Q3 2019 Earnings Call

The third quarter 2019 results conference call at this time, all participants I listen only mode.

After the speaker presentation, there will be a question and answer session.

So I ask a question during the session you'll need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero.

I'd now like to hand, the confidence to your speaker today, Rebecca Lau, Vice President of Investor Relations and corporate Finance. Please go ahead Madame.

Thank you and what.

Well can you think it was third quarter 2019 earnings call.

On the call with me today or frankly, both our Chief Executive Officer, and your Griffin, Our Chief Financial Officer. Shortly we will open up the call for like question.

During the course of today's call will make forward looking statements related to our business plan and strategy as well as expectations for a future performance actual results may differ materially from the results predicted.

Please review the risk factors in her most recently filed Form 10-Q as goals elsewhere in our STC filings for further clarification.

And it.

In addition, we will also discuss non-GAAP financial measure.

Our earnings letter earnings slides and when filed or 10-Q will include reconciliations of our GAAP and non-GAAP financial measures.

Please be sure to look at these reconciliations of the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results.

This conference call is being webcast at it and we'll be available for audio replay on our Investor Relations website in a few hours.

Now I'll turn the call over to Frank first.

Opening remarks.

Thanks Rebecca.

Good afternoon, everyone and thank you for joining our earnings call.

In Q3, we achieved our highest quarterly revenue and bookings ever driven by strong momentum across our lives services as well as contributions from our recently launched titles.

In the quarter revenue grew 48% year over year to $345 million and bookings increased by 59% year over year to 395 million.

Additionally, we operate in cash flow of 69 million up 67% year over year and finished the quarter with approximately $1.45 billion in cash and investments.

Based on this strong performance, we're raising our full year 2019 guidance, which Jeff will discuss in more detail later on this call.

We're on track to deliver our best annual revenue and bookings and Zynga history and continued to be one of the fastest growing public game companies in 2019.

Now I would like to discuss the key drivers over performance in the quarter, including our strengthen my services successful new product introductions and growth in international markets.

First we have strong momentum across our highly diversified portfolio of live services.

Starting with merged Dragons. This franchise has taken or bold beat strategy to a whole new level with new events challenges and meaningful social interaction.

It has more than tripled its Q3 revenue and bookings year over year and achieved another record topline quarter.

In the period players enjoyed a steady cadence of themed events that featured unique items in game rewards and special Dragons.

We also released Dragon dens, a new social feature that gives players the ability to play and chat with friends in game for the first time.

Together these bold beads enabled merged dragons to repeatedly break into the top 10, Android and top 15, iOS U.S. grossing game charts.

Next empires and puzzles once again achieved its best revenue and bookings quarter, driven by a synchronized series a bold beeps.

The franchises unique combination of player versus player competition single player quests Hero collection and alliance features create a highly engaging and social ecosystem for players.

In Q3 empires and puzzles repeatedly broke into the top five U.S. grossing game charts on both Android and iOS.

Finally, csrtwo broke new ground in the quarter with the unveiling of the Podany wire out roadster be CE, marking the first time in auto manufacturer has premiered in exotic supercar in a mobile game before releasing it to the public.

This debut generated tremendous press and community excitement as well as extensive support from our platform partners.

In addition, alongside the release of the blockbuster film, we introduced a new fast and furious Hobbs and Shaw then in collaboration with Universal games in digital platforms.

These key partnerships and the continued repeating of exclusive content from iconic automotive brands are what make csrtwo one of the highest quality and most engaging racing games in the world.

Second the investment in our new product pipeline is paying off.

On September 18th we launched merge magic to worldwide audiences and it is off to a great start.

We are seeing strong engagement from players as they discover and chanted tails inquests in the mysterious world of Midea, where they can combined and collect magical creatures than items using our innovative merge mechanic.

In addition game of Thrones slots casino became our fastest growing slots title in its first full quarter post launch.

We expect these titles to become meaningful contributors to our live services foundation over the coming quarters.

We're also making good progress with the titles, we havent soft launch.

Farmville three recently exited its technical soft launch phase and joins puzzle combat in rigorous testing for engagement and monetization.

We are continuing to make adjustments to both games to optimize for long term success.

Potential worldwide release timing will be determined based on key performance indicators and player feedback gathered in soft launch.

Finally, we are making meaningful progress in growing our portfolio internationally.

In the quarter, our international revenue and bookings grew 67% and 89% year over year, respectively, and now represent 38% of total revenue and 41% of total bookings both up 34% a year ago.

This performance was primarily driven by the addition of empires and puzzles and growth in merged Dragons. As these two titles have strong Android and global audiences.

Further expansion into Asia is a key element of our growth strategy. As a result, we have self published empires and puzzles in South Korea, and Japan, We're especially pleased with the engagement. We are seeing in these markets and while it's early the title has recently broke into south Koreas top 20, grossing game charts on Android we.

