Q3 2020 Zynga Inc Earnings Call
Ask a question during the session you want me to press Star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference to your speaker today that go out VP of Investor Relations and corporate Finance. Please go ahead ma'am.
Thank you Joel and welcome to Zynga third quarter 2020 earnings call.
On the call with me today are Frank Doable are Chief Executive Officer, and Joe Griffin, Our Chief Financial Officer.
Importantly, we will open up the call for live questions.
Before we cover the Safe Harbor. Please note that in an effort to keep her team members healthy each member on today's call is dialed in remotely.
We appreciate your understanding during the call and hope that everyone is staying safe during this time.
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 predicted.
Please review the risk factors in our most recently filed form 10-Q as well as elsewhere as you see filings for further clarification.
In addition, we will also discuss non-GAAP financial measures our earnings letter, earning slides and when filed our 10-Q, one could reconciliations of our GAAP and non-GAAP financial measures.
Please be sure look at these reconciliations as the 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 hours.
Now I'll turn the call over to Frank for his opening remarks.
Thank you Rebecca.
Good afternoon, everyone and thank you for joining us on our earnings call.
We continue to live in unprecedented times as a human cost of the COVID-19 pandemic weighs on so many different aspects of our lives.
Over the past several months, we have been humbled see more people turned toward deeply social game experiences for entertainment and a sense of community.
We are also proud of our teams as they continue to work from home effectively and deliver exciting news on that score players, including the successful launch of Harry Potter puzzles me spelled.
In Q3, we delivered strong results ahead of our guidance across all key financial measures, including our highest ever quarterly revenue and bookings with revenue of 503 million up 46% year over year.
Bookings of 628 million up 59% year over year.
We also delivered our best Q3 operating cash flow of 113 million up 65% year over year.
Today, we are raising our full year 2020 guidance, which Jerre, we'll tell you more about later on the call.
Execution of our multiyear growth strategy has driven our tremendous results to date and generated positive momentum across our business.
The foundation of our multiyear growth strategy is our life services.
By delivering a steady cadence of innovative bold beats, we're able to drive a great growth across our highly diversified portfolio of forever franchises as well as our social slots and casual card titles.
Specifically in Q3, our social slot portfolio, Mark its best revenue and bookings quarter in Zynga history led by break out performances by hit it rich slot and game of Thrones slots casino.
We also saw record Q3 performances from words with friends Csrtwo, our CASM cards portfolio and empires and puzzles.
These outstanding results are a great example of enduring nature of our forever franchises at Zynga.
In July we successfully integrated peak and our teams are working extremely well together.
June Black and White Black were strong contributors in their first full quarter at Zynga and were key drivers of our year over year top line growth.
We also have an exciting pipeline of new games that have the potential to become new forever franchises.
And will add to our growth in the coming years.
At the end of Q3, we watched Harry Potter, probably spells worldwide, which is off to a great start with positive player feedback as well as 4.8 average star ratings on both the Apple App store and Google play.
Building upon its Cogs in watch momentum, we expect to steadily scale, Harry Potter puzzled be spelled over the coming quarters as a meaningful growth driver for Zynga in 2021 and beyond.
Farm Bill three and small joint gains public combat are also progressing well in soft launch as both these titles rig as we test new feature sets designed to deliver long term engagement and monetization.
Over the coming years, we plan to release additional titles, including a new city Bill two games set in the Star Wars universe, as well as new projects from our gas Graham games and peak studios.
The global proliferation of high end smart devices is shifting the entertainment landscape towards mobile games players.
Players across genders geographies in generations are drawn by the ever increasing opportunities to socialize with friends and make new connections anytime and anywhere.
As the industry continues to expand and evolve we are investing in new markets categories and technologies that will have the ability to increase the total addressable market and further accelerate our growth over the long term.
Specifically in Q3, we grew our international revenue in bookings by 44% and 49% year over year, respectively.
Asia. The addition of two glass and our investments in part of the puzzle drug user pay revenue and bookings up 70% and 88% year over year, respectively.
Harry Potter Puzzled me spills, we are partnering with wine, a leading social network in Japan to promote the title and connect players in the game.
On October Onest, we closed our acquisition of the EXEMBOL based Raleigh, bringing an incredibly talented team and community an external developers to zynga.
Robert popular portfolio of hyper casual games and robust prototyping approach to new game development will be strong growth drivers as we continue to scale in one of the largest and fastest growing game categories on mobile.
Well, it's large and diversified audience base will be valuable to think as the mobile games industry and advertising landscape continues to evolve and grow.
Over the next few years, we also see the potential to build outs into the player network, which will unlock more cross promotion opportunities as well as new advertising capabilities.
