Q2 2020 Zynga Inc Earnings Call

[music].

Well one on your telephone please be advised that todays conference is being recorded.

If you require any for assistance Please press star zero.

I would now like the hand, the conference over to your speaker today, So Rebecca Lau, Vice President Investor Relations and corporate finance. Thank you. Please go ahead.

Thanks, and welcome everyone to think of second quarter 2020 earnings call.

On the call me today, our friendship all our Chief Executive Officer, and geographic our Chief Financial Officer.

Shortly we will open up the call for life question.

Before we cover the Safe Harbor. Please note that in an effort to keep our team members healthy each member on today's call is dialed in remotely. We appreciate your understanding during the call I Hope everyone has also safe and well during this time.

During the course of today's call will make forward looking statements related to our business planning strategy as well as expectation for a 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 Sep filings for further clarification.

In addition, we will also discuss non-GAAP financial measures our earnings water earnings slides and when filed or 10-Q will include reconciliations of our GAAP and non-GAAP financial measures.

Please be sure to look at these reconciliations 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 in will be available 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 call.

We are living an unprecedented times and more people than ever before turning to games for entertainment in a sense of community.

With more people staying at home, we saw heightened levels of player engagement, social connection and monetization in our portfolio.

Increased player engagement in our lives services drove our exceptional Q2 results, including record revenue and bookings performances and our best operating cash flow in more than eight years.

We also executed our transformational acquisition of peak and are entering Q3 with eight forever franchises, adding significant scale to our lives services Foundation.

Our new game pipeline is also progressing well and we expect to begin releasing new titles later this year.

Today, we're raising our full year 2020 revenue and bookings guidance, which Jeff will provide more details on later in the call.

In addition, I am pleased to announce that we had entered into an agreement to acquire wallet.

One of the fastest growing hyper casual game companies in 2020.

With wallet, we are meaningfully expanding our entry into hyper casual one of the largest and fastest growing game categories on mobile, while adding a highly talented team and an extensive network of external developers zynga.

Our performance to date demonstrate strong execution of our multiyear growth strategy of a growing our lives services be adding new forever franchise into our portfolio.

And see adding new platforms in markets and technology.

Additionally, we continue to see opportunities to enhance each of these growth pillars through acquisitions.

First our strengthen wide services is the foundation of our multiyear growth strategy.

In Q2, our life services anchored by our forever franchises and social slots in casual cards portfolios drove our best revenue and bookings quarter in Zynga history with revenue up 47% year over year and bookings up 38% year over year.

During the quarter, we achieved many do records as more people turn to our deeply social game experiences while sheltering in place and as players enjoyed our robust lineup of bold beats.

For example, within Empires me puzzles merge magic and hit it rich slots. We recently introduced battle past features which had been well received by players and are proving to be positive drivers of engagement and monetization.

We're also continuing to integrate and expand popular brands within or live services, including fast and furious and Csrtwo Rycan Morty in merged Dragons and a new Dragons of West Rose feature in game of Thrones slots casino.

All of this is fueled by our proven and scalable live services capability comprise a best in class product management data science user acquisition advertising and platform relationships.

Second our goal is to add new forever franchise into our lives services portfolio.

Our recent acquisition of peak brings one of the world's best public game makers to Zynga and there to talk charting games tune glass and toy glass.

These two titles have captured a highly engaged global audience base with some of the industry best player retention and currently have more than 12 million mobile Dia use and 26 million mobile any use.

These titles expand our life services to eight forever franchises, increasing the scale and resiliency of our portfolio.

We're also making good progress on our three new games and soft launch Farmville, three Harry Potter puzzle themselves and public combat.

We have introduced new features to provide players with more content quests and ways to customize their gaming experiences and then expanded into additional software inch territories to continue gathering player feedback.

Our soft launch process includes careful testing and iteration of game features with the goal of delivering long term retention.

We expect to begin releasing new games later, this year and anticipate new titles will steadily scale overtime.

Third mobile is continuously evolving and we are investing in new platforms markets and technology to increase our total addressable market and drive further growth.

Today, we announced our agreement to acquire Raleigh, a developer publisher with a portfolio of popular hyper casual games that have collectively been downloaded more than 250 million times.

Eight abroad gains have reached number one or number two top three downloaded game in the U.S. App store and their latest releases go not three D. Entangled master three D, where the talk to most downloaded game in the U.S. App store in Q2 Twentytwenty.

With this acquisition we are excited to enter the hyper casual market one of the largest and fastest growing mobile gaming categories.

The growth of this category is fueled by advertising driven games that are highly accessible and appeal to a broad audience globally.

With more than 5 million mobile da use and 65 million mobile Emmy use we expect Raleigh to meaningfully increase our audience and expand and diversify our advertising business.

In addition, we are driving strong growth in international markets, with Q2 revenue and bookings up 56% and 34% year over year, respectively.

An android revenue and bookings up 61% and 43% year over year.

With tune glass and toy glass, we will further increase our international business, especially in Japan.

In terms of new platform investments, we released bumped out our second title on the snap games platform as a part of a new multi game partnership with snap.

As well as our first voice based game word pop exclusively for Amazon Alexa.

We also produced a two hour live streaming event with Amazon Twitch crime for words with friends in collaboration with Garth Brooks and Tricia Yearwood that entertains more than 3 million total viewers.

While our investment in these and other initiatives are in the early stages. We believe we they have the potential to increase our growth over the long term.

