Q4 2019 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the single fourth quarter 2019 results Conference call.
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After the speakers presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to your Speaker today, Ms., Rebecca Lau, Vice President Investor Relations and corporate Finance. Please go ahead.
Thank you Liz and welcome everyone to Zyngas fourth quarter full year 2019 earnings call.
On the call with me today or Frank to both our Chief Executive Officer, and Youre Griffin, Our Chief Financial Officer. Shortly we will open up the call for life 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 future performance.
Actual results may differ materially from the results protected.
Please review the risk factors in our most recently filed form 10-Q as well as elsewhere in our SEC filings for further clarification.
In addition, we will also discuss non-GAAP financial measures our earnings letter earnings slides and one filed our 10-K will include reconciliations of our GAAP and non-GAAP financial measures.
Please be sure look at these reconciliations as a non-GAAP measures are not intended to be a substitute for or superior to our GAAP results.
This conference call is being webcast and will be available for audio replay on our Investor Relations website in a few first.
Now I'll turn the call over to Frank for his opening remarks. Thanks, Rebecca good afternoon, everyone and thank you for joining our Q4 earnings call.
Our strong Q4 performance capped off an outstanding year as we delivered the highest annual revenue in bookings and Zynga history.
We are executing well against all aspects of our multiyear growth strategy and expect to build on this momentum as we continue growing our business in 2020.
In Q4, we achieved revenue of 404 million up 63% year over year and bookings of 433 million up 62% your full year.
Our results were well ahead of guidance across all key financial measures and were driven by strength in life services combined with remarkably strong seasonal advertising.
Words with friends achieved record revenue and bookings and empires puzzles also had its best quarter ever with a series of well executed holiday bold beats.
Merge magic continue to build momentum and is on track to become our newest forever franchise.
Looking at the full year 2019, we delivered a record topline performance with revenue of 1.32 billion up 46% year over year and bookings of 1.56 billion up 61% year over year.
Live services were the primary driver of our results and are the foundation of our multiyear growth strategy.
By delivering innovative bold beats, we're driving strong consistent growth from our portfolio.
On top of our lives services Foundation, we launched two new games in 2019 game of Thrones slots casino and merge magic both are off to great starts and will be meaningful contributors in the years to come.
We also grew our international revenue and bookings to their highest levels since 2012, as they were up 58% and 85% year over year.
In Asia, we are seeing positive results from our decision to self publish empires and puzzles in South Korea, Japan and Taiwan.
Our strong 2019 results demonstrate our ability to scale zynga and positions us for more growth in 2020, as we continue to execute on our multiyear growth strategy.
The first pillar of our strategy is to continue to grow our life services as we enter Twentytwenty, we have strengthened momentum in our highly diversified by services portfolio.
We expect to increase from five to six forever franchises CSR racing empires, and puzzles merged Dragons words with friends Zynga poker and our newest one merge magic.
We define a forever franchise as a game service that can entertain players for more than five years and generate at least 100 million of annual bookings.
Adding another new France, Prevnar franchise provides us with more scale to drive our overall growth and operating leverage.
The second pillar of our strategy is to create new forever franchises to layer on top of our lives services Foundation.
We have a robust new product pipeline with several new games in various stages development currently puzzle combat and Farmville three are progressing well in test markets and our Harry Potter title is on track to enter soft launch later in Q1.
We maintain a methodical approach to engineering hits, which includes rigorous testing and soft launch and frequent iteration and tuning with the goal of delivering long term care engagement.
The third pillar of our strategy is to invest in new platforms markets and technology.
In Twentytwenty, we will continue experimenting with titles on chat platforms convinced investing additional marketing and empires and puzzles in Asia.
We're also exploring new game markets, including mass casual AD driven experiences by developing and testing a series of new titles such as puzzle escapes.
While our investments in these initiatives are still in the early stages. We believe they have the potential to increase our growth over the long term.
Lastly, we see opportunities to acquire talented teams and franchises around the world to further accelerate our growth.
Mobiles talent base as global and there are new franchises in categories emerging all the time.
We are pleased with how the casual card studio from peak Graham games, and small giant items have been performing as part of Zynga.
Our proven model of enabling talented teams to maintain their unique creative cultures, while leveraging our scalable studio operations and publishing platform, enabling us to both grow faster together.
With that I would now like to turn the call over to Jerre to discuss our results in more detail as well as our outlook for the coming year.
Thank you Frank.
Q4 kept for great year, as we delivered our highest annual revenue and bookings and Sangha history on margins ahead of our near term goals in Q4 and for the full year.
Our Q4 results were well ahead of our guidance across all key financial measures driven by strength in our lives services, coupled with remarkably strong advertising results.
Revenue was 404 million comprise the bookings of 433 million offset by net increase in deferred revenue of $29 million.
Revenue was 39 million ahead of our guidance and up $156 million or 63% year over year.
The net increase in deferred revenue was $29 million versus our guidance of 50 million and an increase of $19 million in the prior year quarter.
Book for 18 million ahead of our guidance and up 166 million, our 62% year over year.
Our better than expected topline results were driven primarily by words are friends, a tremendous holiday season for Empire, some puzzles and a meaningful contribution from merge magic in its first full quarter post launch.
We generated user pay revenues of 325 million up 84% year over year end user pay bookings of through from 54 million up 80% year over year.
We delivered record advertising revenue and bookings of 80 million up 11% and 12% year over year, respectively.
Our outside outsized advertising performance was driven by exceptionally strong seasonality that kicked in earlier in Q4 and resulted in higher than expected advertising yields.
This was further amplified by strong player engagement throughout the holiday season, as well as onetime benefits from advertising network deals.
The primary drivers of the net increase in deferred revenue, where bookings on Empress and puzzles and merge metric.
While the release of this gap for growth will have a positive impact on revenue and profitability in future periods. It represents a 29 million reduction in revenue net income adjusted EBITDA in Q4.
We ended the year would have deferred revenue balance of 434 million versus 193 million a year ago.
Turning to Q4 operating expenses.
Please note Q4 2019 includes a full quarter of small giant games.
GAAP operating expenses were 250 million up 93 million, our 56% year over year, while non-GAAP operating expenses were 207 million up 66 billion EUR, 47% year over year.
Increased marketing investment in our lives services and new game launches was the primary driver of the increase in GAAP and non-GAAP operating expenses. In addition to an increase in R&D investments on our new game pipeline and rent expense for our San Francisco hedge Q, which we now lease.
The increase in marketing was primarily due to end person puzzles as what the ramp of investment emerge Dragons and our recently released titles.
Contingent consideration expense was also a material driver of the increase in GAAP operating expenses.
The increase in contingent consideration expense was driven by our recent acquisitions continuing to collect as we perform ahead of our expectations.
This resulted in an expense of 31 million up 29 million year over year, and 11 million ahead of our guidance.
Year over year, GAAP operating expenses decreased from 66% to 64% of revenue and non-GAAP operating expenses decreased from 53% to 48% of bookings.
Our strong topline performance resulted in improved R&D and Gionee operating leverage.
We posted a net loss of 4 million 41 million better than our guidance driven by our strong operating performance and lower than expected deferred revenue, partially offset by the hired and expect to contingent consideration expense.
Adjusted EBITDA was 75 million 50 million better than our guidance also driven by our strong operating performance and lower than expected deferred revenue.
Exceptional advertising topline performance and lower marketing spend were the primary drivers of our better than expected operating performance.
We generated operating cash flow of 94 million up 5% year over from the core.
We ended the year with cash and investments of 1.54 billion, which we anticipate will use primarily to fund future acquisitions to further accelerate our growth.
Turning to 2020 guidance, which is as follows.
Revenue of 1.6 billion up $278 million or 21% year over year.
And then increase in deferred revenue of 150 million down $92 million or 38% year over year.
Bookings of 1.7 billion up 186 million, our 12% year over year.
And that loss of 130 million versus a net income of 42 million in 2019.
Please note that our net income in 2019 included a onetime gain on the sale of our San Francisco building of 314 million.
Adjusted EBITDA of 200 million up 113 million are 129% year over year.
Our guidance assumes our lives services will drive the vast majority of our topline performance.
We expect our forever franchises to collectively scaled throughout 2020 and anticipate initial contributions from new games that are targeted to launch in the second half of the year.
In 2020 operating leverage will ultimately be a function of our lives service performance user pay versus advertising mix the timing of our new game launches and the level of marketing investment applied to scale new titles on our life services.
For the full year, we anticipate slight pressure on gross margins due to the higher mix of user pay versus advertising.
We expect to see modest improvement in operating leverage in R&D, NGL may which should be more than offset by increased marketing investments in both our lives services and new game launches.
Our guidance assumes that we will see higher operating margins in the second half of here as greater topline scale provides stronger leverage and R&D and gene a partially offset by launch marketing for new games.
In summary, our full year guidance implies another year of double digit topline growth with margins in line, what our near term goals.
Now for Q1 guidance, which is as follows.
Revenue of 385 million up 120 million or 45% year over year.
And that increase in deferred revenue of 15 million down from 79 million are 84% year over year.
Bookings of 400 million up 41 million, our 11% year over year.
And that loss of 26 million versus a net loss of 129 million in the prior year quarter.
Adjusted EBITDA of 57 million versus a negative 19 million in the prior year quarter.
Our topline performance will be driven by our lives services, including the addition of merge magic and game of Thrones slots casino as well as growth in Empress and puzzles and merge Dragons.
These gets will be partially offset by declines in older mobile and web titles as well as year over year pressure on advertising as we lap advertising network optimizations.
We expect a net increase in deferred revenue of $50 million versus 94 million in Q1 of last year.
The year over year over year change in this gap deferral represents a 79 million year over year increase in revenue gross profit net income and adjusted EBITDA.
We expect gross margins to be up year over year, primarily due to lower net increase in deferred revenue in Q1 2020 versus the prior year quarter, partially offset by the dilutive impact of a stronger user payer mix in Q1 2020 versus the prior year quarter.
We expect our GAAP operating expenses as a percentage of revenue to decrease significantly year over year, primarily due to the lower net increase in deferred revenue and lower contingent consideration expense in Q1 2020 versus the prior year quarter.