As we look ahead, we continue to see more opportunities to acquire talented teams and franchises to further accelerate our growth.
To date, our acquisitions have delivered strong contributions to our lives services added multiple new forever franchises to our portfolio expanded our new game pipeline and provided entry into new categories on mobile.
Our proven integration model enables teams to maintain their unique development cultures, while leveraging think it's highly scaled will skew you operations publishing platform and advertising network. So we can grow faster together.
In conclusion, we are executing well on our multiyear growth strategy as we continue to scale, our business and progress towards our long term margin goals.
We are uniquely positioned as a mobile first free to play like services game company on the largest and fastest growing gaming platform.
Building upon our strong performance to date, we expect are highly diversified light services portfolio and exciting new game pipeline to be meaningful growth drivers in the years ahead.
To further accelerate our growth. We are also investing in initiatives that have the ability to expand think a total addressable market and continue to see more opportunities for M&A.
All of these factors combined habits position to be in interactive entertainment growth leader in 2021, and beyond and gives us confidence in our ability to generate more shareholder value.
Now I would like to turn the call over to Jeremy to discuss our Q3 results in further detail as well as our outlook for 2020 and beyond.
Thank you Frank we.
We delivered strong Q3 results driven by our live services and ahead of our guidance across all key financial measures.
We achieved our highest quarterly revenue in bookings as well as our best Q3 operating cash flow.
We're also very happy to welcome the Raleigh team, who joined on October one, marking our entry into high for casual games in a meaningful way.
Given the full quarter contribution from Raul like and continued strength in our live services, we are raising our full year 2020 outlook.
But first lets discuss our Q3 results.
Revenue was 503 million comprised of bookings of 628 million offset by a net increase in deferred revenue of 125 million.
Revenue was 58 million ahead of our guidance driven by an 8 million bookings speed and a 50 million lower than expected net increase in deferred revenue.
Broad based sprint excuse me broad based strength across our lives services drove our top line beat in particular stronger than expected performance is from words with friends or social slots portfolio and CSR too.
Revenue was up 158 million or 46% year over year, driven by bookings growth of $233 million or 59% year over year offset by a 75 million higher net increase in deferred revenue.
Our year over year top line growth was primarily driven by full quarter contributions from two blast I'm talking blast alongside growth and that person puzzles merge magic and our social slots portfolio.
Use of pay was the primary driver of our topline growth what advertising also up year on year over year.
The net increase in deferred revenue of 125 million was primarily due to the deferral of initial bookings on tune blast and toy blast in their first quarter at Sangha.
The lower than expected increase in deferred revenue was primarily due to a conservative estimate on our guidance related to the revenue recognition on to Blossom toy blast.
In addition to variances in actual bookings mix across the single portfolio.
Turning to Q3 operating expenses.
GAAP operating expenses were 389 million up 104 million or 36% year over year.
Primarily driven by the first full quarter of peak and to a lesser extent higher stock based compensation consider contingent consideration and acquisition related expenses year over year.
We incurred 67 million of contingent consideration expense in the quarter, which was up 6 million year over year, and 42 million higher than our guidance driven by our acquisitions continue to perform ahead of our expectations and the true up of the final year Graham earn out.
As part of a broader strategic review for Graham.
You didn't updated long term incentive plans, we agreed with the prior Graham shareholders to set the final year earn out at approximately 75 million.
Along those to remove the earn out operating covenants I'm fully integrate the operations of the studio in Q4 2020.
The actual payment the finding your earn out will remain in July 2021.
Non-GAAP operating expenses were 275 million up 76 million or 37% year over year, primarily driven by a first full quarter of peak and to a lesser extent the increase in marketing investments across the rest of our lives services.
GAAP operating expenses decreased to 77 million excuse me to 77% of revenue from 83% in the prior year, primarily due to a stronger operating leverage from R&D, partially offset by higher marketing investments year over year.
Non-GAAP operating expenses represented 44% of bookings down from 52% in the prior year driven by improved operating leverage across all operating expense lines.
We reported a net loss of 122 million 38 million better than our guidance and compares to net income of 230 million a year ago, which included a 314 million gain on the sale of our San Francisco building.
The variance to guidance was primarily driven by lower than expected net increase in deferred revenue and stronger operating performance, partially offset by higher contingent consideration expense.
The variance to prior year, excluding the onetime gain on the sale of the San Francisco building was primarily due to higher net increase in deferred revenue amortization of acquired intangibles and stock based compensation, partially offset by our improved operating performance.
Our adjusted EBITDA was 38 million 83 million better than our guidance, primarily due to the lower net increase in deferred revenue and the improved operating performance.
On a year over year basis, adjusted EBITDA increased 10 million on stronger operating performance, partially offset by the higher net increase in deferred revenue.
