. So that’s factored in.
We do have a light slate of game launches in Q1.
Operator
Your next question comes from the line of Brian Pitts – Jefferies.
Brian Pitts – Jefferies
Quick question on the new agreement with Facebook, how does that new agreement affect the go-forward financials? And maybe more specifically, as you continue to gain traction, is there an opportunity for improved margin going forward given that there’s no rev share in that deal?
Mark Pincus
On the strategy side, what’s important about the amendment that we announced is just that in the future we’re going to have more flexibility to market our games on the web through more distribution channels in a way that is – that will still work well and in concert with the important valuable relationships that we have ongoing with Facebook. And I think the second part of your question was what should you assume is the financial impact of the amendment and I’ll hand that to Mark Vranesh.
Mark Vranesh
I look at it this way. Facebook right now we record net in our financials.
The bookings are recorded net and reported net. To the extent we shift to mobile, some of that now becomes gross and also when Facebook credits go away, as they’ve announced, we’ll have to reassess whether we’re going to be on a net or gross basis, so that could have a financial impact as well.
But essentially somatically for 2013, web and Facebook are very important partners for us.
Operator
Your next question comes from the line of Colin Sebastian – Robert W Baird.
(Greg Roshar) – Robert W Baird
I was hoping you guys could maybe provide some more color on the MUP number. It’s been roughly flat quarter-over-quarter and year-over-year but the mobile number is increasing at a dramatic rate and is there any way we can get a sense of what mobile MUPs are because the MUP, the bookings per MUP is also roughly flat but the actual mix of that – if you draw down and if there were an increase in mobile MUPs it could imply that there’s an increased dependence on the PC/web MUP.
Mark Vranesh
I would say on MUPs they were flat in Q4 quarter-over-quarter. We saw it uptick a little bit in web and that was primarily driven by some FarmVille 2 activity that carried over from Q3.
And on mobile they were down just a tad but essentially flat as well. I would say one of the things that we’ve done a much better job of in Q4 and heading into this year is monetizing non-payers through advertising, so that’s become a large focus for us and I think overall that’s going to help our ABPU and let us record incremental advertising revenue.
(Greg Roshar) – Robert W Baird
So just to be clear, so web MUP has actually increased quarter-over-quarter.
Mark Vranesh
No, MUPs I think were flat quarter-over-quarter.
(Greg Roshar) – Robert W Baird
No, no, I mean just the web. If you separated the MUPs in terms of mobile MUPs and web/PC MUPs; I guess that’s what I was just trying to get some color on that.
I thought you were saying that the web/PC MUPs have increased quarter-over-quarter and the mobile MUPs declined quarter-over-quarter.
Mark Vranesh
That was my – yes, on FarmVille 2 we did see a little bump to MUPs on the web side. That was due to FarmVille 2 and then on the mobile side we saw a slight decline and that was mostly due to Draw Something.
Operator
Your next question comes from the line of Douglas Anmuth – JPMorgan.
Kaizad Gotla – JPMorgan
A couple of quick ones here, first, can you just elaborate a little bit on the competitive dynamics on Facebook? It looks like you’ve got five of the top 10 games on Facebook yet your web bookings were still down double digits year-over-year and some of your competitors are seeing pretty good growth.
And second, just a modeling question, can we just assume the implied 1Q cash expense level that you’ve guided to? Is it a decent quarterly run rate for the remainder of 2013?
Mark Pincus
So on the question on what’s gone with – I think what I’m hearing is one question on what is the competitive dynamic and the second is what does that mean in terms of the Facebook opportunity. But on the first question, what we’ve seen in the last year is some new categories start to become significant.
We’ve seen the social casino category expand most notably in slots and we’ve seen the mid core category expand. And we’ve previously announced that we’re expanding in those categories and you see it lead slots in beta now on Facebook.
And in terms of the overall revenues and the opportunity, we had a great launch in FarmVille 2 last quarter which obviously is going to bolster the invest express category, but we also had a couple games miss our expectations, as Dave Ko said, with CityVille 2 in invest express and the friend game in what we’d consider the more casual space. And so we’re seeing some other companies do a good job in a few of those categories.
We hope to be – have great offerings in those categories soon and we had a few opportunities in the last year where we could have helped grow the overall revenue pie more than we did and we hope to deliver something better this year.
Mark Vranesh
Yes, just real quick, Q4 expense run rate is a good place to start. We do see opportunities to reduce our expense base a little bit further, so you can think about a tick down in Q1.
Operator
Your next question comes from the line of Nat Brogadir – Stifel Nicolaus.
Nat Brogadir – Stifel Nicolaus
Just two quick ones, one is on the bookings guide down 20% quarter-over-quarter, should we think about that as the high point or low point sequentially through the year? And I thought I heard Mark say part of that is now booked gross.
I just want to get a sense of how much of that because then it looks I guess on a net basis even worse. And secondly, on the expense side, you guys came in above on the adjusted EBITDA guide on 4Q but on 1Q it looks like a little more expense flowed through.
Did any of the 4Q get pushed into 1Q? Is that why the expense ramp is happening on the adjusted EBITDA side?
Mark Vranesh
First, on the bookings for the quarter, so we did say our bookings range was going to be between $200 million and $210 million, still feel very comfortable with that. For expenses, no.
Q1 should look a lot like Q4 in terms of expense and we should see a little bit of the benefit from the actions we took in Q3 and Q4 come through in Q1.