Outside of these factors, we also expect modest improvement in our year over year operating leverage in R&D, and gionee, which should be more than offset by higher marketing investments across our lives services to maintain momentum in the coming quarters.
In particular, we anticipate increased marketing expenses, primarily for the year over year additions of merge magic and gamma Tron slots casinos as well as continued investment against high growth titles, such as empires and puzzles and merge Dragons.
Finally, we're not anticipating the worldwide release of any new games in Q1, 2020, we expect to spend modest test marketing on these titles in soft launch.
In conclusion, we are pleased with the progress we're making in all aspects of our multiyear growth strategy.
In 2020, we look forward to delivering delivering another year of double digit digit topline growth and strong sustainable profitability.
With that I will turn the call back to Frank.
Thanks, Jeremy before we open the call for questions I wanted to take a moment to discuss zyngas strong position in a rapidly growing gaming landscape today.
In Twentytwenty mobile will be the largest and fastest growing games platform and is expected to reach more than 2.5 billion people across more than 155 countries.
It is also the most ubiquitous and highly accessible platform that enables people to play games anytime and anywhere.
Mobile is constantly evolving with new markets devices and technologies that will service Tailwinds for interactive games in predict in particular, the arrival of Fiveg and streaming will enable higher performance games more streamlined player experiences and innovative new forms of distribution.
As a leading mobile first free to play live services company Zynga is uniquely positioned to capitalize on this opportunity our strong 2019 performance demonstrates our ability to scale zynga through our multiyear growth strategy.
In 2020, our lives services Foundation grows from five to six forever franchises, we have a more robust new product pipeline with puzzle combat Farmville, three and Harry Potter.
We're also continuing to invest in new platforms in markets and see more opportunities to further enhance our growth through acquisitions.
With that we'll open up the call for your questions.
As a reminder, ladies and gentlemen to ask a question you will need to press the star and the number one key on your touched on telephone.
To withdraw your question press the pound key.
And the interest of time, we ask that you. Please limit yourself to one question and one follow up question.
Our first question comes from line of Eric Sheridan with MBS. Your line is now open.
Thanks for taking my question, maybe two to bigger picture questions coming out of what you just said there rather theater Frank if you go back a couple of years ago.
You guys were very heavily skewed towards North America, and the wire last sort of how to plan of getting more geographic distribution as well and getting better at Android platform now a couple of years on sort of as there's still a lot more work to do that could open up for addressable market for the company of the types of games, you're bringing to market, maybe just to check in on.
That and now we're sick. So after the investments that are being base versus broadening out distribution and the second part a topic talked about last couple, earning calls you're testing out a lot of newer distribution mechanism to expect Snapchat Facebook and others.
Update there on on whats some of the testing and learning might have at that by that happen from some of those newer distribution platforms or do you think outside the box looking out over the next couple of years. Thanks, So much guest.
So Eric I'll take the question and when you look at our are waiting a few years ago, you're absolutely right. We were heavily biased to north American Ioannis.
And we undertook a very.
Methodical approach to try and expand our appeal through new intellectual properties opening a better performance on Android by developing the Apple and Android first in some cases and we've seen terrific progress there I think that our total addressable markets still has a lot of room to grow we just got into Asia. As you know in 2019 with Empire and puzzles and we're seeing.
Some good early results I mean, we're also starting to see a bigger weight of Android performance internationally in our mix and I think thats in so if you look at Empire and puzzled There're really the Best example, we're seeing tremendous growth in empires and puzzles internationally in on Android It does very well in Iowa, Wes, but the highest growth rates for that franchise are.
Our international and Android platforms, so seeing the same dynamic with our games from Graham Big one of the things that you'll see US experiment more with as we look at new GE as an opening up new markets is we'll start to do faster to market games games that are potentially less expansive in terms of their total depth and feature rate and start to get.
Into faster iteration times of games I think a good example of that working is what we did with merge magic last year that game had a very fast development cycle. It did extremely well in test launch and so we'll be able to come to market very quickly I would expect for you to see more shots like that from US. In addition to the 10 pull titles that we've already put publicly can.
Integrated we also talked in the letter a little bit about our interest in mass casual, which we also think of the isn't addressable market that we're not very deeply in right. Now these are AD driven experiences they appeal to the mass casual market globally.
Lot of things are called hyper casual there's there's a mix of titles in there as I think the Zynga brand in the Zynga studio can can execute there that we're excited about in terms of the second question about.
Trying new distribution platforms.
Yes, we absolutely invested in looking for new channels chat being the one that.
We occupied most of our time.
We had some very good learning on Facebook Messenger in fact, our words with friends product there does very well and then we last year launch tiny ROI on snap and we're encouraged by you know looking at these channels long term and we're going continue to iterative and developed games and learn these very early development title so any.
The impact on the business is premature but in terms of looking at traffic patterns what types of designs intellectual properties work and we're very committed to continuing to innovate in mobile in I think when fiveg starts to come online in terms of the infrastructure I think they'll be more innovation in terms of new and distribution technique, you'll see a much more efficient player funnel.
In terms of acquisition and in the higher performance games, I think that will open up incremental new incrementally new distribution channels, so I'm going to try and stay in front of it.
Thanks, so much.
Our next question comes from Alex Shiloh with Jefferies. Your line is now open.
Hey, guys. Thanks for taking my questions. So to from a first wanted to ask broadly on the M&A environment within mobile we've seen two or three deals take place here within the last few weeks. So just curious if the competitive environment is creating a situation in which bids for some of these assets out there going up.
Then just taking a step back this is team still feels if there are attractive assets out there and then secondly, just just an update you can provide around the soft launch games and thoughts around launch timing would be helpful. I think Jerry said second half of the year, but just wanted to clarify thanks guys.
Yes in terms of the overall M&A environment.
This is it's a global marketplace a mobile for development teams, there's a lot of talent out there that new franchises and categories popping up all the time, so I would definitely say that the M&A environment is active theres a good supply of opportunities there for companies to look at.
As you know over the last few years, we've been very active there and we continue to be very active there we positioned ourselves by selling the building and entering the convert market to generate 1.5 billion to be able to go out and and look at opportunities to grow the company through mergers and acquisitions, we're still committed to that.
We haven't seen bids going up competition has shifted a little bit from how it's been in the past in terms of who you're seeing the in the processes, but in terms of the overall there hasn't been a huge inflation the prices of the asset Theres just been a lot of really good deals out there because the talent basis, So big and the market is so large so we anticipate that.
When we look at the environment for M&A, the consolidating effect that you're seeing right now in the overall marketplace will continue but we also think theres an ample supply of opportunities if you're looking globally and if you're looking across a lot of different categories and platforms I think theres theres, a theres deal to be had.
So from our perspective, when we look at how we're going to grow the company. We see the majority of our focus on building out our lives services and the new product pipeline, we're very excited about where puzzle combat and Farmville three are in soft launch.
As as you know our goal is to deliver long term engagement. We want these games to be able to last for five years or more at scale $100 million are more year in revenues and so we just really really take our time with putting the games through rigorous testing and making sure that theyre fully featured and that we have a good sense of how they're going to performance. So we feel good about.
Both of those titles and Harry Potter has done very well in its development cycle is entering soft launch here in Q1, we did weight the year towards the second half in terms of communicating where we think the titles will land, but really it comes down to how is that what are the CPI is coming in what are they look like.
And do we have a green light to go forward launch, but when we look at the overall revenue.
Mix in the year.
The vast majority of the 2020 guide comes from our lives surfaces and that helps us de risk the company from the standpoint of being too reliant on new releases and it gives our development time our teams the time in space to really get the games in position to be successful releases.
And sometimes they can go really fast like merge magic, sometimes it can go really on timely game of Thrones slots did tons, we take a little bit more time with the game in order to get it into the right position.
Our next question comes from Mike Olson with Piper Sandler Your line open.
Hey, good afternoon. So.
So maybe just following up on that pipeline for 2020 is it reasonable for us to expect any other titles. Other then well go comment Farmville, three and Harry Potter are those the titles that.
We should expect it could potentially be other ones in the year and then from a margin profile I think the goal has been to drive on multiyear upward margin trajectory, obviously, but that may solve it this year with new title launches I know you're looking.
Pat.
2020, right now not 2021 for probably not wanting to give guidance, but would it be reasonable to expect an upward trajectory in 2021 months. There is some unknown pipeline of titles coming in that here. Thanks.
Yes. This is Jerry.
In terms of new games I think to three that are mentioned in our in our prepared materials are I would say the main games that.
Our obviously and soft launch are coming to soft launch what I will say is you will see additional games coming out from from Sangha, and two prototyping and into soft launch.
In the in those sort of mass casual are.
Thats Sciandra.
You've seen some games come out from Graham games, and Thats in that in that Elkann. You've also seen some other games come out from the company overall.
As it relates to the margin profile we.
We're effectively guiding to.
If you look at EBITDA, excluding the impact to deferred revenue or looking at 20% EBITDA for 2020.
As you think about 21 ultimately the EBITDA flow through in 2000, 2021 will be a function of how we grow our lives services and how we scale the new games. So right now, it's our ambition to grow into 2021.
But as we progressed through this year, we'll have a better sense of what that means as we see the trajectory of our core live services and the new games coming up as it relates to 21 beyond we won't be done with new games.
Ultimately, we have a slate of games beyond the ones. We've mentioned, we've talked about them in the past.
Don't be surprised if you see new games again and 21.
So we'll give more color that as we get closer into the middle of this year.
Thank you.
Our next question comes from Michael Huang with Goldman Sachs. Your line is now open.
Great. Thanks for the question.
A bit of a follow up to the last one.
I guess for the 12% bookings guidance for 2020 can you talk about how much contribution you're assuming from yes. Those this two new games and the soft launch and chairs, hoping you could just elaborate a little bit more about some of those new games from Graham games.
We saw a couple like pirate evolution and rate Kingdom could these be potential 2020 launches or are they just very much and testing phase. Thank you.
In terms of the full year guide very very similar to last year. The majority of our bookings the vast majority of our bookings is coming from like we're we've said this in the past we were not going to put big numbers on new games.
Guide could be flattered ultimately by the launch a new games, depending on when the turn up.
But more importantly, it will also be dependent on the level of marketing, we invest in launching those games and sustaining them through the ended the year and obviously into 21.