Last we continue to see opportunities to acquire talented teams and franchisee to further accelerate our growth.

The talent base for mobile gaming is global and the mobile platform is vast and constantly evolving with new innovations emerging every year.

Today, our acquisitions have delivered strong contributions to our life services.

Added multiple new forever franchise into our portfolio.

Expanded our new game pipeline and opens up new categories for us on mobile.

Our proven integration model enables team to maintain their unique development cultures, while leveraging thing is highly scalable studio operations and publishing platform. So we can collectively grow faster together.

Now I would like to turn the call over to Jerre to discuss our Q2 results in further detail as well as our outlook for Twentytwenty and beyond.

Thank you Frank.

We comped capped off a great first half performance with tremendous Q2 results delivering our best quarterly revenue bookings and Sangha history.

Strength across our like services delivered better than expected topline operating leverage.

We're also happy to have now have peak and the thing a family having closed this transformational acquisition on July onest, bringing into second amazingly talented studio with two top charting franchise in two left and type last.

It's going to strengthen our life services, including a full second half of the year contribution from peak, we're raising our full year outlook for revenue and bookings.

But first let's discuss our Q2 results.

Revenue was 452 million comprised of bookings of 518 million offset by the increase in deferred revenue of 66 million.

Revenue was 22 million ahead of our raised guidance driven by an 18 million bookings fee and a 4 million lower than expected net increases for revenue.

Broad based strength across our lives services drove our topline Pete and particular stronger than expected performances from our social slots portfolio, what's your friends Csrtwo and person puzzles versus our risk guidance.

Revenue was 145 million or 47% up your year over year, driven by bookings growth of 142 million or 38% year over year, and a 3 million lower increasing deferred revenue.

Our year over year revenue bookings growth was driven by broad based strength across our mobile life surfaces in particular from a person puzzles merge dragons merge magic Gamma trunk club's casino.

You should pay was the driver for our topline growth with advertising as expected moderately down year over year.

The net increase deferred revenue was 66 million and was driven primarily by bookings from Efferson puzzles Emirates Dragons.

We ended Q2 would have deferred revenue balance of 523 million versus 350, if money in a year ago.

Turning to our Q2 operating expenses.

GAAP operating expenses were 402 million up 161 million, our 67% year over year.

Partly driven by higher contingent consideration expense marketing investments and acquisition related expenses versus our prior year.

Our small giant games and grandkids acquisitions continued to perform ahead of our expectations, resulting in a 149 million contingent consideration expense up 125 million year over year at 24 million ahead of our guidance.

The increase in marketing was primarily due to the year over year additional March magic and the overall investments across our life service portfolio as well as James test markets.

Year over year, GAAP operating expenses increased to 89% versus 79% of revenue.

Marty due to the materially increasing contingent consideration expense.

Non-GAAP operating expenses were 222 million up 25 million or 13% year over year, primarily due to the increase in marketing investments.

Non-GAAP operating expenses represented 43% of bookings down from 52% of bookings in the prior year, primarily driven by or improved operating leverage and all expense lines.

We reported a net loss of 150 million 10 million better than our guidance 94 million higher than our net loss of 56 million a year ago.

The variance the guidance was driven primarily by the Burton expected operating performance, partially offset by the higher contingent consideration expense.

The variance to prior year was driven primarily by the higher contingent consideration and income tax expense, partially offset by our approved improved operating performance.

Our adjusted EBITDA was 17 million 35 million Farrell, our guidance, primarily due to our heart and expect to topline performance and lower than anticipated marketing expenses.

On a year over year basis, adjusted EBITDA increased 67 million on strong operating performance.

We generated operating cash flow of 145 million, our best performance since 2011 and up 47% year over year.

As of June Thirtyth, we had 1.6 billion of cash and investments.

As of today, we have approximately 620 million in cash and investments with demand material payments in July being the 923 million related to the acquisition of peak.

68 million for our latest earn out payment to grab games.

We also have a 150 million available under our existing credit facility with no amounts outstanding.

Looking forward.

We expect positive operating cash flow through the balance of 2020 and are assessing debt financing alternatives to further expand our cash reserves, which we expect will be primarily used to fund future acquisitions to further accelerate our growth.

Now I would like to take a few moments to comment on our proposed acquisition of ROIC.

Today, we announced an agreement to acquire is some bad Istanbul based trial like mobile games development publisher, what an exciting portfolio of popular hyper casual games.

This acquisition gives sangha, a more meaningful presence on one of the largest and fastest growing gaming categories on mobile.

And also adds a highly talented team and an extensive network of external developers.

Relics titles currently have more than 5 million mobile to use and 65 million mobile M&A use which will meaningfully increase our audience and grow our advertising business.

We are initially acquired 80% of product for 168 million in cash at an implied valuation of 210 million for the total company.

Well, we're not disclosing specific valuation multiples for this transaction for full year Twentytwenty on a standalone basis, rather is on track to deliver just north of 100 million of revenue and bookings and margins broadly in line with dosing got per Twentytwenty.

Over the next three years second we'll acquire the remaining 20% and equal installments at valuations based on specific bookings and profitability goals.

The transaction is subject to customary closing adjustments and we expected to close on October Onest Tony 20.

Clarity.

Well, we expect the acquisition of product to close on October Onest.

Our current guidance does not include any contribution from Robert.

Now turning to guidance.