Operator
Your next question comes from the line of Justin Post – Bank of America.
Ryan Gee – Bank of America
Getting back to mobile on the DAUs, it sounds like you’re still working through some of the Draw Something declines. But it looks like the quarter-over-quarter decline in DAU users slowed a little bit versus 3Q, I think 2 million down this quarter and 11 million in 3Q.
Do you feel that you’ve reached a point where building out the mobile network will actually help you grow your mobile users on a year-over-year or sequential basis? Or basically in other words, do you feel that you’ve reached a point where the Draw Something declines have stabilized and you can start to see your mobile DAUs grow again?
Mark Pincus
So in terms of thinking of our overall mobile network traffic and DAUs, you’re going to see two drivers of that this year and – three drivers of that. First, what you referred to is the stability of our existing mobile game traffic.
Our teams, especially on Words With Friends, and our other With Friends games, did a great job maintaining and even growing engagement in the quarter, which we saw. Also, we saw great performance by mobile poker, so we’re seeing our franchises do really well.
The second driver on traffic is going to be our new game launches this year. And we’re – we are both bringing existing major franchises like FarmVille 2 to mobile and we’re launching new potential franchises in new categories, so we hope to grow that traffic this year from new launches.
And the third is what we can do on the network level. If you look at the kind of efficiencies that we’ve driven, both the network effects for our players and for us in not just driving distribution but ongoing engagement, what we’ve done on the web with both our Zynga social center on Facebook and if you look at – I encourage everyone to go try our games on zynga.com.
If you look at the right rail, what we call the live stream, you’ll see where I think our teams are really innovating and helping our players have a more social experience. And if you look at a product like live stream, what that’s done for our games on the web is give our players this ongoing much more social experience through connecting them with communities who share their passions.
And we’re excited on mobile to start connecting these communities more because we think that the experience you have on mobile is so fragmented and it’s so hard for both the, all the players and for game developers to offer that kind of social liquidity and social interaction in mobile environment. So if you get to the – how does that affect the traffic numbers, on the web, we’ve – as we’ve said, we’ve been able to drive huge engagement, so the majority of our players interact with our network channels and that is the most important channel that they have and we have and we haven’t turned that on yet on mobile and we think that that will be a real game changer for us and our players throughout the year.
Ryan Gee – Bank of America
And I guess one follow-up; if it’s possible, does your guidance for 1Q – what does that imply for mobile DAUs or for the mobile category as a whole?
Mark Vranesh
We didn’t have that guidance in our outlook today.
Operator
Your next question comes from the line of Ken Sena – Evercore Partners.
Ken Sena – Evercore Partners
I was just wondering, could you give some growth rates on the MAU mobile 72 million or the 62 million DAUs year-on-year just so that we can look at the ABPU in mobile and how that’s changed over time consistent with the 8% to 21% of total revenues?
Mark Vranesh
Yes, so on a year-over-year basis, mobile MAUs grew 75% -- that’s Q3 to Q4 – to 72 million.
Ken Sena – Evercore Partners
And on DAUs?
Mark Vranesh
It’s similar. It’s about 64%.
Operator
Your next question comes from the line of Ben Schachter – Macquarie.
Ben Schachter – Macquarie
I’m still struggling a big to understand how the network effects differ on mobile versus Facebook and then how Apple and Google impact that. And then just separate, two questions, are you using and/or having success with Facebook install ads and any potential for Zynga games to appear on the new consoles for Microsoft and Sony?
Mark Pincus
So sounds like it’s three questions; the first one was why – how did the network effects play out on mobile versus on Facebook on the web? So on Facebook on the web, there is a couple things going on that don’t exist today in an easy fashion on mobile.
Facebook has done a great job in creating an environment that already brings together a huge audience and gives them the social friend graph as a way to connect and a whole bunch of really useful channels for people to surface their game play and connect to each other like the feed and request. And on mobile, those kinds of channels don’t yet easily exist.
So like I said, for our players in Words With Friends, or any of our games, or any one game on mobile, if you want to actually play a game with somebody else, what you have to do is most – probably a lot of games have started by people walking up to each other and actually telling each other to go and sell a game and play it. So it’s word of mouth.
Maybe it’s going on in a bar or at work. But it’s very hard to do it through mobile channels.
So the push notifications re obviously the most important channel on your mobile phone. But if you started playing Words With Friends and your friend didn’t have it, you can’t send them a push notification today inviting them to play with you.
It has to go through other channels. What we’re excited to do is deliver on the promise that you can invite your friend once and play forever, that you can have this instantly social experience, that whether or not your friends ever want to play Words With Friends with you, you can look to Zynga to give you interesting people that you can play with right now.
And I believe on mobile that level of instant social gratification is going to matter to people even more than it does on the web and on your PC. That was a long answer to your first question.
I think your second one was – I’ll hand it over to David – was what we think about the new Facebook mobile ads.
David Ko
Yes, on the Facebook installs, I believe that’s the question you asked, Ben. It’s early for us.
We have been testing, so I really don’t have anything to report right now. But we may have more on that later on but it’s been early testing for us so far.
Mark Pincus
I would add on it that we’re excited about the innovation that Facebook is driving on mobile. We think it represents exciting growth for everybody in social gaming.
Krista Bessinger
So I think we’re out of time for today, so thank you all for your participation and we look forward to speaking with you next quarter. Thank you.
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.