From a guidance perspective, you could you should proceed this guide to be fundamentally a life service guide.
In terms of the the smaller games, yes, we're talking with the parts game the Raiders game.
The rating game you also had.
We've got to other games work puzzle games that are coming out of our studios here in San Francisco.
Yes, those games follow a more of a prototype approach. So my caveat, if you see those games and you'd probably see more games like that pop into the marketplace.
The teams are testing those taking them out testing them again, they take a different approach to what I would say more mainstream games.
Like the ones. We've mentioned that are in soft launch so from that perspective, we have not put a lot of.
There is there a lot of bookings against those games, but again I think as you know in our marketplace.
Small game can come have become a big game very quickly if its adopted and pairs engage with it and so were very much focused on.
Delivering game, so we feel will appeal to that Beth mass casual audience.
And our yields you'll see you'll definitely see a portfolio of those games that turn up in 2020, whether they sustain and grow will be a function of the testing we do on the games.
Great. Thank you and if I could just have one quick follow up.
Tierpoint the ex deferred EBITDA margin for 2020 is about 20%.
So that's a little bit better than the call at one to two percentage points of margin contraction that I think a lot of people or thinking about it.
Is there something that you see that gives you more confidence about margins whether thats.
Maybe the games performing better so you need less launch marketing or is there something else. Thank you.
Well I think where what we're very happy what is the scale of our lives services and how we see that ramping over over the year.
As we indicated in our in our prepared remarks, we do expect to see improvement in margins in the second half due to that scale.
And so as we think about last year again, I when I when I started last year I guided to few points of pressure.
Given the performance of our lives services and in particular to the ended the year. The strength, we saw an advertising we obviously.
We delivered a 21% in 19, so that's that's a hell of lot better than where we thought we'd end up at the started the year.
And as we've talked about this year, giving the live service profile.
We feel that the 20% is a good base to operate from and then ultimately was so how are live services progressed through the year, we'll see how the advertising versus user pay mix.
Evolves and also depending on when the new games arrived as I say I'm not worried about bookings from new games. It's ultimately what is the shape of the PNM for those games to the end of 2020 and how are they going to help me.
Grow the company and 21.
Great. Thank you very much.
Our next question comes from Colin Sebastian with Baird. Your line is now open.
Great. Thanks, and nice quarter can you talk about the advertising strength that you saw in words with friends in terms of what specifically worked well how much of that revenue was one time and whether you can utilize that experience across other franchises and my follow up is on trends in poker and CSR.
In terms of what you're seeing there what your plans are to generate growth from those franchises in 2020. Thanks.
Yes, we so as we as we said in our prepared remarks, we definitely saw.
The uptick in seasonality Eric during the quarter. So we met a lot more track to go after.
Dropping strong yields in the advertising business, but we do see that as a function of Q3 to Q4 traditionally we've seen a drop off from Q4 to Q1 and Thats, what our guide implies.
In terms of the onetime factors the number of.
What I would say uplift bonuses, we got in the quarter, but there was also.
We have to renegotiate.
The contracts would.
Make sense that we got in the quarter.
That was roughly in the in the in the mid single digit millions for for Q4 with the balance of the upside obviously coming through the seasonal lift and what I would call more traditional yield uplifts.
As you think about the Q1 Guy that's why you're seeing the obviously a drop off from that perspective, how we see advertising evolve true true this year will be a function of.
Obviously, the engagement level within our games would an addressable add audience and also the yields we can meant in the goals here what our partners.
As it relates to CSR in poker, we're happy with how how those games are progressing.
We're not expecting significant growth quarter on quarter, but they are they're both performing well within the portfolio and we expect them to sustain less nicely in Q.
Our next question comes from Mario Live with Barclays. Your line is now open.
Hi, Thanks for taking the questions to on empires puzzles, specifically to the valor pass.
So the dollar Passives released a couple of days ago, and you mentioned in the shareholder letter that is seasonal subscription.
But I think as I understand it currently players have to manually we knew the dollar pass each time as new season begins. So is there a reason why gaming companies do not make their battle patches subscription model I would think of potentially help with churn at least on mobileye on mobile and potentially lower the platform fees from Apple and Google and then secondly.
Unlike other battle passes to offer an experienced multiplier through the season.
I don't see any major incentives to buy the pass on day. One therefore do you expect revenues from the past to be more front end loaded.
And the reason assets potentially.
The season that could be a couple seasons that started in Q1 versus just one in Q2. Thanks.
Thanks for the question Mario the Valor pass is something that we're testing and innovating. We're also looking at its applicability to other franchises.
And honestly, we're going into is in a in a very methodical way, we want to we want to test the current offering and we want to test how player react to it to understand whether you can switch to a recurring subscription model as opposed to a one time 50 day.
Transaction. So we don't disagree with you that moving into subscription models has all the benefits you highlighted with with platform fees with recurring revenue and.
And we just want to make sure that the value, we're providing as well received by the players and that we see the engagement gains without altering the overall fairness of play in the game and so thats one of the things that we're doing as we as we start to roll. These out is is we're carefully putting out on offer understanding it and then in tuning it for based on player feedback.
Back and player reaction.
And so as they seek wins in.
Well look at how we time those against season three.
For empires and puzzles, how we would time it again expansion in other games that we have tied to bold beads. We think the two can operate in a very complimentary eight.
But we we see this is a long term positive for players and four for Zynga and so we're just we're going to treat it in a way that we don't go fast too quickly with where we make a mistake we want to understand how the dynamics worked for scaling it up even bigger.
Great. Thanks.
Our next question comes from Brian Nowak with Morgan Stanley. Your line is now open.
Thanks, taking my questions I have to just the first one frame to kind of go back earlier, we're talking about sort of the globalization and five Ci and the new player distribution funnel I'd be curious sort of you as you step across and look at your your whole portfolio and sort of those genres you address.
You talked about sort of getting more into mass casual talk about sort of how you think about can consumer behavior and consumer expectations or what are the biggest under addressed opportunities you see for zynga to invest in either through R&D or through M&A to really kind of capitalized on the way in which the global mobile players may change the next.
Few years, then the second one just to go back to your comment on the advertising strength talk us through again, why you typically see the seasonal and drop off from for Q to one Q and so if you've already seen that in the current quarter and is that why you're taking a more pragmatic approach with the guide. Thanks.
Yes, Brian I'll start.
In terms of the total addressable market our company is a little different than a lot of the gaming companies out there where the majority of our players are women, they're busy adults who want to have fun session lengths that arent 45 minutes on a couch, we what we want to be as accessible to people as possibly want to be as global as possible. So when it comes to.
Our intellectual property when it comes to our designs when it comes to our platform mix on Android iOS. We still think we have a tremendous amount of opportunity to grow grow the business and when we look at areas inside of our portfolio, where our brands in our style of development can work, we do see opportunities in Asia, we do see opportunities in mass casual.
Albeit the evolution of hyper casuals going on those short session length games that appeal to everyone and can be played in anything any place that feels really good us for us in terms of an investment opportunity. We've seen the early positive turns on Asia. So we feel like Theres brands and IP that we can invest in more there in the pipeline in the current.
Five services portfolio.
And then in addition to that we do see more PDP experiences being.
Well received on mobile and our Zynga poker game, our words with friends product, our heavy PDP, so as empires and puzzles and.
And so we have some expertise about how PDP works and elder game designs and as look at the core market and we look at where PDP designs can appeal. Most we are looking at IP with regards to whether it's a star wars title CSR or new game, we are investing more in elder game PDP systems to start to lever that more.
Or as we get into.
And even bigger market as the years progress globally, so from our perspective its.
The company is well positioned for multiple takes.
Yes on the advertising front basically.
We've seen historically coming from Q3 into Q4, a pickup in the mind, what our network partners, you've got traditional advertising in our space, which is in the gaming category, but you also see verticals.
Index, a little bit more into Q4.
We saw that start earlier.
It's a function of whether its traditional retail traditional demand for games.
It definitely inflected.
Quicker into the quarter than we anticipated.
We generally see as and this is what's implied in the guide and based on our our understanding of our own network deals and yield profile for Q funds that were going to see some drop off purely based on demand and then also when you look at year on year. The overall profile of our network optimizations. If you look at our perfect.
Once in advertising over the last two years.
We have significantly growth growing the business, we've had very strong double digit growth in both years and so we're playing off a very strong base when we compare the yields year on year just in terms of the deals.
There is there is some weakness during Q1 versus Q1 of last year, So you've got to.
A double that I'm dealing with one is a traditional what I would say seasonality.
Drop off that we've seen every quarter since since I've been here in the data science teams have looked at it and then secondly, we're looking at a little bit more weakness as it relates to the just the yield profile in Q1, which we expect to pick up during the year as as we negotiated some of these deals.
On the new terms.
Great Thats Super helpful. Thanks, guys.
Our next question comes from debt, Chris with Cowen. Your line is now open.
Hey, Thank you in the letter you mentioned your decision to self Polish empowers and probably isn't covered benefit just wondering if you just going on in more detail on that what was the thought process. There how does that help you on how to what did you learn from that.
Yes, Doug we looked at Korea, initially with empires and puzzles and we felt that we could put the game into the market get the player feedback directly without having to go through a partner and what we found is as we looked at Japan, and Korea, and even China to degree there are becoming increasingly performance based marketing.
There there used to be a lot more power in the distribution channel and what sites you were on and how was promoted that is that is lowered and its impact over time and what we've seen is they're starting to operate much like you see western markets were paid acquisition tied to some organic programs really moves the needle in terms audience generation and we felt that we wanted to have a direct line.
From the player to our data science seems really understand the player behavior without.
Without limiting between trying to interpret it for us.
So as a bit of a risk, but the small giant team is up in Helsinki is really sharpen understanding their games and looking at these things and so thats, what we proceeded with.
And we like we like the results and so we've been slowly rolling out we went Korea than we would Japan, we've looked at Hong Kong, Taiwan, Macau, and then we're going to continue to roll it out a country by country.
And use performance marketing as well as direct feed preliminary back from the market to make the right adjustments and changes to the game for for look conditions, we definitely altered some things in the game.
And we will continue to do so to the chart position the performance there.
Great. Thank you.
Our next question comes from David Karnovsky with JP Morgan. Your line is now open.
Thanks for taking my question.