We have developed our Q3 on full year 2020 guidance based on information available because today August fit 2020.

And using similar methodology to prior quarters.

Given the higher level of uncertainty in the industry in particular around the comment 90 crisis.

For a wider range of outcomes, both positive and negative as it relates to our ultimate business results.

I said, let's discuss our Q3.

20 guidance.

Guidance for Q3 was as follows.

Revenue was 445 million up 100 million or 29% year over year.

An increase from revenue of 175 million.

50 million in the prior year.

Bookings of 620 million up 225 million, our 57% year over year.

And so the 160 million versus net income of 230 million in the prior year.

Adjusted EBITDA loss of 45 million versus adjusted EBITDA of 28 million in the prior year.

Factors to consider in assessing our Q3 guidance include.

Like services will drive the vast majority of or top line performance led by our forever franchises, including full quarter contributions from two last quite blast and merged magic.

So overall I meant to move partially offset by year over year declines in over mobile and web titles.

We also expect the year over year use.

Let me, we also expect that Europe per user per to growth will more than offset declines in advertising yields.

What our acquisition of peak when we've had a two forever franchises to glass and toy glass to our portfolio.

As these are new to think a consistent when it caught with standard accounting practices, we expect a material net increase in deferred revenue at the majority of these additional book associated with these titles will be from upfront recognition as revenue in future quarters.

Certainly thank you Tracy we expect a net increase in deferred revenue of 175 million.

This represents the largest quarterly increase in deferred revenue and take a history that compares to an increase of 50 million in Q3 2019.

The year over year changing SCAP referenced for is it meaning factor in Europe you for comparability.

At a represents a 125 million year over year decrease in revenue gross profit net income and adjusted EBITDA.

We expect gross margins to be significantly down year over year due to the higher net increase in deferred revenue amortization of acquired acquired intangibles and usurping Q3 2020.

Q3 2019.

We also anticipate our GAAP operating expenses as a percentage of revenue to increase year over year, primarily due to the impact of the or net increase in deferred revenue, partially offset by lower contingent consideration expense year over year.

Outside of these factors, we anticipate year over year improvements in operating leverage in R&D and Gionee, partially offset by higher marketing investments across our life service portfolio and you can't pipeline.

We expect a net loss of 160 million in Q3 2020.

This compares to net income of 230 minutes in Q3, 2019, which included a one time gain of 340 million related to the sale of our San Francisco building.

Other drivers of the year over year expansion that loss or the higher net increase in deferred revenue our position of acquired intangibles and stock based compensation.

Partially offset by our improved operating performance at lower contingent consideration expense.

We expect an adjusted EBITDA loss of 45 million in Q3, 2021st as adjusted EBITDA of 28 million in Q3 2019.

This year over year change is primarily driven by the 225 million Trophy growth and then that increases for revenue.

Offset by our improved operating performance.

Now turning to 2020, our revised guidance is as follows.

Revenue of 1.8 billion up 478 million are 36% year over year, and up 110 million versus our prior guidance.

And then increase in deferred revenue of 400 million.

<unk> hundred $50 million, 65% year over year, and up 250 million versus our prior guidance.

As of 2.2 billion.

Up 636 million or 41% year over year, and up 360 million for surpassing our guidance.

And that loss of 550 million.

Net income of 42 million in 2019, and 200 million higher than our prior guidance net loss of 350 million.

Adjusted EBITDA of 85 million down 2 million or 3% year over year Dot 138 million versus our prior guidance.

For the students at live services will deliver the vast majority of our topline performance driven by our forever franchises and could full year contribution from the recently acquired two class didn't talk last front, Texas as well as initial contributions from new games that we expect to launch later this year.

We also expect European or use or pay growth offset declines in protecting yields.

We expect a net increase in deferred revenue of 400 million, an increase of 250 minutes versus our prior guidance.

For the first with the majority of initial bookings from our recently acquired franchises to less than twice last.

The year over year change. This gap deferral is it made for factory in year over year, our ability as it represents 858 million year over year decrease and have you gross profit net income and adjusted EBITDA.

We expect gross margins to be significantly down year over year, primarily due to the higher net and Chris deferred revenue.

Additional amortization of acquired intangibles.

<unk> mix in 2020 versus 2019.

Given the higher data crescent for revenue and contingent consideration expense in 2020 versus 2019.

Spec GAAP operating expenses as a percentage of revenue decrease year over year.

Outside of these factors, we anticipate improvement in operating leverage from R&D, and she nay, which should be partially offset by increased marketing investments our life services and you can't launches.

Operating leverage will ultimately be function of our life service performance.

They are paid advertising mix timing of our new game launches and the level of marketing as students getting our life surfaces and you titles.

2020.

And also I've hundred 50 million.

200 million higher than our prior guidance of 350 million, primarily due to the acquisition of peak and its resulting impact on the net increase in deferred revenue amortization of acquired acquired intangibles stock based compensation.

The offset by income tax benefits operating contribution from the acquired cycles.

This compares to a net income of 42 million in 2019, which created a onetime gain of 314 million related sailor for San Francisco building.

The other primary drivers of the year over year expansion that Bose heart net increase deferred revenue and contingent consideration expense.

But our improved operating performance offsetting.

Year over year due to changes in other GAAP to non-GAAP reconciling items.

We expect adjusted EBITDA 85 million down 138 versus our prior guidance.

Stronger operating performance will be more than offset by the additional 250 billion of net increase in deferred revenue.