Expect to invest additional marketing in these countries over the coming quarters.

With that I would now like to turn the call over to Jerre discuss our Q3 results in more detail as well as our raise outlook for the year.

Thank you Frank.

We closed out a grid Q3 with strong mobilized service momentum and operating leverage.

Building on our strong performance today, we're raising our full year outlook for revenue and bookings.

But first let's discuss Q3.

Revenue was 345 million comprised of bookings of 395 million offset by a net increase in deferred revenue of 50 million.

Revenue was 20 million ahead of our guidance on a 15 million bookings beat on the lower increase in deferred revenue 5 million.

Our topline beat was driven by strong like mobile live service performance in particular outstanding performances from merge Dragons and then PRASM puzzles as well as initial contributions from merge magic, which released on September 18th.

Revenue was up 112 million, 48% year over year, driven by bookings growth of 146 million, our 59% year over year, partially offset by growth in deferred revenue of 34 million.

This was driven by our best mobile revenue and bookings performance incentives history with mobile revenue of 328 million up 54% year over year on mobile bookings of 378 million up 64% year over year.

Our year over year bookings growth was driven by our mobile live services, including a full quarter over Empire. Some puzzles continued growth in merged Dragons and initial bookings from our recently released games.

The net increase in deferred revenue of 50 million was driven primarily by bookings growth from Empire, some puzzles and merge Dragons.

While the release of this gap differ will have a positive impact on revenue and profitability in future periods. It represents a 50 million reduction in revenue net income and adjusted EBITDA in Q3.

On a year over year basis, the difference in the change in deferred revenue represents a 34 million decrease in the year over year change in revenue net income and adjusted EBITDA.

We ended Q3 would have deferred revenue balance of 403 million versus 174 million a year ago.

Turning to our Q3 operating expenses.

GAAP operating expenses were 285 million up 135 million or 90% year over year.

This was primarily driven by higher contingent consideration expense and increased marketing investments versus the prior year.

The increase in marketing was primarily due to a full quarter of Empire, some puzzles as well as the ramp on merge Dragons and our recently released titles.

The contingent consideration expense was driven by the recent acquisitions continuing to perform ahead of our expectations.

This resulted in an expense was 61 million up 59 million year over year, and 46 million ahead of our guidance.

Year over year, GAAP operating expenses increased from 64% to 83% of revenue.

This was a function of the significant increase in deferred revenue marketing and contingent consideration expense, partially offset by improved operating leverage in SBC and in other R&D and GNS expense lines.

non-GAAP operating expenses were 203 million up 75 million or 58% year over year, primarily due to the increase in marketing investments.

Year over year non-GAAP operating expenses remained consistent at 52% of bookings.

This was due to improved operating leverage in R&D, egina expense lines, which offset the higher sales and marketing as a percentage of bookings.

Our strong operating performance. In addition to the 314 million onetime gain related to the sale of the San Francisco building enabled us to deliver our highest quarterly net income of 230 million up 220 million year over year.

We were up 20 million lower than guidance, primarily due to the higher contingent consideration expense, which more than offset the better than expected operating performance in the quarter.

Our adjusted EBITDA was 28 million 21 million better than our guidance and a decrease of 11 million year over year.

The variance the guidance was driven by better than expected operational performance as well as a lower build and deferred revenue.

The variance to prior year was heavily influenced by the significant increase in deferred revenue, which more than offset the strong year over year improvement in operating performance.

We generated operating cash flow of 69 million in Q3 up 67% year over year.

On July Onest, we completed the sale leaseback of our San Francisco building, which provided net cash proceeds of approximately 581 after taxes and fees.

As of September Thirtyth, we had approximately 1.4 or 5 billion of cash and investments, which we anticipate will be used primarily to fund future acquisitions to further accelerate our growth.

Turning to guidance.

Guidance for Q4 is as follows.

Revenue of 365 million up $160 million or 47% year over year.

And that increase in deferred revenue of 50 million.

Bookings of 415 million up 148 million or 55% year over year.

And that loss of 44 million and adjusted EBITDA of 25 million.

Some factors to consider in assessing our Q4 guidance include.

Our topline performance will be driven by our mobile live services, where we expect sequential growth collectively across our five forever franchises.

As well as initial country contributions from merge magic and the continued ramp of game of Thrones slots casino.

These gains will be partially offset by declines in older mobile and web titles.

Our topline guidance does not assume the launch of any additional new titles in Q4.

We anticipate that our gross margins will be broadly in line with Q3.

And we expect a decrease in our operating expenses sequentially with a lower contingent consideration expense more than offsetting increases and other expenses and particularly higher marketing investments on our recently launched cycles and live service portfolio.