Mitch drag and it looks the decelerated slightly in the quarter just wondering how much you would attribute this to merge magic ramping up and then just clarify would you say when you live Magic Council Forever franchise. This has been the game is currently at run rate for 109 to bookings annually or is it that we now feel certain the game will fail to that point sometime in the future.
Thanks.
Yes, the merge magics on a run rate to reach Red Refranchised status. So it's got to its doing really well.
In the quarter Q4 merge Dragons had a little bit of softness.
It was largely related to their holiday soft launch their holiday bold beat launches.
Some of them didnt perform as well as we'd hoped and in addition to that we did see a little bit of cannibalization from from merge magic, but it was certainly manageable when you look at the combination of the two franchises. It's certainly a positive and when we look at the player dynamics that the crossover cannibalization rate was actually inline with expectations.
So a little bit it was that but I think as you see Q1 Q2, the those gains will start to diverged even more in terms of their feature sets and their player bases. So we're very encouraged where merged dragons is going in the coming quarters as a very strong bowlby plant in front of it.
Okay. Thank you.
Our next question comes from Matthew Thornton of Suntrust. Your line is open.
Hey, good afternoon. Thanks for taking my question guys to two if I could I guess first on the user acquisition. Just wondering if you can maybe give us an update on just the kind of trends you're seeing here as we exit for Q1 into into 2020 here.
And just remind us how you think about maybe user acquisition costs as a percentage of revenue and maybe to launch quarter versus a non launch quarter.
And then just secondly, you talked a little bit about the pipeline obviously for 2020.
Taking the pass you've talked a little bit about some of the other titles further out. So a couple of Star Wars titles Cityville game of Thrones anything there that maybe as.
Maybe joined the pipeline or exit the pipeline just any color you'd be willing to provide there would be would be helpful. Thanks guys.
In terms of way. It's we're constantly evolving are you a strategy and execution, we learned a lot from small jining Graham in terms of how they have developed games and hot rolled games out and what we see that.
An important part of the soft launch processes to gain deep insight into the the CPI.
The cost to install versus the overall LTV of the games. We spent a lot of time, making sure that we can actually scale through multiple bands of CPI increases and so thats, an interesting thing that might be a little bit new for folks to think about in terms of how much of that time in soft launch is going against that particular item.
We did in the quarter in Q4, you saw our EBITDA margin jump up it was because we got the marketing into a place where we felt like we had emerged magic and game of Thrones slots were moving out of launch mode and into sustain and growth mode. So we see the efficiency start to gain there I like where we're going with you weigh in in 2020, we still.
I have to invest in some of the new launches, but as we as we get the overall lie services business, we're starting to see scale emerge in our performance as a result, as it relates to audience acquisition organically as well as paid theres always new techniques and tools coming along but at the end of the day.
We're looking at this daily and if we're not seeing positive ROI on a spend we don't spend.
We do have a global perspective, and so if one market like iOS us gets a little expensive, but we see really positive returns on Android in eastern Europe, or Android Naser Android someplace in South America will move the money. We have we have a very flexible in a very global point of view in terms of how we deploy our marketing capital.
In terms of the title plan beyond 2020, Theres not a lot of new updates I'd give you. There we are an active development on a number of titles, including the Star Wars products still.
Yes, I think the new news is really the faster cycle time development that you are starting to see us experiment with much to the the games from Graham some of the mass casual games like puzzle escapes where to start to look at those opportunities as increasing those opportunities for the company to grow beyond just the set piece kind attention.
Titles that we've delivered over these last couple of years, we think that that is something that as we developed our studios and we've learned from small giant Graham we think thats an area for us to lean in more.
As a reminder, ladies and gentlemen that is star then one it would like to ask a question at this time.
Our next question comes from the line out Ryan team at Bank of America. Your line is now open.
Yes, hi, good afternoon, and thanks for taking the question. So just real quickly on Asia and that opportunity. So our our data kind of shows that when you think about China Korea, Japan, Thats, probably 60% to 70% of the mobile market out there RPG titles. When you think about that genre, it's probably 50% of revenue.
You in those countries, whereas.
Casual and casino genre command much less probably single digits.
Not sure if you agree with that but how do you guys go out and really tackled the opportunity in Asia I know you've mentioned acquisitions in the past and pension for that.
Do you think that acquisitions are your way in do you have other games in the pipeline that we should look forward to or do you really feel that maybe your existing markets Theres just still so much room left it's not really a focus for you now anything on Asia would be great.
Yeah look at Asia is a massive market for mobile its and its an important market for Zynga long term and I think as we look at how to enter that market.
So rushing in with a bunch of to do a big deal or over investing to quickly.
Is is a strategy that weve personally in our career seeing fail and so when we added from the standpoint of Zynga.
We do think that there's there's opportunity for our existing intellectual properties to perform in Asia, but.
Both the ones that you guys know about and ones that we have in the pipeline I don't disagree with you that that Rpgs and core experiences are very valuable in Asia. I think if you look at Empire and puzzles. It has RPG elements inside the design.
Also emerged Dragon's Inn merge magics to a degree so one could argue CSR as a car RPG. So I think within our portfolio. Some of those systems and mechanics will translate to Asia with the proper testing and with the proper go to market plans.
So what we're trying to do is take a very careful and methodical approach to growing our business in Asia.
Totally agree with you see no doesn't work in Asia, Youre, not going to see any of our slots games or poker products going east, but we do think that when you look at Graham small giant natural motion I.
I think what the right incorporation of learning from those markets they can FERC.
Farmville is a brand that historically has done well in Asia.
Star Wars does well in some markets in Asia.
And I think if you look at Harry Potter, that's that's a branded unwell so.
We're going to we're going to continue to chip away at it.
We can't forecast overnight success, but know that we're committed to it to the long term in that.
If there's opportunities to acquire assets that perform in Asia that certainly is part of the things that we look at.
But we're not really forecasting any of those right now.
Okay, and then just a follow up I could I think we've seen some of your console competitors partner with some big part bigger publishers over in China, specifically in its deliver them early successes, that's something that you guys have looked into maybe partnering with one of the big publishers in any one market.
Leveraging some of their knowhow in their local knowledge to to.
Convert your IP into a great game.
Yes, I think that's an option for us and we certainly.
Don't rule that out the challenge for US, though is as we look at the flow from from revenue down to what you actually takeaway in profit. After you have a large partner in the mix because remember we don't have the same scale as some of those console guys.
It's not as attractive.
And so the risk reward is such that you you might you don't have much to lose by going self publishing route.
In fact, you might actually learned more faster to get you better prepared for the second generation of games that you put out there, but we wouldnt rule out that type of arrangement.
But right now we feel good about what we're doing with our current strategy.
Great. Thank you guys.
Our next question comes from the line every essential with consumer edge Research. Your line is now open.
Great. Thanks for taking my question, so the new focus or at least efforts around mass casual or things like puzzle escapes how do you think about.
It's all thing and building out those titles and launching those titles relative to introducing them as new modes within your existing titles. So puzzles Cape as an example, we could see as a mode in theory within the words with friends.
Product and then second to that as far as the scale of some of these titles is there any sense that you can give there's there's not as good data on advertising relative to some and purchase data. So can you give us a sense of the scale that some of these titles could achieve from an AD dollar perspective. Thanks.
Yes the.
We do innovate inside of games for example, recently on words with friends, we introduced the word wheel as kind of a light mechanic that engages people in between product in between games. So we constantly look at is this a feature or is this a full game.
And what we find in the hyper amass casual is that they're short session length. There shorter life spans in terms of engagement, but they're very inexpensive they're very fast to market and they can generate massive audience is if you hit the right. The right cord. There is a paid element, but there's also inorganic element and they would also give a benefit to the overall network of zinc.
Games, because we could bring those users into other products. So we see a lot of interesting benefits for being able to build out these.
Short session.
Mass casual mass appeal games and when we looked at we when we looked at the puzzle game, we decided that that had enough to be a full product.
When we looked at the case word will we felt that that was a good feature for words with friends and so we'll make creative decisions along the way on that if you look at the overall ecosystem and mobile right now there's a tremendous volume of engagement user dynamics installs coming from this this category and we feel like it's a place that we can that we can compete and be successful and.
So thats what were embarking on.
In terms of the model that will look at it will definitely be weighted towards an AD model, but it will also have elements of IP in it but I think the majority of the revenue as you currently seeing these games is advertising driven but I think over time, you'll start to see the engagement curves elongate a bit I think you'll start to see IP emerge in some of these games. So we.
We think that if you look at chart position resit relates to advertising is one of the challenges we have with words with friends, which is if you included the advertising revenue it generates including Andy IP at top of the charts kind of game, but it doesn't show up there because the charged on track AD.
I don't know how to help you under ill give you a good sense. The rule some of what these are doing but they can be very sizable contributors.
Great. Thanks, so much for that and as far as.
Stepping back at the bigger picture for hyper casual do you view that is different than what you're talking about with mass casual and there's always sort of a conversation about the sustainability of hyper casual you guys now of the opinion that the model there is sustainable or you applying tweaks that make it different from maybe the last year of hyper casual within them.
Okay.
Hyper casuals constantly evolving and I think it's like what we coined the term mass casual internally, we're looking at the space between hyper casual in between again like words with friends.
Theres a number of examples a very successful titles in that space, but I think what you'll see an hyper casual it'll continue to evolve.
Think it'll sustained because if the volume in the percentages of audience generation are just so large that it's it's hard to imagine that disappears overnight and it sustained for many years, it's not like it just showed up last year. So I think what hyper casual is teaching the market is that there's a eight space in People's lives for short one two minute.
Experiences they can get in.
Screw around have good time, and then pop out and jump to the next game a few weeks later, so I think from our perspective, we see player behavior. That's rewarding these types of products.
And if they do shifting change, but in general there's a lot of people playing those games globally and they've been playing them for many years now and I think we're taking note of of potential design changes in product new product introductions that might.
Tap into that.
Great. Thanks again.
I'm showing no further questions in queue at this time I'd like to turn the call back to Rebecca Lau for closing remarks.
Thank you Liz 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.
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Ladies and gentlemen, thank you for standing by and welcome to the single fourth quarter 2018 results Conference call.
At this time, all participant lines hurdle listen only mode.