Some of your basis, we anticipate adjusted EBITDA will be down 2 billion.

Primarily by the 158 million year over year growth in our net increase in deferred revenue largely offset by or improved operating performance.

Our strong execution that 2020 should position. Thank God for continued growth in 2021, where we expect double digit top line growth potential further margin expansion and positive operating cash flow.

In summary, while we are operating an unprecedented times, we remain focused on entertaining and connecting our players to our games.

Our business fundamentals are strong and we're continuing to execute our multiyear strategy.

With that I will turn the call back to Frank.

Thanks, Jerre before we open the call to lie to you in a I want to take a moment to touch on our current operating environment.

First we hope that all of you are safe and well along with your family friends and colleagues.

In these challenging times, the health and safety of our teams have been a top priority.

We're extremely proud of how Zynga has seamlessly transitioned to a work from home configuration without any material disruption to our operations and while delivering new features content and product score players.

We anticipate that our north American offices will work from home through early 2021, while our international base offices will begin to reopen based on guidance from local authorities.

To support our teams over the past several months, we have updated and introduced many new health and wellness benefit programs and services to assist with work from home needs.

We also continued to support our communities in in Q2, we donated over $2 million to a variety of causes.

In addition, we're committing 25 million over the next five years towards diversity and inclusion initiatives at Zynga and in the overall gaming industry.

In summary, supporting our teams communities and Zyngas founding mission to connect the world through games has never been more important.

Our business fundamentals are strong and we are incredibly excited by the growth and innovation ahead for interactive entertainment.

Is increasingly clear that games are emerging as powerful new social networks, where people around the world come together to connect play and socialize.

Zynga is uniquely well positioned within that landscape as a leading mobile first free to play live services social game company with a portfolio a proven franchises.

We're on track to deliver a record year for Zynga in 2020, and our position for further growth in 2021, where we expect double digit growth topline growth potential for further margin expansion and positive operating cash flow.

With that I would now like to open up the call to your questions.

Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key please standby, while we've compiled accumulate roster.

I sure first question comes from the line of Eric Sheridan from UBI. Please go ahead.

Thanks, so much for taking the question hotels role as safe as long as a team there as well first maybe big picture question for you. Frank I think is doing all the acquisitions I think generally investors are pretty good sense of the known titles that you've acquired what sort of visibility do have now out.

Over multiple years sort of a big picture question in terms of thinking about what these teams might be able to develop what a pipeline might look like just so investors can generally get a sense of what sort of inorganic growth.

The layering in the on top of some of the organic growth from the titles that they already know about just curious just conceptually how that might play out and then maybe for the back over the year continued the a lot of changes in the broad advertising environment investors are asking a lot of questions, but I was 14, IB if say Oh yeah.

Guys thinking both potentially for headwinds for your advertising revenue as well as your marketing all along in the back towards the year given some of the changes that might be playing out the advertising that's great. Thanks, so much.

Thanks for the question art.

I'll take the first one with regard to the new product pipeline when we look across all the zynga, including a studio such as Naturalmotion teams in the North American studios as well as Graham small giant and now talking about peak, we have active products in development.

That are planned for 2020, 2021 and beyond I'm really looking at the expertise that each of those studios brings and looking at our overall portfolio in terms of where we have the best opportunities to grow. The company. We also have projects planned that are smaller in scale for chat platforms.

For the more mass casual platforms that are an active development in test.

And we're looking for ways of or in the future to learn from Wallich's prototype in process. They have an amazing approach to how they prototype games work, but outside developers and bring them to market. So we think that theres an opportunity there as well to further <unk> enhance and expand our product pipeline, which now encompasses chip.

Matt hyper casual as well as more traditional main mainline mobile game, so very exciting opportunities for us in the future to continue to grow the company organically. In addition to what we've done in life services, and then potentially the future inorganic opportunities in terms of the second question. If you look at the second half of the year as it relate to.

To acquiring players and also a running the advertising network.

You know obviously, there's a lot to talk about a idea bay and the impact the overall business and also just overall trends inside the economy and what's going to happen, obviously, a lot of unknown there and from our perspective, when we look at you know our business our trends in our in how things are tracking well, we look into the second half obvious.

Our advertising businesses is hitting our expectations, we communicated that we felt that would be flat to slightly down it it seemed a little bit of a recovery here in the second half of Q2, but in terms of overall growth I think it's really going to start to accelerate when rawlings becomes part of the advertising network in Q4, when we see a sizable increase.

And they use in addition to a diversification of the demos and also regions that we can advertise into.

In terms of the actual specific impacts that idea they will have on acquisition or or advertising Cpms. Neil I think it's a little too early to tell a what'll happen. There I think there's going to be puts and takes and I think long term things will settle out all the new opportunities New places to innovate a at the same time that you know some traditional.

Tools and tactics might start to lose their effectiveness, so it'll be a little bit choppy here in the early stages.

And is Apple rolled out some of its a platform shifts. We also still have 'em Android and other platforms that are continuing to operate in the context that we're currently comfortable with.

I would point out that indicates of wallet for example, the way that they acquired players does not rely on idea Fay.

So we do have sectors of our business in terms of how we go out inorganically acquire and also from a paid standpoint acquire players that probably won't be that impacted but there will be other parts that will be we're just not sure by how much and what the mitigating a counter measures will take in terms of how we've all the business from here.

Thanks, so much.