However, should our recent acquisitions continue to perform ahead of our expectations. We may see a further increase in the cumulative contingent consideration accrual.

Turning to the full year.

Building on our strong performance to date, we are raising our 2019 outlook and should deliver our best annual revenue and bookings in Zynga history.

We are raising our revenue guidance to 1.28 billion up 41% year over year, and an increase of $42 million versus our prior guidance.

We expect a net increase in deferred revenue of 263 million up $3 million versus our prior guidance.

While the release of this cap deferrals will have a positive impact on revenue and profitability in future years. It represents a 263 million reduction in revenue net income and adjusted EBITDA in 2019.

We are raising our bookings guidance to 1.55 billion up 59% year over year, and an increase of $46 million versus our prior guidance.

We are on track to deliver results ahead of our profitability expectations that we outlined at the started 2019 bolt on an absolute and a margin percentage basis.

This better than expected performance is being driven by the strong momentum of our lives services and the phasing of our new game launches.

These factors have more than offset the pressure on gross margins from a higher mix of use of pay versus advertising.

As well as the incremental rent expense in the second half of the year.

We're finishing 2019 with tremendous momentum.

Looking towards 2020, we continue to expect low double digit organic revenue and bookings growth on top of our raise 2019 guidance.

We expect to improve our operating results in absolute terms in 2020 would operating leverage ultimately a function of our lives services performance the timing of new game launches and the level of marketing investment we deployed to scale. These titles.

Over the next few years, we continue to expect to make meaningful progress towards achieving margins more in line with our peers on a like for like basis.

In conclusion.

We're very pleased with the momentum as we enter Q4.

And the progress, we're making on our multiyear growth strategy.

With that I will turn the call back to Frank.

Thanks, Jerre before we open the call for Q in a I'd like to take a moment to discuss how we are uniquely positioned today.

In 2019, we're on track to deliver our best annual revenue and bookings in Zynga history, driven by the strength of our life services, which is powered by our bold beats.

We expect to build upon this momentum in 2020 by continuing to execute our growth strategy to expand our lives services create new forever franchises and invest in emerging markets and platforms.

We also see opportunities to further accelerate our growth through acquisition.

It's an incredibly exciting time for Zynga, we're well positioned as a leading mobile first free to play live services company on the largest and fastest growing gaming platform in the world. We're confident in our ability to further scale, our business and generate more value for players and shareholders.

With that we'll open up the call for your questions.

Thank you as a reminder to ask the question you'll need to pest style line on your telephone.

Which I a question pest upon key in the interest of timely assets you. Please limit yourself to one question and one follow up please standby of all the composite Kenny roster. Our first question comes from Michael English of Goldman Sachs. Your line is now open.

Great. Thank you for the question I just have to first so just wondering if you could update us on.

Your capital allocation plans and what the M&A environment looks like.

What criteria are you looking for in an M&A candidates and then second.

Could you just.

Talk to us about the low double digit organic revenue bookings growth guidance for 2020, which are just remind us what's assumed in there from a forever franchise growth perspective, as well as any new title benefits. Thank you.

In terms of M&A I'll start and end Jerry can talk about 2028 in terms of what we look for in the marketplace. It starts with a recognition that mobile is a global platform and Theres talent all over the world.

A lot of the great teams in mobile or international.

And so we start by looking globally for four teams that have great leadership strong creative cultures.

That have franchises that are either add scale or coming of scale that can really benefit from the unique publishing platform that zynga has for live operations. When you look at data science product management, the marketing and on the other platform capabilities. We have in the unique studio culture that we have with so many diverse teens, we look for those two.

Types of of opportunities.

We don't look at a particular size it could be a company that is what we'd call up a plug in which is something that's smaller in nature. It could be a company. That's larger we really don't walk in with too many constraints there our criteria really is looking at team leadership.

And also that the nature of their franchises in the types of products that they build.

In terms of just on the capital allocation as we said on the call you know the primary use of our cash and investments.

We'll be against acquisitions are against obviously the payout on on some of the earn outs that were accruing on existing acquisitions.

So as we look forward that that is the primary use of our cash given the.

The success, we've had in the password our acquisitions and the attracted the attractiveness of saying as as a destination for creative teams.

We see opportunities to continue to grow through acquisition in addition to organically.

Im to your question in terms of 2020.

Where our expectation is that our forever french's franchises collectively will grow in 2020, we haven't given specific.

Breakdown of of of the low double digit growth, but obviously, a key driver of our business and key contributor to our overall bookings is our is the forever franchises, followed by our slot portfolio, our casual cards portfolio.

There will be a an element of new in our in our in our in our our bookings for 2020, but we'll give more color on the overall shape of the bookings when we get through our Q4 earnings.

Thank you. Our next question comes from Alex Jama with Jefferies. Your line is not often.