After the speakers presentation, there will be a question answer session.
To ask a question during the session you want me to press Star then one on your touched on telephone.
Please be advised of today's conference maybe recorded.
If you require any further assistance. Please press star then zero to reach operator.
I'd now like the other conference over to your Speaker today, that's Rebecca Lau Vice President Investor Relations in corporate Finance. Please go ahead.
Thank you Liz and welcome everyone says it goes fourth quarter full year 2019 earnings call.
On the called me today are afraid to both our Chief Executive Officer, and your Griffin, Our Chief Financial Officer. Shortly we will open up the call for life question.
During the course of today's call will make forward looking statements related to our business planning strategy a goals expectations for future performance.
Actual results may differ materially from the results predicted.
Please review the risk factors in our most recently filed form 10-Q as well as elsewhere in our S easy filings for further clarification.
In addition, we will also discuss non-GAAP financial measures our earnings water, earning flies and one filed or 10, okay. Well include reconciliations of our GAAP and non-GAAP financial measures.
Please be sure look at these reconciliations as a non-GAAP measures are not intended to be a substitute for or superior to our GAAP results.
This conference call is being webcast and it'll be available for audio replay on our Investor Relations website in a few hours.
Now I'll turn the call over to Frank for his opening remarks. Thanks, Rebecca good afternoon, everyone and thank you for joining our Q4 earnings call.
Our strong Q4 performance capped off an outstanding year as we delivered the highest annual revenue in bookings in Zynga history.
We are executing well against all aspects of our multiyear growth strategy and expect to build on this momentum as we continue growing our business in 2020.
In Q4, we achieved revenue of 404 million up 63% year over year and bookings of 433 million up 62% your fear.
Our results were well ahead of guidance across all key financial measures and were driven by strength in life services combined with remarkably strong seasonal advertising.
Words with friends achieved record revenue and bookings and empires <unk> puzzles also had its best quarter ever with a series of well executed holiday bold beat.
Merge magic continued to build momentum and is on track to become our newest forever franchise.
Looking at the full year 2019, we delivered a record topline performance with revenue of 1.32 billion up 46% year over year and bookings of 1.56 billion up 61% year over year.
<unk> services were the primary driver of our results and are the foundation of our multiyear growth strategy.
By delivering innovative bold beats, we are driving strong consistent growth from our portfolio.
On top of our lives services Foundation, we launched two new games in 2019 game of Thrones slots casino and merge magic both are off to great starts and will be meaningful contributors in the years to come.
We also grew our international revenue and bookings to their highest level since 2012, as they were up 58% and 85% year over year.
In Asia, we're seeing positive results from our decision to self publish empires and puzzles in South Korea, Japan and Taiwan.
Our strong 2019 results demonstrate our ability to scale zynga and positions us for more growth in 2020, as we continue to execute on our multiyear growth strategy.
The first pillar of our strategy is to continue to grow our life services as we enter Twentytwenty, we have strengthened momentum in our highly diversified lights services portfolio.
We expect to increase from five to six forever franchises CSR racing empires, and puzzles merge Dragons words with friends Zynga poker and our newest one merge magic.
We define a forever franchises the game service they can entertain players for more than five years and generate at least 100 million of annual bookings.
Adding another new French forever franchise provides us with more scale to drive our overall growth in operating leverage.
The second pillar of our strategy is to create new forever franchises to layer on top of our lives services Foundation.
We have a robust new product pipeline with several new games in various stages development currently puzzle combat and Farmville three are progressing well in test markets and our Harry Potter title is on track to enter soft launch later in Q1.
We maintain a methodical approach to engineering hit which includes rigorous testing in soft launch and frequent iteration and tuning with the goal of delivering long term their engagement.
The third pillar of our strategy is to invest in new platforms markets and technology.
In Twentytwenty, we will continue experimenting with titles on shot platforms. This investing additional marketing and empires and puzzles in Asia.
We're also exploring new game markets, including mass casual AD driven experiences by developing and testing a series of new titles such as puzzles gapes.
While our investments in these initiatives are still in the early stages. We believe they have the potential to increase our growth over the long term.
Lastly, we see opportunities to acquire talented teams and franchises around the world to further accelerate our growth.
Mobile talent base as global and there are new franchises in categories emerging all the time.
We're pleased with how the casual card studio from peak Graham games, and small giant systems have been performing as part of Zynga.
Our proven model of enabling talented teams to maintain their unique create a cultures, while leveraging our scalable studio operations and publishing platform, enabling us to both grow faster together.
With that I would now like to turn the call over to Jerre to discuss our results in more detail as well as our outlook for the coming year.
Thank you Frank.
Q4 cap for great year, as we deliver the our highest annual revenue and bookings and Sangha history on margins ahead of our near term goals in Q4 and for the full year.
Our Q4 results were well ahead of our guidance across all key financial measures driven by strength in our life services, coupled with remarkably strong advertisement adults.
Revenue was 404 million comprised the bookings of 433 million offset by net increase in deferred revenue of 29 million.
Revenue was 39 million ahead of our guidance and up 156 million or 63% year over year.
The net increase in deferred revenue was 29 million versus our guidance of 2 million and an increase of 19 million in the prior year quarter.
Bookings were 18 million ahead of our guidance and up 166 million or 62% year over year.
Our better than expected topline results were driven primarily by words with friends a tremendous holiday season for Empire, some puzzles and a meaningful contribution from merge magic in its first full quarter post launch.
We generated user pay revenues of 325 million up 84% year over year end user pay bookings of thrift from 54 million up 80% year over year.
We delivered record advertising revenue and bookings of 80 million up 11% and 12% year over year, respectively.
Our outside outsized advertising performance was driven by exceptionally strong seasonality that kicked in earlier in four and resulted in higher than expected advertising yields.
This was further amplified by strong player engagement throughout the holiday season, as well as onetime benefits from advertising network deals.
The primary drivers of the net increase in deferred revenue were bookings on and president puzzles and merge metric.
While the release of this gap furrow, we'll have a positive impact on revenue and profitability in future periods. It represents a 29 million reduction in revenue net income adjusted EBITDA in Q4.
We ended the year would have deferred revenue balance of 434 million versus 193 million year ago.
Turning to Q4 operating expenses.
Please note Q4 2019 includes a full quarter of small giant games.
GAAP operating expenses were 258 million up $93 million or 56% year over year, while non-GAAP operating expenses were 207 million up 66 billion EUR, 47% year over year.
Increased marketing investment in our lives services, a new game launches was the primary driver of the increase in GAAP and non-GAAP operating expenses. In addition to an increase in R&D investment on our new game pipeline and rent expense for our San Francisco hedge Q, which we now lease.
The increase in marketing was primarily due to him person puzzles as what the ramp of investment emerged Dragons and our recently released titles.
Contingent consideration expense was also a material driver of the increase in GAAP operating expenses.
The increase in contingent consideration expense was driven by our recent acquisitions continue into collectively perform ahead of our expectations.
This resulted in an expense of 31 million up 29 million year over year, and 11 million ahead of our guidance.
Year over year, GAAP operating expenses decreased from 66% to 64% of revenue non-GAAP operating expenses decreased from 53% to 48% of bookings.
Our strong topline performance resulted in improved R&D and Gionee operating leverage.
We posted a net loss of 4 million 41 million better than our guidance driven by our strong operating performance and lower than expected deferred revenue, partially offset by the hard and expect to contingent consideration expense.
Adjusted EBITDA was 75 million 50 million better than our guidance also driven by our strong operating performance and lower than expected deferred revenue.
Exceptional advertising topline performance and lower marketing spend were the primary drivers of our better than expected operating performance.
We generated operating cash flow of 94 million up 5% year over from the core.
We ended the year with cash and investments of 1.54 billion, which we anticipate will use primarily to fund future acquisitions to further accelerate our growth.
Turning to 2020 guidance, which is as follows.
Revenue of 1.6 billion up 278 million or 21% year over year.
And that increase in deferred revenue of 150 million down 92 million or 38% year over year.
Bookings of 1.7 billion up a 186 million, our 12% year over year.
And that loss of 130 million versus a net income of 42 million in 2019.
Please note that our net income in 2019 include a onetime gain on the sale of our San Francisco building of 314 million.
Adjusted EBITDA of 200 million up 113 million are 129% year over year.
Our guidance assumes our lives services will drive the vast majority of our topline performance.
We expect our forever franchises to collectively scan throughout 2020 and anticipate initial contributions from new games that are targeted to launch in the second half of the year.
In 2020 operating leverage will ultimately be a function of our life service performance user pay versus advertising mix, the timing of our new game launches and the level of marketing investment applied to scale, you titles and our life services.
For the full year, we anticipate slight pressure on gross margins due to the higher mix of user pay versus advertising.
We expect to see modest improvement in operating leverage in R&D and GE in a which should be more than offset by increased marketing investments in both our lives services and new game launches.
Our guidance assumes that we will see higher operating margins in the second half here as greater topline scale provides stronger leverage and R&D and gionee, partially offset by launch marketing for new games.
In summary, our full year guidance implies another year of double digit top line growth with margins and like what our near term goals.
Now for Q1 guidance, which is as follows.
Revenue of 385 million up 120 million or 45% year over year.
And that increase in deferred revenue of 15 million down from 79 million are 84% year over year.
Bookings, a 400 million up 41 million, our 11% year over year.
And that loss of 26 million versus a net loss of 129 million in the prior year quarter.
Adjusted EBITDA of 57 million versus a negative 19 million in the prior year quarter.
Our topline performance will be driven by our lives services, including the addition of merge magic and game of Thrones slots casino as well as growth in Empress and puzzles and Marts Dragons.
These gets will be partially offset by declines in older mobile and web titles as well as year over year pressure on advertising as we lap advertising network optimizations.
We expect a net increase in deferred revenue of 50 million versus 94 million in Q1 of last year.
The year over year over year change in this gap deferral represents a 79 million year over year increase in revenue gross profit net income and adjusted EBITDA.
We expect gross margins to be up year over year, primarily Jude Thorne that increase in deferred revenue in Q1 2020 versus the prior year quarter, partially offset by the dilutive impact of a stronger user pay mix in Q1 2020 versus the prior year quarter.