Thank you.

I show next question comes from the line of Alex Jamel from Jefferies. Please go ahead.

Okay. Thanks, guys two questions, maybe one for Frank and then and then one for Jerre, Frank going back to Toronto. It can you maybe just provide some background on the company you know maybe how long you've been in discussions and what attracted you to to that asset specifically and then for Jerre just regarding the guidance for both the third quarter and the fully.

Here can you provide a bit of color on whats assumed from a peak contribution should we still just be run rating that 600 million number you provided at announcement thanks guys.

Thanks, Alex the the opportunity to come together with Raleigh really presented itself in the in the first half of this year, we had been studying hyper casual now for several years a in monitoring the progress and been very impressed with the growth rate of category the share of voice that it now you know.

Occupies on the App stores, a you know the number of a chart positions in the top top 10 in top 20 for installs that are that are maintained by hyper casual game. So we like the category as we've watched it evolved it has changed over the last several years, but it continues to show resiliency and strength and continued growth.

As a result, we started to look at ways to build versus buy odd to go after this opportunity and a you know the that journey brought it to Raul like in the in the first part of this year, we were able to meet and talk to them via you know the means that you usually a pandemic which bill.

But we also were able to leverage the great strength that we have in Turkey.

Our Graham team our peak team the casual cards group.

<unk> those management teams were able to meet directly with Raul. It really gets know each other a in addition to us getting to meet them virtually all resume and diligence was with a very straightforward exercise we found a team.

That is very aggressive very new in terms of being founded in December 2018, but if you look at their track record in terms of bringing in outside developers as well as standing up their internal studios.

Their results in this first part of 2020, it's really been remarkable you know Ada Bralettes gains have reached a you know one or two in terms of most downloaded they've had 250 million club downloads and the growth rate just looks a surprisingly strong even through some of these challenges that we see was with the pandemic and economic distress the category.

He is great because it's it's you know there lightweight gains are instantly play a boulder broadly appealing to globally appealing it feels like that that as an opportunity for us to grow our business and with the AD model being so strong there they have a very deep bench of advertising executives and folks that know a lot about how to monetize and.

Side of AD driven gain that we think will help the overall portfolio thing as well so very excited to add to our footprint in in Turkey, Raleigh will maintain or you know what we usually do with acquisitions and they've got their culture they've got their approach.

Have aligned goals and you know over the next several years, we expect that we're going to be able to grow faster together.

Hi, Alex in terms of.

Assumptions for the second half the year, Yes, I I would just continue or what we said when we announced the peak to peak acquisition. That's the base assumption, we're using for guidance.

Great. Thank you both.

Thank you.

I saw next question comes from the line of Mario Lu from Barclays. Please go ahead.

Thanks for taking the questions and congrats on a great quarter. So I have one on peak and one on Battle pass. So we talked a lot of opportunities and which thing I can help monetize peaks titles, but the question is on the flip side. So how much knowledge can you leverage competes expertise and the puzzle John on to your own titles.

Such as the upcoming Harry Potter title as well as piece ability to grow its sister title to tune glass, which mirrors. The goal of Zynga sets are titles, such as public on that and merge magic.

Secondly on Battle pass on I find a very interesting that the mechanics currently stands do different genres within your portfolio.

Is there any reason why it cannot be applied to all as they get titles over time and any color you can provide how additive that is to bookings reached idle. Thanks.

Thanks, Mario in terms of the impact that peak is having on our creative organization. You know, it's only been a very short period of time, they've been part of our studios, but I've been really blown away by the amount of collaboration and teamwork that they've already embarked upon with our games or the Harry Potter team and.

The the P. team have already met multiple times they have been trading build the notes and that that the insights that peak of developed over the years a building highly retentive games that are near the top of the charts isn't something that were propagating through Zynga arms. The Darren is his leadership team has been.

It was very generous with their time to participate in design brainstorms reviews of levels gain bouncing nodes. Its really been impressive to see how quickly the teams of Jelled and are really helping each other so it's only been just.

A matter of weeks frankly, since they've been engaged and we're already seeing impact come this way, which is really one of the strength of the model that we have bye bye keeping you know the studios decentralized with their own strong cultures antenna Street, the collaboration that we see between Graham and smell giant naturalmotion, peaking.

Our other studios like words with friends and poker its pretty awesome thinking about the potential long term and we're already seeing it in short term changes and modifications to existing games.

In terms of the second question on you know we are we started the battle pass obviously off in a small giants product. We like the result, it's still you know has potential to grow and we're still tuning it could be the best that it can be but a lot of you know as as I just mentioned didn't in the prior question we share a lot.

Collaborate a lot inside the company and so I'm all the data that the battle passes generating insight empires and puzzles was shared with all these into teams and the important part was to take the basic value proposition that a battle Pat has for players.

And express it in and that in a category or franchise appropriate way like with hit it rich or like with with the Graham title So the be crop.

Value proposition is very flexible and it has a lot of room to run on you just have to make sure that you implement it in a way that make sense inside the franchise that is going into and and the players need the value proposition of signing up.

For poor that path and they've been there really enjoy it. So we we do a lot of testing and I think that this will be something that can make its way into other parts of the portfolio over time are the important thing is to not rush, it and stifle the engagement or the retention curb by over monetizing or putting a breakage and.

The game Tomorrow, we typically take a lot of time testing and implement and before pulling them when patient goes in but we're very excited by the result.