Great. Thanks for taking the question. So two for me as well first it looks like the commentary in the letter around the outlook for 2020 margins changed a bit from last quarter not to get too nitpicky, but I think the language last quarter was was operating leverage now you're pointing towards operating results improving and.

So the terms so is there anything different planned on the expense side are you know and I, just reading too much into that and then going back to the previous question on capital allocation.

Appreciate the color around M&A, but I do think you guys have a 200 million dollar buyback authorization. So maybe just general thoughts on potentially leading heavily into that if there are no attractive options in the market right now thanks.

The tech in your last question first you know the primary use of our funds will be against acquisitions. We do have a we do have about a buyback with 174 million outstanding obviously, if we see the opportunity to buyback stock at.

At the right levels, we well, but again.

When we look at and we've done this analysis when we look at our investment against buybacks over over the past years and our investment against acquisitions since the current management management team took over.

The returns were delivering to shareholders on on the acquisition side have been more compelling, but again the the next use of cash outside of a acquisitions would be a returns to shareholders. We don't have any other material uses of cash.

Given we're a digital business. So it's not like where we've got a bunch warehouses or anything else would be building up.

In terms of the 2020 outlook.

There there was a a clarification if of sorts and the way I explain the operating results. Obviously, we're ending this year stronger than we guided to at the start of the year. If you. If you look at the the margin flow through and actually the absolute dollars and we started the year with a guidance of bookings the thirteenfifty expire.

Acting a some some points a pressure in terms of our EBITDA, our operating contribution, we're actually and ending the year well over 150 million above that and in terms of the bookings and we're delivering obviously in absolute terms and in March in terms as stronger result.

Part part of that is a function of the strength of our lives services and part of that's a function in terms of how we faced are our new games as you think about next year.

A very we've said this in the past you know we are going to increase the overall operating results of the company based in the stronger bookings contribution in 2020.

In terms of the actual margin in any given quarter and for the full fiscal yeah. We do expect to continue to see very strong margins coming from our lives services, but the timing of new games and the level of marketing against new games can have an impact and 90 given quarter and ultimately on the on the outcome and.

So all we are trying to there is just sort or reconfirm our re read reemphasize. The fact that we do expect to grow in absolute terms, but the ultimate percentage.

Flow through will be highly dependent on the timing and scale of a new game investments.

Thank you. Our next question comes from Datacom with Stifel. Your line is open.

Thanks, guys.

Kind of related to the last question. Yes. This part first the increased your margin guidance for 2019 can you address the impact the timing of Farmville and puzzle combat have on that that in any way suggests some pullback in marketing spend that's getting pushed into 2020, maybe that's having some then.

Packed on how you're thinking about margins and then separately maybe for Frank.

Yeah, Im pretty optimistic on merge magic and it's very early but how how is that trended relative to merge dragons, but the same point thats lifecycle. Thanks.

It is as chair in terms of when we when we started the year, we outlined that the majority of our bookings was going to come from our life business. We did indicate that we had put a small amount in for new games and as we update upgraded that guidance through the year we.

We get risks while it was broadly speaking about 50 million that we had put in for new games.

What we did say as though that we had at least a place holder to initial marketing from it in particular in the second half the year against a potential new game launches. We have launched some new games, we've launched or social casino slots Camel, we've launched merger magic, but when you look at the overall contribution from our our life business that's.

Being better than expected. So that's obviously helped margins and also the phasing of marketing against our launches both the once we've launched and and some other placeholders for additional marketing is definitely less than we originally anticipated at the start of the year.

So the combination of those two things, obviously helped improve the margins and as as you've seen in the past when when we're dealing with a purely a live service quarter, we've delivered out our our even above 20% flow through that's the EBITDA, excluding the impact of deferred revenue.

As you're layering in marketing so some of that marketing plans place holder that we had in the second half the year, yes. Some of that's going to turn up next year for obvious reasons and in terms of the number of launches next year, we're not going to give any color around that but depending on the number of launches in the timing of launches you could see some ups and downs about.

Our expectations is still in terms of absolute terms that we'd be it will grow the business. Obviously topline we will and then a bottom line will be the level of growth will depend on on the overall level of marketing against new games.

On your question about merged Magic. The game is actually off to a very good start it's a it's actually scaling faster than than merged Dragons did initially it benefits from a lot of the key learnings that we developed over time from merged Dragons. It has some similarities but it also some very key differences in terms of the player experience the design.

Fine I'm, how the elder game works, especially.

And so we're finding is that the games are very complimentary that they appeal to people for different reasons on there is some crossover clearly between the audience base, but it's something that we're very comfortable with and we believe that the two together will perform very well for us over the long term.

Thank you and our next question comes from David Karnovsky with JP Morgan. Your line is now open.

Pardon me David If your line is muted please UN mute.