We expect our GAAP operating expenses as a percentage of revenue to decrease significantly year over year, primarily due to the lower net increase in deferred revenue and lower contingent consideration expense in Q1 2020 versus the prior year quarter.
Outside of these factors, we also expect modest improvement in our year over year operating leverage in R&D, and gionee, which should be more than offset by higher marketing investments since our lives services to maintain momentum in the coming quarters.
In particular, we anticipate increased marketing expenses, primarily for the year over year additions of merge magic and gamma Tron slots casino as well as continued investment against high growth titles, such as Empire, some puzzles and Mertz Dragons.
Finally, we're not anticipating the worldwide release of any new games in Q1, 2020, we expect to spend modest test marketing on these titles in soft launch.
In conclusion, we are pleased with the progress we're making in all aspects of our multiyear growth strategy.
In 2000 feet, we look forward to deliver delivering another year of double digit digit topline growth and strong sustainable profitability.
With that I will turn the call back to Frank.
Thanks, Jeremy before we open the call for questions I wanted to take a moment skus zynga strong position in the rapidly growing gaming landscape today.
Twentytwenty mobile will be the largest and fastest growing games platform and is expected to reach more than 2.5 billion people across more than 155 countries.
It is also the most ubiquitous and highly accessible platform that enables people to play games anytime and anywhere.
Mobile is constantly evolving with new markets devices and technologies that will service Tailwinds for interactive games in predict in particular, the arrival of Fiveg and streaming will enable higher performance games more streamlined player experiences and innovative new forms of distribution.
As a leading mobile first free to play live services company Zynga is uniquely positioned to capitalize on this opportunity our strong 2019 performance demonstrates our ability to scale zynga through our multiyear growth strategy.
In 2020, our lives services Foundation grows from five to six forever franchises, we have a more robust new product pipeline with puzzle combat Farmville, three and Harry Potter.
We're also continuing to invest in new platforms in markets and see more opportunities to further enhance our growth through acquisitions.
With that we'll open up the call for your questions.
As a reminder, ladies and gentlemen to ask a question you will need to press the star and the number one key on your touched on telephone.
To withdraw your question pressed upon key.
And the interest of time, we ask that you. Please limit yourself to one question and one follow up question.
Our first question comes from line of Eric Sheridan with Yes. Your line is now open.
Thanks for taking my question, maybe two to bigger picture questions coming out of what you just said there rather theater Frank if you go back a couple of years ago.
You guys were very heavily skewed towards North America, and the wire last sort of how to plan of getting more geographic distribution as well and getting better on the Android platform now a couple of years on sort of is there still a lot more work to do that could open up more addressable markets of the company of the types of games, you're bringing to market, maybe just to check it out.
That and how we're thinking about some of the investments that are being base versus broadening out distribution and the second part a topic talked on the last couple earning calls you're testing out a lot of newer distribution mechanism things like Snapchat, Facebook and others.
Update there on on whats some of the testing and learning might that might have happened from some of those newer distribution platforms. When you think outside the box looking out over the next couple of years. Thanks, So much guys.
Eric I'll take the question and when you look at our are waiting a few years ago, you're absolutely right. We were heavily biased to north American Ioannis.
And we undertook a very.
Thoughtful approach try and expand our appeal through new intellectual properties opening a better performance on Android by developing the Apple and Android first in some cases and we've seen terrific progress there I think that our total addressable markets still has a lot of room to grow now we just got into Asia. As you know in 2019 with Empire puzzles, we're seeing some.
Good early results I mean, we're also starting to see a bigger weight of Android performance internationally in our mix and I think thats in self because if you look at Empire. Some puzzled there're really the Best example, we're seeing tremendous growth in empires and puzzles internationally in on Android It does very well in Iowa, less but the highest growth rates for that franchise are.
International on Android platforms, so seeing the same dynamic with our games from Graham one of the things that you'll see us experiment more with as we look at new GE as an opening up new markets is we'll start to do faster to market games games that are potentially less expansive in terms of their total depth and feature rate and start to get into.
Faster iteration times of games I think a good example of that working is what we did with merge magic last year that game had a very fast development cycle. It did extremely well in test launch and so people to come to market very quickly I would expect for you to see more shots like that from US. In addition to the tent pole titles that we've already put.
Stated, we also talked in the letter a little bit about our interest in mass casual, which we also think of the as an addressable market that we're not very deeply in right. Now these are AD driven experiences they appeal to the mass casual market globally lot of things are called hyper casual there's there's a mix of titles and there's I think the zynga brand in the Zynga studio.
Can execute there that we're excited about in terms of the second question about trying new distribution platforms.
Yes, we absolutely invested in looking for new channels chat being the one that.
We occupied most of our time.
We had some very good learning on Facebook Messenger in fact, our words with friends product there does very well and then we last year launch tiny ROI on snap and we're encouraged by looking at these channels long term and we're going continue to iterative and developed games and learn very early development title. So any.
The impact on the business is premature but in terms of looking at traffic patterns what types of designs intellectual properties work, we're very committed to continuing to innovate in mobile.
Think when Fiveg starts to come online in terms of the infrastructure I think there'll be more innovation in terms of new and distribution technique, you'll see a much more efficient player funnel in terms of acquisition and in the higher performance games I think that will open up incremental new incrementally new distribution channels and run to try and stay in front of it.
Thanks, so much.
Our next question comes from Alex Shiloh with Jefferies. Your line is now open.
Hey, guys. Thanks for taking my questions. So two from me first wanted to ask broadly on the M&A environment within mobile we've seen two or three deals take place here within the last few weeks. So just curious if the competitive environment is creating a situation, which bids for some of these assets out there going up.
And then just take a step back this a team still feels that there are attractive assets out there and then secondly, just just an update you can provide around the soft launch games and thoughts around launch timing would be helpful. I think Jerry said second half of the year, but just wanted to clarify thanks guys.
Yes in terms of the overall M&A environment.
This is it's a global marketplace in mobile for development teams, there's a lot of talent out there that new franchises and categories popping up all the time, so I would definitely say that the M&A environment is active theres a good supply of opportunities there for companies to look at.
As you know over the last few years, we've been very active there and we continue to be very active there we positioned ourselves by selling the building and entering to convert market to generate 1.5 billion to be able to go out and look at opportunities to grow the company through mergers and acquisitions, we're still committed to that.
We haven't seen bids going up competition has shifted a little bit from how it's been in the past in terms of who you're seeing the in the processes, but in terms of the overall there hasn't been a huge inflation the prices of the asset Theres just been a lot of really good deals out there because the count basis, So big and the market is so large so we anticipate that.
When we look at the environment for M&A, the consolidating effect that you're seeing right now in the overall marketplace will continue but we also think theres an ample supply of opportunities if you're looking globally and if you're looking across a lot of different categories and platforms I think theres theres, a theres deal to be had.
So from our perspective, when we look at how we're going to grow the company. We see the majority of our focus on building out our flight services and the new product pipeline I'm, we're very excited about where puzzle combat and Farmville three are in soft launch.
As as you know our goal is to deliver long term engagement. We want these games to be able to last for five years or more at scale $100 million are more year in revenues and so we just really really take our time with putting the games through rigorous testing and making sure that theyre fully featured and that we have a good sense of how they're going to performance. So we feel good about.
Both of those titles and Harry Potter has done very well in its development cycle is entering soft launch here in Q1, we did weight the year towards the second half in terms of communicating where we think the titles will land, but really it comes down to how is that what are the capesize coming in what are they look like.
Like and do we have a green light to go for launch, but when we look at the overall revenue.
Mix in the year.
The vast majority of the 2020 guide comes from our lives surfaces and that helps us de risk the company from the standpoint of being too reliant on new releases and it gives our development time, our teams the time and space to really get the games in position to be successful releases and sometimes they can go really fast like merge magic, sometimes it can go really on.
Timely game of Thrones slots did tons, we take a little bit more time with the game in order to get it into the right position.
Our next question comes from Mike Olson with Piper Sandler Your line is open.
Hey, good afternoon. So.
Let me just following up on that pipeline for 2020 is it reasonable for us to expect any other titles other than public comment Farmville, three and Harry Potter are those the titles that.
We should expect it could potentially be other ones in the year and then from a margin profile I think the goal has been to drive on multiyear upward margin trajectory, obviously, but that may solve it this year with new title launches I know you're looking at.
2020, right now not 2021 for probably not wanting to give guidance, but would it be reasonable to expect an upward trajectory in 2021 months theres some unknown pipeline of titles coming in that here. Thanks.
Yes. This is Jerry.
In terms of new games I think to three that are mentioned in our in our prepared materials are I would say the main games that.
Our obviously and soft launch are coming to soft launch what I will say as you will see additional games coming out from from thing and two prototyping and into soft launch.
In the in the sort of mass casual are.
Thats Sciandra.
You've seen some games come out from Prime games, and Thats in that and that Elkann. You've also seen some other games come out from the company overall.
As it relates to the margin profile we.
We're effectively guiding to.
If you look at EBITDA, excluding the impact of deferred revenue or looking at a 20% EBITDA for 2020.
As you think about 21 ultimately the EBITDA flow through in 2000, 2021 will be a function of how we grow our lives services and how we scale the new games. So right now, it's our ambition to grow into 2021.
But as we progressed through this year, we'll have a better sense of what that means as we see the trajectory of our core live services and the new games coming out as it relates to 21 beyond we won't be done with new games.
Ultimately, we have a slate of games beyond the ones. We've mentioned, we've talked about them in the past.
Don't be surprised if you see new games again and 21.
So we'll give more color for that as we get closer into the middle of this year.
Thank you.
Our next question comes from Michael Huang with Goldman Sachs. Your line is now open.
Great. Thanks for the question.
A bit of a follow up to the last one I.
I guess for the 12% bookings guidance for 2020 can you talk about how much contribution you're assuming from I guess, those two new games and the soft launch.
And Jeff I was hoping you could just elaborate a little bit more about some of those new games from Graham games.
We saw a couple like pilot evolution and rate Kingdom could these be potential 2020 launches or are they just very much and testing phase. Thank you.
In terms of the full year guide very very similar to last year. The majority of our bookings the vast majority of our bookings is coming from like we're we've said this in the past we were not going to put big numbers on new games.
That guide could be flattered ultimately by the launch a new games, depending on when the turn up.