That's very helpful. Thank you.

Thank you.

Our next question comes from the line of Brian Fitzgerald from Wells Fargo. Please go ahead.

Thanks, maybe a follow up to a big Alex's question.

Discussion, a little looks and and that's just is this going to be sand or the more classic Zynga play book in terms of integration, where you utilize the the best practices, but you don't you don't do any rationalization or ER synergy kinda leverage and then to to Alex's question on that run rate.

For peak is that weighted evenly or is it is their differences between Q threes in Q fours.

Hi, Bob and I will take us Okay got it.

The second question in terms of the integration of Wallich, it'll it'll follow our our playbook that you know they will continue to drive their business. They are extremely aggressive and focus on hyper casual doing a great job our job is to a not getting the way but be excel.

All right their progress wherever we can so if there's things that we can do and data science you a.

Our advertising network deals.

Pop publishing platform relationships with Apple and Google those all those discussions are well underway and it's very exciting to see how the two companies with them together from a synergy standpoint. This is a this is the team with less than 40 people and assemble that a lot of variable or resources in terms of the partners that they were.

With but it's a very small team. So it's very like footprint and they can then leverage the rest of the thing is organizational knowledge institutional information and capabilities and that's that's kind of the excitement and configuration for Raleigh, and then Jerre can take the a question on peak in term how splits out in Q3 in Q4.

Yeah, Brian I would just assume even.

Over the two quarters, that's that's how it's a it's flowed into the current guidance.

Got it thanks, guys appreciate it.

Thank you.

Our next question comes from Colin Sebastian from Baird. Please go ahead.

[noise] if you have your line muted please limit yourself common.

[noise]. Okay. Next question comes from the line of Doug Crudes from Cowen. Please go ahead.

Hey.

Thank you.

Can you talk a little about what you what you're seeing in terms ROI isn't the right. It seems like on your Q on call you would indicate as you were going out related to lower our allies.

It's been more in Q2 in it it looks like a good but maybe not quite as much as you thought you would.

How did that evolved during the quarter and what are you seeing now thank you.

Oh, Hey, Doug we nearly part of the corridor, knowing that that March April may timeframe or the withdrawal a lot of brand advertisers and entertainment I campaigns opened up opportunities for gaming companies to buy with very good deals very good returns so a lot of that.

Activity occupied the first half of the quarter.

Once we got to a point, where you know things started to look a little bit different towards the end, where where brand advertisers came back in some of the rates went up due to the activity. We frankly had a lot of velocity already in the business and the momentum was good and organics and engagement wrong. So.

Where we didnt see the returns that we wanted we pulled back so.

From a combination of elements, we're being very selective about where we in that but you know that kind of land rush towards a lot a really good deals ended very quickly because a lot of game company thought, but as things have gone back to elevated levels above Q1, but not at the peak of co bid in May we still feel good opportunity.

Grow our businesses and and we're going after it but we're not we're not necessarily feeling very pressured right now to have to overinvest.

Characterize the.

Okay, Yes, I'll give you any sorry. This is sorry, Doug. This is you're the only thing I I would add sort of building on what Frank just said if you look at Q2 results understanding we were dealing with a a covert quarter, if we want to call it that I.

I think what you saw in terms of the dynamics in live services is that given the performance of our bold beaten the engagement of our players.

We obviously, we're able to optimize the way spend so versus our guidance and versus the prior quarters. That's why you. Obviously when you when you see that strong bookings.

And optimization you could you can deliver north of 25% flow through.

Okay great.

Thank you.

Our next question comes from the line of Matthew Thornton from Trust secure Trust Securities. Please go ahead.

Yeah, Good afternoon, Ah Hey, Frank edge there. Thanks for taking the question maybe two if I could I guess first of all the pipeline you talk a bit about starting to bring titles that I think it was plural later on this year just wondering if you're probably it provides a more color on just how you're thinking about a impact in the second half comes from new titles in any any update you might have on some of the other.

Out your kind of projects that you guys have at least announced previously.

Then just secondly, coming back to Raleigh per second just curious if you can talk little bit about what the kind of normalized growth rates are about that business looks like thanks guys.

Oh, Hi, Matt on the the new title plan is very much when we communicated in the remarks in terms of the second half a farm Bill three puzzle combat and Harry Potter is all oral making very good progress and soft launch and we're looking at releasing in the second half when we get.

To a point, where the K P. I demonstrate to us that we have a games with great long term engagement retention and and we can really open them up for up or global market. The thing that I would point out is that we did cite that each of these games would roll out and build over time. So the actual contribution in the second half is minimal.

It's the second half is very much a lied services business combined the peak rollicking new games are well, it's not in and new games is very small in terms of what we're thinking about on the guidance level with regard to the a the growth rate on Raleigh. You know this first half is is really doing great I in terms of how there.

Growing and its little hard to tell exactly how long a in what form their growth will sustain but it feels very good to us in terms of how there how they're bringing in titles other prototype and how to bringing in the market hopefully with our help or we can we can see some optimizations and growth in the more so than we're seeing now but.

It's exciting to have a you know.

A growth that that like Raleigh come in at the second half of the year for us and really set us up for you know what in 2021 could be a great year in terms of growing wallet.

Next question operator.

Thank you I'm next question comes from the line of Matthew cost from Morgan Stanley. Please go ahead.