Hi, Thank you for taking the question I was hoping you could discuss your outlook for advertising ahead, and you know what applicator and you see for further.

Network Optimizations, and then just on game of Thrones slots, how much do you think the brand value. The IP wasn't driver in making that gain the success you know ready to start and it just sort of move further away from the TV show in HBIO does that create any engagement risk around the game at all thanks.

This is Jerry on advertising.

As we've we've said in the past and through the first half there we saw a really strong growth in advertising around 33% and we expect to to obviously had some tougher comps for the second half. So we still expect our advertising for the full fiscal to be in the in the double digit growth level in terms of where where it will be for next year I'm going to hold off until.

We ended the year to deal with that you know for those who view the heard my advertising so little okay. Before we know we've grown advertising over the last three years, but again, it's better to wait to see how we end the year and see how how we're trending into into next year I.

I would just add we do spend a lot of time as we've said in the past working with our our partners to optimize our yields and we also look very closely what our studio teams to see how we can introduce a additional inventory or addressable advertising into inventory into our games, but always in the in a player focus manner.

So.

It is true to say that we will continue to look for ways to grow our advertising, but in terms of watt nextshares advertising outlook will be I'll give more details on that on the Q4 call.

For the question about game of Thrones, a casino the product is obviously doing great first full quarter, it's the fastest growing slots game we've ever produced.

A lot of that yes does have to do the license. There's a very strong user base. There that is familiar with the game of Thrones machines that are on the casino floors, and the real world and of the the idea that they can play those at home on is very compelling but in addition to that we we spent a lot of time innovating, new social and RPG mechanics that allow players.

The play together on that can join different houses compete.

In in a social group jackpot kind of manner and we found that that is a very compelling product feature for our fans I mean, we haven't seen any dip in the intensity or the I'm you know the time that people are spending in the game as as we move further from the television shows I think this will be one of those evergreen brands for this.

He could a category and given the stickiness of the design I think that we'll be able to holding and grow the audience base over or over the long term.

Thank you and next question comes from Brian Nowak with Morgan Stanley . Your line is now open.

Hi, guys, it's a matter for Brian Thanks for taking the question. So two if I can on farmville exiting like the technical soft launch, which you mentioned in the prepared remarks is that a faster than expected and kind of how is the game how does the gaming tracking and then just in terms of that and puzzle combat I apologize if you're exposed to here.

Explicit here, but are we no longer expecting puzzle combat to potentially be in Fourq. You is it more likely a 2020 event and then if you wouldn't mind just an update on what you're seeing in the in Korea, and Japan for empires. Thanks.

In terms of Farmville, three a technical soft launch when according to plan. So we are in it just as long as we were supposed to be in it. The results were very good on the device coverage the frame rate. The downloads everything was was exactly what we wanted to be we now moved into the stage, where we're looking at retention engagement.

Monetization player reaction early results were very encouraged by we think we've got something really interesting in terms of whats coming together and farm Bill three will continue to expand more countries as soft launch unfolds as Jeff noted our guide for Q4 of 415 million in bookings does not include.

Any contributions from Farmville, three or or Empire are a puzzle combat I think what we need to really understand overall here is that we're in a position of the company, where we've got tremendous momentum coming from live you know merged magic and game of Thrones lots are off to a very good start and we're in a position where we can really take our time with.

Making sure that these games have the right long term engagement retention metrics. So these are games that can be successful over many years and be forever franchises for us. We don't we don't feel any quarterly pressure to rush the games.

It's really one of those things what we're going to put it through a rigorous test market and when we see green indicators and we can go to market like we did on merged magic and like we did on game of Thrones slots. We will release those titles I mean, that's one of the reasons why weve configured the company this way and why we emphasize a growth in lives and how it's contributing over all the majority of our ROE.

Revenue and profits year on year, we like where we're positioned and we think that that configuration will service well in terms of Korea, and Japan. You know we took 'em an approach there where we did not partner with any local companies.

We self publish the games in the markets. We bought performance marketing initially we made some changes the titles not extensive ones and we started out by releasing the games into the market without a lot of marketing just to see how they settled into see what the fan reaction was a and we saw very encouraging results in terms of engagement retention I'm, especially in Korea.

Largely an Android market as you know and it's very encouraging for us to see it pop into the top 20 on Android. This quickly after introduction I'm. So we are we like what we're seeing there and as we look at Asia for empires and puzzles a longer term will start to address additional countries that just went into Japan.

It's starting to move up the charge so its exciting to see a global IP like that find audiences in Asia. Traditionally zynga has not generated very much revenue at all from Asia. So this is a very positive development for us.

Thank you. Our next question comes from Akshay, then let Tvs Your line is open.