But more importantly, it will also be dependent on the level of marketing, we invest in launching those games and sustaining them through the end of the year and obviously into 21.
From a guidance perspective, you could you should proceed this guide to be fundamentally a life service guide.
In terms of the smaller games, yeah, we're talking with the parts game the Raiders game.
The rating game you also had.
We've got to other games work puzzle games are coming out of our studios here in San Francisco.
Yes, those games follow a more of a prototype approach. So my caveat if you see those games and you probably see more games like that pop into the marketplace.
The teams are testing those taking them out testing them again, they take a different approach to what I would say more mainstream games.
Like the ones. We've mentioned that are in soft launch so from that perspective, we have not put a lot of.
There is there a lot of bookings against those games, but again.
As you know in our marketplace, a small game can come have become a big game very quickly if its adopted and players engaged with it and so we're very much focused on.
Delivering game, so we feel will appeal to that that mass casual audience.
And.
You'll see you'll definitely see a portfolio of those games that turn up in 2020, whether they sustain and grow will be a function of the testing we do on the games.
Great. Thank you and if I could just have one quick follow up.
Tierpoint the ex deferred EBITDA margin for 2020 is about 20%.
Yes, so it's a little bit better than the call. It one to two percentage points of margin contraction that I think a lot of people or thinking about.
Is there something that you see that gives you more confidence about margins whether that.
Maybe the games performing better so you need less launch marketing or is there something else. Thank you.
Well I think where.
We're very happy what is the scale of our life services and how we see that ramping over over the year.
As we indicated in our in our prepared remarks, we do expect to see improvement in margins in the second half due to that scale.
And so as we think about last year again, I when I when I started last year I guided to few points of pressure.
Given the performance of our lives services and in particular to the ended the year. The district, we saw an advertising. We obviously, we delivered a 21% in 19. So that's that's a hell of lot better than where we thought we'd end up at the start of the year.
And as we think about this year given the life service profile.
We feel that the 20% is a good base to operate from and then ultimately.
So how our lives services progressed through the year, we'll see how the advertising versus user pay mix evolves and also depending on when the new games arrived as I say I'm not worried about bookings from new games. It's ultimately why does the shape of the piano for those games to the end of 2020 in how are they going to help me grow the company in 21.
Great. Thank you very much.
Our next question comes from Colin Sebastian with Baird. Your line is now open.
Great. Thanks, and nice quarter can you talk about the advertising strength that you saw in words with friends in terms of what specifically worked well how much of that revenue was one time and whether you can utilize that experience across other franchises and my follow up is on trends in poker and CSR in turn.
So what you're seeing there what your plans are to generate growth from those franchises in 2020. Thanks.
Yes, we so.
As we said in our prepared remarks, we definitely saw.
The uptick in seasonality Eric during the quarter. So we had a lot more track to go after.
Dropping strong yields in the advertising business, but we do see that as a function of Q3 to Q4 traditionally we've seen a drop off from Q4 to Q1 and Thats, what our guide implies.
In terms of the onetime factors the number of.
What I would say uplift bonuses, we got in the quarter, but there was also.
We have to renegotiate.
Contracts would.
Make that we got in the quarter.
That was roughly in the in the in the mid single digit millions for for Q4 with the balance of the upside obviously coming through the seasonal lift and what I would call more traditional yield uplifts.
As you think about the Q1 Guy that's why you're saying the obviously a drop off from that perspective, how we see advertising evolve true true this year will be a function of.
Obviously, the engagement level within our games would it addressable add audience and also the yields we can meant in the goals here what our partners.
As it relates to CSR in poker, we're happy with how how those games are progressing.
We're not expecting.
A significant growth quarter on quarter, but they are they're both performing well within the portfolio and we expect them to sustain less nicely in Q.
Our next question comes from Mario Live with Barclays. Your line is now open.
Hi, Thanks for taking the questions to the on empires puzzles, specifically the dollar past. So the dollar passes released a couple of days ago, and you mentioned in the shareholder letter that is seasonal subscription.
But I think as I understand it currently there is hope to manually renewed valid pass each time as new season begins. So is there a reason why gaming companies do not make their battle passes subscription model.
Think of potentially help with churn at least on Mobileye on mobile and potentially lower the platform fees from Apple and Google and then secondly, unlike other battle passes to offer an experienced multiplier through the season.
Don't see any major incentives to buy the pass on day. One therefore do you expect revenues from the past to be more front end loaded.
And the reason assets potentially.
The season that could be a couple of seasons that started in Q1 versus just one in Q2. Thanks.
Yeah. Thanks for the question Mario the Valor pass is something that we're testing and innovating. We're also looking at its applicability to other franchises.
And honestly, we're going into this in a very methodical way, we want to we want to test the current offering and we want to test how plex react to it understand whether you can switch to a recurring subscription model as opposed to a onetime 50 day.
Transaction. So we don't disagree with you that moving into subscription models has all the benefits you highlighted with with platform fees with recurring revenue and.
We just want to make sure that the value, we're providing as well received by the players and that we see the engagement gains without altering the overall fairness of play in the game and so thats one of the things that we're doing as we as we start to roll. These out is is we're carefully putting out an offer understanding it and then in tuning it for based on player feeds.
Back and player reaction.
And so as they sequence in.
Well look at how we time those against season three.
For empires and puzzles, how we would time it again expansion in other games that we have tied to bold beads. We think the two can operate in a very complimentary.
But we we see this is a long term positive for players and Fort for Zynga and so we're just we're going to treated in a way that we don't go fast you quickly with where we make a mistake we want to understand how the dynamics worked for scaling it up even bigger.
Great. Thanks.
Our next question comes from Brian Nowak with Morgan Stanley. Your line is now open.
Thanks say my questions I have to just the first one frankly kind of go back earlier, we're talking about sort of the globalization and five Ci and the new player distribution funnel I'd be curious sort of you as you step across and look at your your whole portfolio and sort of the genre as you address.
You talked about sort of getting more into mass casual talk about sort of how you think about can consumer behavior in consumer expectations or what are the biggest under addressed opportunities you see for zynga to invest in either through R&D or through M&A to really kind of capitalized on the way in which the global mobile players may change the next.
Few years and the second one just to go back to your comment on the advertising strength talk us through again, why you typically see the seasonal and drop off from for Q1, Q and so have you already seen that in the current quarter and is that why you're taking a more pragmatic approach with the guide. Thanks.
Yes, Brian I'll start.
In terms of the total addressable market our company is a little different than a lot of the gaming companies out there where the majority of our players are women, they're busy adults who want to have fun session lengths that aren't 45 minutes on the couch, we want to be as accessible to people as possibly want to be as global as possible. So when it comes to.
Our intellectual property when it comes to our designs when it comes to our platform mix on Android iOS. We still think we have a tremendous amount of opportunity to grow grow the business and when we look at areas inside of our portfolio, where our brands.
In our style of development can work, we do see opportunities in Asia, we do see opportunities in mass casual, albeit the evolution of hyper casuals going on those short session length games that appeal to everyone and can be played in anything any place that feels really good does for us in terms of an investment opportunity we've seen it.
Early positive turns on Asia, So we feel like Theres brands and IP that we can invest in more there in the pipeline in the current live services portfolio.
And then addition to that we do see more PDP experiences being.
Well received on mobile and our Zynga poker game or words with friends product, our heavy PDP, so as empires and puzzles and.
And so we have some expertise about how PDP works and elder game designs and look at the core market and we look at where PDP designs can appeal. Most we are looking at IP with regards to whether it's a star wars title CSR or new game, we are investing more in elder game PDP systems to start to lever that more.
Or as we get into.
And even bigger market as the years progress globally, so from our perspective its.
The company is well positioned for multiple takes.
Yes on the advertising front, yes basically.
We've seen historically coming from Q3 into Q4, a pickup in demand what our network partners, you've got traditional advertising in our space, which is in the gaming category, but you also see verticals.
Index, a little bit more into Q4.
We saw that start earlier.
It's a function of whether its traditional retail traditional demand for games.
It definitely inflected.
Quicker into the quarter than we anticipated.
We generally see as and this is what's implied in the guide and based on our our understanding of our own network deals and yield profile for Q fund that we're going to see some drop off purely based on demand and then also when you look at year on year. The overall profile of our network optimizations. If you look at our perfect.
Once in advertising over the last two years.
We have significantly growth growing the business, we've had very strong double digit growth in both years and so we're playing off a very strong base when we compare the yields year on year just in terms of the deals.
There is there is some weakness during Q1 versus Q1 of last year, So you've got to.
Double that I'm I'm dealing with one is a traditional what I would say seasonality.
Drop off that we've seen every quarter since since I've been here and as the data science teams have looked at it and then secondly, we're looking at a little bit more weakness as it relates to the just the yield profile in Q1, which we expect to pick up during the year as as we negotiated some of these deals.
On the new firms.
Great that's super helpful. Thanks, guys.
Our next question comes from Doug Creutz with Cowen. Your line is now open.
Hey, Thank you.
In the letter you mentioned your decision to self publish pairs and public holidays on how about it benefited I'm wondering if you just go into more detail on that what was the thought process. There how does that help you.
And how to what did you learn from that.
Yes, Doug we looked at Korea initially with.
Empires and puzzles and we felt that we could put the game into the market get the player feedback directly without having to go through a partner and what we found is as we looked at Japan, and Korea, and even China to degree there are becoming increasingly performance based marketing there they're used to be a lot more power in the distribution channel and what sites you were on.
I was promoted that is that has lowered and its impact over time, what we've seen is they're starting to operate much like you see western markets were paid acquisition tied to some organic programs really moves the needle in terms of audience generation and we felt that we wanted to have a direct line from the player to our data science seems really understand the player behavior without.
Without limiting between trying to interpret it for us.
And so it was a bit of a risk, but the small giant team is.
I think he is really sharpen understanding their games and looking at these things and so thats, what we proceeded with.
And we like we like the results and so we've been slowly rolling out we went Korea than we would Japan, we've looked at Hong Kong, Taiwan, Macau, and then we're going to continue to roll it out a country by country.
And use performance marketing as well as direct feeds preliminary back from the market to make the right adjustments and changes to the game for for look conditions, we definitely altered some things in the game.
And we will continue to do so Dickey chart position the performance there.