Hi, guys. Thanks for taking the question. So when you look at the trends that you're seeing I guess lead into Q2 and now is there were a bump into Q3, where's that tracking versus maybe what you expected at the beginning of the year pre coded and how would you think about a you know sort of where we are on the journey to getting back to a freak overdrawn.

Or put another way how how long do you expect the benefit to stick around for and then within the context.

Of the of the portfolio, you've noted that social slots in casual cards, where an area of particular strength, how sustainable do you view that the strength in that category relative to the rest of the portfolio than I have one follow up thanks.

Yeah. This is Joe I'll I'll pick the the on in terms of trends. If you look if you look acute Q1, obviously, we had a very strong quarter across the life service portfolio. So if I sort of ignore Q2 and look at Q3, we're still showing growth across the across the life services. So from the.

Well work, where we're happy with.

Whereas where the core business is and it is if we hadn't done peak.

We'd still be in a position where we'd be upgrading our guidance purely based on that aspect of our business. So from that perspective, we're happy what I will say.

It it again, there's still a lot of uncertainty around covert 19 normalization go back to back to normal, but what normal is.

So as well we have seen.

The activity in games in July compared to two June.

It is mixed across the board summer summer still growing some are showing some sort of trends towards what we call a peak over the level, but big picture overall based on our core execution on our bowl beat strategy, we're comfortable that we've got a resilient and and vibrant life service business.

And expect to continue that through the end of the year, obviously very happy to layer into that the toys less than two blast and as Frank mentioned erotic will come in if as long as the deal closes in Q4.

That some additional have to our advertising business, but big picture, we feel good about the fundamentals of the Sangha Theres a lot of uncertainty in the market in general, but you know for what we can control we feel good that we're executing.

Great. Thanks, and then just quickly on margin a you know obviously with the extraordinary situation in Q2, but now that you've put up what I think as is the highest EBITDA margin and almost a decade I think at this point, where where our where are you on the path to sort of you know your near and kind of medium term.

Margin goal.

Well the you know our full year, our full year guidance is indicating excluding the impact of deferred revenue, we're gonna be printing, 22%. So we're we're we're beyond more hope we've actually held obviously true true the year north of our immediate near term girl, which was break 20 and sustain.

And now it's the path to 25 and beyond.

As you said you know.

The Q4 of last year was 24% this this quarter.

Was 26, so you can see the dynamic where you have a stronger level of engagement or monetization in your and.

And your business business in any given quarter, you can break to higher levels.

The key though is sustaining overtime and you know, where we're managing a portfolio and I'm all quarters earned equal and but as you can see we're we're guiding again north of 20 for this quarter and obviously 22 for the full year.

The ultimate outcome for the full year will will be a function of how our lives services performed.

New games will not be a major factor they'll they'll be a factor from an marketing perspective, but it's theres no from a bookings perspective, new games and 20 Twond he will be reasonably small compared to the life service performance.

But the main wildcard quite frankly as marketing.

Yes, as we see strong results in our lives services. It gives us more latitude to optimize our user acquisition and while there is some uncertainty around what idea. If it means when you look at our diverse portfolio of of life service games, and the approach and scale of our audience we.

You have levers there to to continue to manage that effectively so.

I would say you know printing 22. This year. It is a good result.

And then as we look into the following year, it's going to be the San playbook continue to execute against our life services launch these games and steadily scale them and obviously, we will get a full year contribution from peak and if we close Roddick, which we hope to due October Onest, we'll get a full year contribution from ROIC. So I think we've got.

The the levers to continued to grow not just the bookings, but also the EBITDA overtime and the operating cash flow.

Great. Thank you.

Thank you.

Next question comes from the line of Mike Hickey from the Benchmark Company. Please go ahead.

Hey, Frank Jerre, Rebecca answer I'm, taking my questions guys and congrats on a pretty incredible quarter, yes, its first on wallet.

We sort of look after the success of the gains how much does it sort of creative design.

Versus maybe a data driven science approach or maybe something else is sort of wondering.

You know, how they sort of sustain their competitive position.

Hi, My thanks to that question and the comment we when we looked at how wallet build game I think one of the things that was Ah. So so impressive was a the top of funnel for how they actually create products yeah. The combination of their their internal studio, which you know has real.

We generated some of their top installed but also they have access to a huge network can develop.

But to bring him the best in the brightest if you will have ideas from all of the World. We then put those through or wallich puts those through a very vigorous prototype testing on process, where they're looking at a efficiency anyway, they're looking at engagement and then the game that basically greenlit and they do this in a matter of.

Dave one prototypes come in so it's a very fast moving process, the very scalable processes and it's one that has a lot of access a in terms of internal external ideas. So I think overtime. It will be resilient I think where you know hyper casual company sometime.

In a you know their growth curves bounce a bit is when they're unable to manage the top of the funnel, there released and slow down or the yield don't generate as much as they hope. So there's there's ways that wallet to configure that we thought was very innovative an interesting that would allow us to manage that over time together, a coupled with some of the.

Some of the near term synergies I think that we can help them with in terms of data science anyway or add deal rates and platforms.

Thanks, Ryan can then you obviously.

No. It it looks like you guys want to continue to.

Find success in M&A is the type of casual sort of.

The news on the or platform you want to continue to build on an M&A and how robust.

Is that market.

I think that's.

Yeah, No Mike I think that it's great point that the talent base is is in mobile is global in it. It's it there's a lot of supply of great companies out there big small in different categories.