Thanks for taking the question guys. Just curious maybe a bigger picture question on the marketing side. It sounds like obviously one of the things you're sort of indicating is as we get into 2020, and we see more game launches that will put pressure on the overall marketing budget as a company, but that's the company continues to scale with you have a breadth of offerings in a number of different sectors of the industry.

Are you gaining scale efficiencies are being able to cross promote games across Europe .

Player ecosystem and door can you give us a little bit of color what some of the more successful channels have been for you in terms of both launching games and promoting sort of reengagement with games. So we could get get a better understand of what sort of oral why you're getting on a marketing dollars should continue to scale. The company on the back of all the M&A we've done over the last couple of years. Thanks, So much.

Eric in terms of this chair in terms of scale, obviously growing the company from your close $1 billion of bookings last year to 1.5.

Gives a gives us more air cover in terms of having a stronger and contributing.

Portfolio Forever franchises, plus the rest of the games in our portfolio. So from that perspective, there is more scale and obviously with the new teams on board, we are leveraging our existing publishing capabilities, but obviously that brought they brought some interesting insights to the table as well in terms of marketing their games pre pre acquisition.

As it relates to where where we go fishing for our players I I think where we're at digital business. So we were obviously investing into digital channels I'm not going to specific you'd call out any specific channels, that's better than than anyone else, specifically because I'd like my my competitors go figure that out for themselves, but we have a very talented.

And you add group and they're investing in a lot of different channels and testing a lot of channels to see where we can we can engage repairs. Some of those channels will be obvious you know.

Games do advertising and other games.

But we also are looking broader at channels, where where our target pair bases are.

Hi, This is Frank I'll, just add one thing which is the.

Zynga historically has had a.

Hundreds of millions of installs across multiple of our brands like the Farmville days and Zynga poker or words with friends and so we spend a lot of time and data science product management and in our marketing platform looking at how do we recapitalized players that have lapsed. Many times those players are more efficient to.

Require a and especially if they come back to a game that has evolved and has a whole bunch new features than the last time. There were there. So we look at you know what was their experience like the last time there in the game.

Why did they leave and we start to make adjustments to potentially how do we market to bring them back on and so a words with friends is a great example, as we've added more and more features like booz like the daily challenge like dual like Lightning round I, we're able to go out and marine market onto those folks all these new features that they in a game that they love they just they just or whatever.

Reason moved on and we're able to bring them back pretty efficiently. That's one of the real strengths of Zyngas publishing platform is looking not necessarily at brand new player acquisition, but really looking at you know recapitalizing lapsed players and getting existing players to play more.

Is there any other two points I would make us I think it's important to understand and we've talked about this in the past one when when are you a team looks at their their overall budget for user acquisition for the year. There, obviously looking at or on a total bases, but they're also looking at by gaming by genre and given.

The diversified nature our portfolio.

There are always looking for the best returns on where they feel the need to invest the money to continue to drive growth our sustainability in individual franchises. So there is a continual rebalancing and reprioritizing of money. So it's not always additive in other words as many times, where I've had discussions with my studio and you add teams, where one studio will.

Hey, listen, we're we're performing well it'd be good if we had a few more dollars, but when we when we've looked at the overall perk prioritization, we've we've invested that across on on some other titles. The other thing I would say is when we when you think about 2020 and you think about the second half of this year.

While we're indicating in terms of the 2020 teams is not that there's a a permanent pushed down in margins. What we're saying is that as you launch new games. A there is an additive element to that marketing investment you can redeploy live services, you a marketing to new games, but in general terms there.

As of a pickup as you start to launch the game as that game becomes a what I call a contributor to society in other words. It starts generating bookings then it becomes a obviously an operating contribution contributor as well and so you move true that sort of phase of of the lifecycle, but you need to get through that lifecycle and depending on when.

Those titles arrived in the level of scale you want to invest against some that can impact your margins in any given quarter and potentially over the fiscal.

Thank you. Our next question comes from that fits with Cowen Your line open.

Oh that last answer is a good leading to the next question I'm just curious for.

The launch as you have out this year have they been contributors to EBITDA positive contributors or you're not to the point of lifecycle yet.

Like game of Thrones Slops is is the isn't that non contributor at the moment from an EBITDA perspective, obviously, it's contributing bookings, but as you know with these with slots games. They scale on a on a on a on a a very measured level and you know the bigger overtime and we're very happy with the results were seeing in terms of engagement them.

Monetization, but overtime as we invest against that that the title, we'll see a growth.

At March Magic, just just launched so from that perspective, it's really early stage again early indicators are really good in terms of the player engagement, but again as we as we scale that business it won't be a surprise to that the the marketing investment against that title will be higher than the gross margin.

Contribution in it and it's fairly early early months.

Okay. Thank you.

Thank you.

Our next question comes from Ryan Gee with Bank of America. Your line is now open.

Hey, guys. Thanks for taking my questions. Two if I may so in a letter you guys mentioned, how you expect to continue making progress towards.