Great. Thank you.
Our next question comes from David Karnovsky with Jpmorgan. Your line is now open.
Hi, Thanks for taking my question.
The track and it looks the decelerated slightly in the quarter just wondering how much you attribute this to merge magic ramping up and then just clarify would you say when you live which magic now so forever franchise business being the game is currently at run rate for 109 to bookings annually or is it that we now feel certain the game will fail to that point sometime in the future.
Thanks.
Yes, the merge magics on a run rate to reach forever franchise status. So it's got to its doing really well.
In the quarter Q4 merged Dragons had a little bit of softness.
It was largely related to their holiday soft launch their holiday bold launches.
Some of them didnt perform as well as we'd hoped.
In addition to that we did see a little bit of cannibalization from from merge magic, but it was certainly manageable when you look at the combination of the two franchises.
It's certainly a positive and when we look at the pleasure dynamics the crop the crossover cannibalization rate was actually inline with expectation so a little bit it was that but I think as you see Q1 Q2, the those games will start to diverged even more in terms of their feature sets and their player bases. So we're very encouraged.
Emerged dragons is going in the coming quarters as a very strong bull beat plan in front of it.
Okay. Thank you.
Our next question comes from Matthew Thornton of Suntrust. Your line is open.
Hey, good afternoon. Thanks for taking the question guys to two if I could I guess first on the user acquisition. Just wondering if you could maybe give us an update on just the kind of trends you're seeing here as we exit for Q1 into into 2020 here.
And just remind us how you think about maybe user acquisition costs as a percentage of revenue and maybe the launch quarter versus a non launch quarter.
Then just secondly, you talked a little bit about the pipeline obviously for 2020 I think in the past you've talked a little bit about some of the other titles further out. So a couple of Star Wars titles Cityville game of Thrones anything there that maybe as.
Maybe joined that the pipeline or exit the pipeline has any color you'd be willing to provide there would be would be helpful. Thanks guys.
In terms of few way. It's we're constantly evolving are you a strategy and execution, we learned a lot from small giant and Graham in terms of how they developed games and have rolled games out and what we see that.
Important part of the soft launch processes to gain deep insight into the CPI.
The cost to install versus the overall LTV of the games, we spend a lot of time, making sure that we can actually scale through multiple bands of CPI increases and so thats, an interesting thing that might be a little bit new for folks to think about in terms of how much of that time in soft launch is going against that particular item.
We did in the quarter in Q4, you saw our EBITDA margin jump up it was because we got the marketing into a place where we felt like we had emerged magic and game of Thrones slots were moving out of launch mode and into sustain and growth mode. So we see the efficiency start to gain there I like where we're going with you weigh in in 2020, we still.
I'll have to invest in some of the new launches, but as we as we get the overall lie services business, we're starting to see scale emerge in our performance as a result, as it relates to audience acquisition organically as well as paid theres always new techniques and tools coming along but at the end of the day.
We're looking at this daily and if we're not seeing positive ROI on a spend we don't spend.
We do have a global perspective, and so if one market like iOS us gets a little expensive, but we see really positive returns on Android and eastern Europe or Android in Asia and freight someplace in South America will move the money. We have we have a very flexible in a very global point of view in terms of how we deploy our marketing capital.
In terms of the the title plan beyond 2020, there's not a lot of new updates I'd give you. There. We are an active development on a number of titles, including the Star Wars products still.
Yes, I think the new news is really the faster cycle time development that you are starting to see us experiment with much to the the games from Graham some of the mass casual games like puzzle escapes where to start to look at those opportunities as increasing those opportunities for the company to grow beyond just the set piece kind of 10.
Titles that we've delivered over these last couple of years, we think that that is something that as we developed our studios and we've learned from small giant Graham we think thats an area for us to leaning more.
As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question at this time.
Our next question comes from the line of regime with Bank of America. Your line is now open.
Yes, hi, good afternoon. Thanks for taking the question. So just real quickly on Asia and that opportunity. So our our data kind of shows that when you think about China Korea, Japan, that's probably 60% to 70% of the mobile market out there RPG titles. When you think about that genre, it's probably 50% of revenue.
In those countries, whereas.
Casual and casino genre command much less probably single digits.
Not sure if you agree with that but how do you guys go out and really tackled the opportunity in Asia I know you've mentioned acquisitions in the past and a pension for that.
I think it acquisitions are your way in do you have other games in the pipeline that we should look forward to or do you really feel that maybe your existing markets. There is just still so much room left it's not really a focus for you now anything on Asia would be great.
You look at Asia is a massive market for mobile it's and it's an important market for Zynga long term and I think as we look at how to enter that market.
So rushing in with a bunch of to do a big deal or Overinvesting too quickly.
Is is a strategy that weve personally in our career seen fail and so when we said it from a standpoint of Zynga.
We do think that there is theres opportunity for our existing intellectual properties to perform in Asia.
Both the ones that you guys know about and ones that we have in the pipeline I don't disagree with you that that Rpgs and core experiences are very valuable in Asia. I think if you look at Empire isn't puzzles. It has RPG elements inside the design and also merged Dragon's Inn merge magics to a degree. So one could argue CSR is a car RPG. So I think.
Within our portfolio some of those systems and mechanics will translate to Asia with the proper testing and with the proper go to market plans.
So what we're trying to do is take a very careful and methodical approach to growing our business in Asia.
Totally agree with you see no doesn't work in Asia, you're not going to see any of our slots games or poker products going east, but we do think that when you look at Graham small giant natural motion I.
I think with the right incorporation of learning from those markets they can FERC.
Farm Ville is a brand that historically has done well in Asia.
Star Wars does well in some markets in Asia.
And I think if you look at Harry Potter, that's that's a brand that unwell. So.
We're going to we're going to continue to chip away at it.
We can't forecast overnight success, but know that we're committed to it to the long term and that.
If there is opportunities to acquire assets that perform an Asia that certainly is part of the things that we look at.
But we're not really forecasting any of those right now.
Okay, and then just a follow up fine I could I think we've seen some of your console competitors partner with some big part bigger publishers over in China, specifically in its its deliver them early successes. That's something that you guys have looked into maybe partnering with one of the big publishers in any one market.
Leveraging some of their knowhow in their local knowledge to to.
Convert your IP into a great game.
Yes, I think that's an option for us and we certainly.
Don't rule that out the challenge for US, though is as we look at the flow from from revenue down to what you actually takeaway in profit. After you have a large partner in the mix because remember we don't have the same scale as some of those console guys.
It's not as attractive.
So the risk reward is such that you you might you don't have much to lose by going self publishing route and in fact, you might actually learn more faster to get you better prepared for the second generation. The games that you put out there, but we wouldn't rule out that type of arrangement.
Right now we feel good about what we're doing with our current strategy.
Great. Thank you guys.
Our next question comes from the line Affray, social with consumer Edge Research. Your line is now open.
Great. Thanks for taking my question, so the new focus or at least efforts around mass casual or things like puzzle Scapes, how do you think about.
Hello thing and building out those titles and launching those titles relative to introducing them as new modes within your existing titles. So puzzles Cape as an example, we could see as a mode in theory within the words with friends.
Product and then second to that as far as the scale of some of these titles is there any sense that you can give theres theres not as good data on advertising relative to some and purchased data. So can you give us a sense of the scale that some of these titles could achieve from an AD dollar perspective. Thanks.
Yes the.
We do innovate inside of games for example, recently on words with friends, we introduced the word wheel as kind of a light mechanic that engages people in between product in between games. So we constantly look at is this a feature or is this a full game.
And what we find in the hyper amass casual is that they're short session length or shorter life spans in terms of engagement, but they're very inexpensive they're very fast to market and they can generate massive audience is if you hit the right. The right cord. There is a paid element, but there's also inorganic element and they would also give a benefit to the overall network of zinc.
Games, because we could bring those users into other products. So we see a lot of interesting benefits for being able to build out these.
So short session.
Mass casual mass appeal games and when we looked at we when we looked at the puzzle game, we decided that that had enough to be a full product.
And when we looked at the case word will we felt that that was a good feature for words with friends and still make creative decisions along the way on that if you look at the overall ecosystem in mobile right now there's a tremendous volume of engagement user dynamics installs coming from this this category and we feel like it's a place that we can that we can compete be successful.
And so thats what were embarking on.
Terms it the model that will look at it will definitely be weighted towards an AD model, but it will also have elements of IP in it but I think the majority of the revenue as you currently seeing these games is advertising driven but I think over time, you'll start to see the engagement curves elongate a bit I think you'll start to see IP emerge in some of these game so.
We think that if you look at chart position resit relates to advertising. It's one of the challenges we have with words with friends, which is if you included the advertising revenue it generates including Andy IP at the top of the charts kind of game, but it doesn't show up there because the charged on track AD.
I don't know how to help you under give you a good sense. The rules some of what these are doing but they can be very sizable contributors.
Great. Thanks, so much for that and as far as stepping back at the bigger picture for hyper casual.
Do you view that is different than what you're talking about with math casual and there's always sort of a conversation about the sustainability of hyper casual you guys now of the opinion that the model there is sustainable or you applying tweaks that make it different from maybe the last year of hyper casual within the market.
Hyper casuals constantly evolving and I think it's like what we coined the term mass casual internally, we're looking at the space between hyper casual in between again like words with friends.
And there's a number of examples a very successful titles in that space, but I think what you'll see an hyper casual it'll continue to evolve I think it'll sustained because if the volume and the percentages of audience generation are just so large it's it's it's hard to imagine that disappears overnight and it sustained for many years.
It's not like you just showed up last year. So I think what hyper casual is teaching the market is that there's a eight space and people's lives for short.
One two minute experiences they can get in.
Screw around have good time, and then pop out and jump to the next game a few weeks later, so I think from our perspective, we see player behavior. That's rewarding these types of products.
And if they do shifting change, but in general there's a lot of people playing these games globally and they've been playing them for many years now and I think we're taking note of potential design changes in product new product introductions that might.
Tap into that.
Great. Thanks again.
I'm showing no further questions in queue at this time I'd like to turn the call back to Rebecca Lau for closing remarks.
Thank you Liz we want to thank everyone for joining our earnings call. Today, we look forward to connect you with you more over the coming weeks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.