In different regions of the World. So you know consolidation is obviously underway in the interactive category, we're actively participating in growth through planning partnerships with companies out there I just happened to be a hyper casual acquisition. This time last the one before that would peak was more about Trevor franchises.

And and a you know AAA studio with titles on the way so from our perspective, when we look at what's next you know it's really a you know it's really a a huge opportunity for us in terms of looking for not just more hyper casual game companies that potentially other company scale is gonna be increasingly important.

And in mobile and as we exit this year you know our and they use are gonna be somewhere in the neighborhood of 160 million I was 40 million do you usually have an advertising network. We have a portfolio of eight forever franchises. So we're going to be in a position where a smaller developers and mid sized developers that maybe aren't able to navigate some of the issues.

Out there are going to be able to partner was then going away that I think that help them grow and help us grow. So long term I think there's a lot of oh opportunity still to go there, but you know day in day out with Gemini and the management team spend all of our time on is growing growing lives services getting double beats out on time, making sure the new game pipeline is tracking.

So it it's going to be a combination of organic inorganic as we grow the company over the next several years not just a acquisition.

Thanks, guys Mccullough.

Thanks.

Thank you.

Our next question comes from Colin Sebastian from Baird. Please go ahead.

Great. Thanks, guys I guess on merge Magic now that's officially or forever franchise I'm, just wondering how that changes if at all the way you manage game development or marketing support.

For the front for the game and maybe just on your last point regarding organic growth and the 2021 commentary around double digit bookings I'm, assuming that that does embedded growth for the existing portfolio outside of P. It can enroll like thank you.

Yeah.

I don't have that doesn't make the discussion about input on getting more detail on Oh. Please recall that happened this year, but in general we're looking at you know.

We're growing the lag that Vince regarding new business, obviously been stuff that upcoming families. So from our perspective. It is a combination of those elements and again, we'll get into more detail in in the second half of the year on on what he constituent components about 21 guide is.

In terms of the merge magic question.

Now that they kind of got the game out and we're starting to scale it the transition to scalable bogey.

And data driven as well as creative driven decision, making in terms of how the year unfolds with Roadmaps is really where we're transitioning towards with the team are much like what we did with dragon. So as we start to evaluate new feature but Roadmaps you know the team does take on a little bit of different configuration, not dramatically different but I indicate the where.

We're at into development now that it out and scaling we started to shifted the focus towards some were ER segment level information and design and new features for the Roadmaps.

Alright, thank you.

Thank you.

I last question comes from the line of drew Crum from Stifel. Please go ahead.

Okay. Thanks for sneaking me and guys with with peak and now ROIC would you say you need time to digest these transactions or would you look to pull the trigger if something else comes along trying to gauge your appetite to do more deals over the near term and then Frank.

Okay.

As you referenced in the press release had its best bookings quarter since Threeq here between understanding it's been somewhat of a struggle to get back to that threshold.

Based on what your observed in to see how do you see the performance that franchise going forward. Thanks.

Hi, Thanks drew you know in terms of appetite for M&A, we actually are wearing integration mode right now I'm. So yeah, we're focused on making sure that we deliver the second half of the year that we successfully continue to integrate a peak and they continue to a you know make our company and business better and then.

With wallet coming in October you know, there's a lot of work to be done there. So we feel like we've got enough irons in the fire right now in terms of where we're at and how we're positioned I think looking forward over the long term most of the commentary in the prior questions about M&A was was more focused on the future not necessarily a right now because I think we've got a.

A really great position right now in its about executing and focusing on the deliverables.

Yeah, I'd just add.

The Frank's comments and he said this earlier you ever everyday we wake up we're focused on our core life business and your peak as part of that business now it's got its two of our forever franchises. It's a team that's intercreditor already into our weekly revenue calls and it's working closely with with the life services side of our business.

But you know as they think about it from a from a CFO perspective, you know.

Operating the business is core the other area that's very much a focus for me is ongoing capital allocation.

As we mentioned in the Investor that are we will continue to assess raising additional funds to make sure we do have the.

The cash powder to go out and do additional acquisitions in the future, but right now I would say.

I'm focusing more on that and running the business and you know key is obviously.

One of the factors.

That defined the targeting of to close date for Roddick was to make sure. We continue to focus on the core business integrating peak and then.

The team from Raleigh can come join us in Q4.

What I will tell you is we have the bandwidth to deal with that.

Yeah, we've said that in the past. These studios are pure in the sense that they're a very tight configuration of creative teams theres not a lot of overhead and complication to 10th grade and that's why they fit very well with.

The overall configure sangha.

But yeah, we're looking forward to printing a very strong results full fiscal and obviously entering 2021 with both peak in Raleigh, because part of our life teams.

With regards to the question on poker it took a little bit longer than I would've liked in many of us would like but the game has been rebounding as you. As you noted I were very impressed with a lot of the changes. In addition that the a the game team has been making and as we look forward in terms of poker were you know we're excited about the trend that we see there.

There, but yeah, we're still we're still hiring out things, we're still working through the process Q2 was a nice quarter for us and the key is the to sustain that performance and the team is doing a pretty good job on right now.

Thank you.

Ladies and gentlemen, I shouldn't for the courses in the culinary. This concludes our Accuen a session and today's conference call. Thank.

Thank you, ladies and gentlemen for attending today's call him with the Statins you may now disconnect.

[noise].

[music].

[music].

[music].