Yes cheating margins in line with your peers on a like for like basis. So it would really love to unpack that a little more maybe help us ring sense the opportunity so against the 19% EBITDA margin that you'll probably exit 2019 at.

Are you what it appears that you guys are referring to when you make that statement is it companies like NC softened next on into 40% EBITDA margin to the companies like EA ANAC Division in the high Thirtys operating margin just help us think about what you see as a.

Here that you guys could target and then what do you mean on a like for like basis, and then I have a follow up.

Yeah, we look at our western peers and on our east from peers. So it's all all of the above what we mean on a like for like basis, one or one of the vagrancy silver industry is some some of our peers report on a net bases. There there are showing that bookings in other words that take the.

The revenue share with the platforms and they deduct that from the revenue numbers. So there you know there hundred as a 70, even though the call at 100 and so that gives their operating margins are they look higher. So if you take if you take a 20% margin and you literary were a pure play a user pay business a 20% is actually.

28%, so when we when we look at our peers, we have to obviously dissect our numbers because some of those numbers. You quoted are are often that basis as opposed to gross we report off girls. So when we generate at dollar from our players.

On a user pay basis, you see a dollar in our report a bookings you see 30 cents in our cost of sales in the 30, a 70% gross margin in simple terms.

So that's what we mean so you know on a net bases were trending quite nicely, we're heading towards 30%.

On a on a on a gross bases were trending towards obviously this year were coming close in summer on 19, 20%.

Okay. Here has your basis there is that some of those companies I mentioned are reporting on a net basis. So the 40% EBITDA margin is probably 30 and you guys are tracking towards 30.

Yeah, we'd have to go literally a company by company, but if you. If you look at the way. They then disclose their their the Rev. Rec, you should be able to figure it out a lot of them have a lot of this information in there GAAP to non-GAAP reconciliations the other thing I would note and you know, it's just a function of.

<unk>.

You know portfolio when you look at our life business our life business.

Is generating north of 20% on a gross basis in terms of flow through but obviously, we're investing in the future and so we're looking to create additional forever franchises that we can scale into our lives service business overtime and as those games are being built their call centers. So they they obviously are a drag so.

So you know as as we get those games into market Allah.

You know our casino game, our emerge magic came they become contributors to the overall live service business.

So it's a balancing act there, but you know were very happy with the scale of our lives service business, where we're very happy with the portfolio of games, we've got in development to launch over the next 234 years.

But yeah as as we launch those games you know if you go back in history, you look at somebody like a king when you have one game that gets to the kind of scale to candy crush got too. That's that's how we get to 40% fairly easy I wasn't easy for them, but they got their where where we have obviously got a a portfolio of off.

Performing titles and if we can scale those titles, especially when there are a life. That's a that's a meaningful way of getting there. If we can add additional forever franchises into the mix. That's how you get there and having any titled scale over and above where it is right now is a meaningful improvement to our margins.

Thank you as a reminder to ask a question you only tapas style one on your telephone.

Our next question comes from May start with consumer Edge Research. Your line is now open.

Great. Thanks for taking my question to what extent as merge magic currently have.

Sim merge Dragons bold beats embedded within the game and for what's not really in there for merge magic is the roadmap of bold beats going to look pretty similar here just trying to get a sense of how confident we can be in this becoming a growth game.

Yes, there's a lot of knowns in both games as it relates to how the merge mechanic actually works how the camp the collection the different puzzles and events harnesses works that we operate off of what we believe our you know.

A series of key components that we believe will generate success with players and help us grow the game to a forever franchise someday, but but we also are purposely teasing the games apart and making them differentiated so.

In terms of the types of creatures that you can that you can collect the way things play the elder games will be different so we're actually looking to make them very complimentary and they're almost siblings as opposed to a replacement cannibalization strategy. So very early on you know we're starting to as you can see and merged Dragons and put a you know the dragging down and really investing.

Social features that are tied to that we're not doing as much of that right now and merge magic and we'll take a different approach to solving for social and collaboration so I would not necessarily think about them as as a one for one replacing it is absolutely living alongside a and growing together.

Got it thanks, and then when you make the decision about your across your portfolio as to whether or not to ramp content for some of your life games.

We know that that some games you can sort of get caught in a content ramp cycle, where players continue to expect more and more content it gets harder and harder to deliver and more costly. How do you think you are on that continuum and broadly speaking.

Can you add a developer talent to grow content and some of your games is there sort of room to do that in your portfolio hope that makes sense. Thanks. It does.

The first the first thing that we look at as the difference we between isn't an event a bold beat or is that a a gain a new gain feature and all an all new way to play the game those tend to operate differently and the consumption.

Event, driven content is very high it goes faster usually than you think and it's something that players get used to but when you introduce an all new way to play like what we saw with boost in words with friends you can fundamentally change the way the engagement with the game occurs I'm. So as we look at our bold beat Roadmaps we.

We differentiate between is this a pagani event, where we're releasing a new car that people can experience for a period of time or are we adding on all new way to play like showdown, which is a new way to play PDP and CSR, which we think has a longer term impact on engagement and retention. So we deploy a lot of product management data side.

Science and studio teams, a time and energy against looking at these Roadmaps and you know sometimes you are in a place where you can scale up on the content that you putting erode rap any road map by using contracted services or internal teams to ramp more content for events or to double down on a particular.

Feature so if we see the opportunity we do it but in general we feel like we have the right cadence of bold beads across these games now it is entertainment. So not all bold beads are created equal some outperform others and sometimes you know things level out a little bit and you've got to come back at it. So it's definitely an art form into.

Terms of how you keep a player in a community engaged with a very long term, but it's something that we work very hard at Zynga, making a competitive advantage and it is it is the engine for why would grow.

Thank you I final question comes from Mike Hickey with benchmark. Your line is now open.

Hey, Frank share congrats on the quarter Guy just a couple of quick questions from me a working for example know that.

We recently made some adjustments.

Cool model than typical monetization sort of enabling and TX micro transactions.

Though.

Give yourself into opportunity outside that secured since curious if you will see does an opportunity and.

I can track with something meaningful overtime and I guess, just looking at sort of you saw last public combat find the foremost gastar was Harry Potter, you've got a city fill a bunch of games.

Sort of thinking about launching in 1920 to sort of curious if you sort of rank your excitement in terms of.

Potential impact on bookings over most meaningful impact on.

Bookings top tier so in the pipeline helpful. Thank you.

Yeah. That's on the first question, Mike the the boost economy and the way to play words with friends with with consumables as.

As is really really taken hold its something that the fans really like in fact, we're looking at additional boost that we can add to the game, we want to do it in a way that it really doesn't disrupt the traditional words with friends dynamic in the way the community likes to play the game, but it's definitely been a net positive and we believe that it still has room to grow.

At the same time, we've been in innovating and adding new AD products to the game that allows fans to engage with the advertising in a way that extends the experience and so I think there's there's interesting opportunities to grow words with friends in the future because of this new base a boost features and the economy you see there.

In terms of the new product pipeline, you know look I think we've got an extremely exciting product pipeline coming between Farmville and Cityville Harry Potter couple of Star Wars Games. In addition to what Graham and small giant are working on I think we never we love all our children equally so we never try and take favorites here.

But I think all of them are going to have a profound impact on the company in a positive way over the long term and it's really great to be in a position, where we don't have to rush. The game development. We can really look at what's best for our players what's the what's the highest quality experience, we can configure and design and then bring them out in a way that leads.

Long term success as opposed to is driven by some quarterly pressure or not.

Hi, Thanks, Thanks, a lot.

Thank you.

And last question one outcome found Maya live with Barclays. Your line is now open.

Hey, guys. Thanks for squeezing me in couple of questions on empires on puzzles.

Done really well driving up the ARPU.

The introduction of new heroes and costumes any color you can provide on how much runway for ARPU growth do you think this last what any would you say you're in.

And secondly, I understand as a VIP passing the game that cost $5 for 30 days.

Have you thought about.

Tessa implementing a battle past mechanism as well other mobile titles have implemented to great success. So just wondering if you think that's an option to drive ARPU further or do you think it's better fit it for titles at the later stage of its monetization cycle.

Thanks.

Yeah, I think as as we look at.

Empires and puzzles, we think that there's more value to create for players and game, which will lead to you know the change in that dynamic in terms of the ARPU, we look at the increasing opportunity with PDP base building the ability to go deeper in year Alliance. So the guys in Helsinki have a tremendously.

Vibrant roadmap ahead of us on empires and puzzles and so we're we're very excited about putting more content more features more ways for the players to engage inside the products. So it's definitely you know just had its best quarter ever.

And we said that last quarter, we said at the quarter before so we were on a pretty good tear here and we like to see it keep going.

In terms of battle past mechanics, a you know, it's certainly something that we're definitely analyzing I don't think battle passes necessarily are tied to a lifecycle stage I think it's absolutely that the price value proposition that player goes through in terms of how they're thinking about engaging with the products. So you can introduce them very early on I believe.

And in the case of a you know the game from Helsinki, and Empire and puzzles.

The VIP pass is something that we're analyzing and looking at the folks that use it really like it and when we're looking at ways that that could potentially a play a role in the future growth of the game.

Thank you I'm not showing any further questions at this time and I'd like to turn the call back over to have that could allow Fannie Freddie remarks.

Thank you Joe while we want to thank everyone for joining our earnings call today, we look forward to connecting with you more over the coming weeks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.