We generated our best Q3 operating cash flow at 113 million up 65% year over year.
As of September 30, it before we closed our acquisition neurotic, we had approximately 750 million of cash and investments.
Well, we expect to end 2020 with strong a strong cash position supported by positive operating cash flow. We are assessing thats financing options to further expand our cash reserves, including for use in future acquisitions.
Turning to guidance.
We have developed our Q4 and full year 2020 guidance based on the information available to US today November four 2020, and using similar methodology used to prior years.
Excuse me prior quarters.
Given the higher level of volatility and uncertainty in the industry in particular around the covert nine King crisis. There is the potential for a wider range of outcomes, both positive and negative as it relates to our ultimate business results.
For example.
In Q3.
Well, we have seen audience levels return from shelter in place highs in Q2.
We continue to see strong pear engagement and monetization from existing and new cohorts.
Looking ahead, while we expect to see some level of continued normalization. This may be influenced by many factors related to the ongoing pandemic.
That said, let's now discuss our Q4 and 2020 guidance.
Guidance for Q4 is as follows.
Revenue of 517 million up $166 million or 41% year over year.
And that decrease in deferred revenue of 100 million versus 29 million in the prior year.
Bookings of 670 million up 237 million or 55% year over year.
And that loss of 92 million versus 4 million in the prior year.
Adjusted EBITDA of 35 million versus 75 million in the prior year.
Some factors to consider in assessing our Q4 guidance include.
Life services will drive the vast majority of our topline growth, including full quarter contributions from two blast toy blast as well as a full quarter contribution from relics hyper casual games portfolio.
We also will have initial contributions from our recently launched Harry Potter puzzles, and spouse, which we expect to scale steadily in Q4 and into 2021.
This momentum will be partially offset by declines in older mobile and web titles.
Our topline guidance does not assume the launch of any additional titles in Q4.
We expect gross margins to be slightly down year over year due to the higher net increase in deferred revenue amortization of acquired intangibles and user pay mix.
We expect GAAP operating expenses as a percentage of revenue to increase year over year, primarily driven by the significantly higher net increase in deferred revenue and an increase in stock based compensation, partially offset by lower contingent consideration expense.
Outside of these factors, we expect year over year operating leverage improvements in R&D and Gina to be more than offset by higher marketing across our lives service portfolio, including full quarter investments into blast toy blast and Roddick hyper casual games portfolio.
Additionally, building not Harry Potter puzzles and spell successful launch momentum, we plan to invest meaningful marketing dollars to steadily scale. This title in Q4 and into 2021.
We expect the key drivers of the year over year change in our net loss will be the significantly higher net increase in deferred revenue as well as increases in amortization of acquired intangibles and stock based compensation, partially offset by our improved operating performance lower contingent consideration expense and the benefit from income taxes.
The year over year decrease in adjusted EBITDA is a function of the 71 million growth in net increase in deferred revenue, partially offset by our improved operating performance.
Turning to 2020, our raised guidance is as follows.
Revenue of 1.93 billion up 607 million or 46% year over year, and up 129 million versus our prior guidance.
The increase in deferred revenue of 312 million up 70 million or 29% year over year and down 88 million versus our prior guidance.
Bookings of 2.24 billion up 677 million or 43% year over year and up 41 million first as our prior guidance.
And that loss of 468 million versus net income of 42 million in 2019.
And 82 million improvement on our prior guidance of 550 million of <unk> and that loss.
Adjusted EBITDA of 211 million up 124 million or 142% year over year and up a 126 million versus our prior guidance.
The primary drivers of our increased outlook for the full quarter contribution from Raul like as well as continued strength in our lives services portfolio.
For 2020, we expect.
Our best annual revenue and bookings in Zynga history.
We are also on track to deliver strong year over year operating leverage demonstrating meaningful progress towards our long term margin goals.
Our strong execution and 2020 should position Sangha for continued growth and 21, we continue to expect double digit topline growth as well as the potential for further margin expansion and positive operating cash flow.
In summary, while we are operating in unprecedented times, we remain focused on entertaining and connecting our pairs to our games our.
Our business fundamentals are strong as we continue to execute our multiyear growth strategy.
With that we'll now open the call for your questions.
Thank you Ashley mine bed to ask a question you will need to press star one on your telephone.
Let's try a question press the pound key in the interest of time, we ask that you. Please limit yourself to one question and one follow up.
Our first question comes from Alex Jama with Jefferies. Your line is now open.
Great. Thanks for taking the question maybe to one for Frank in one for chair.
Frank obviously, another another strong top line beat and raise but it does seem as if the magnitude of the beat was was a bit lighter than what we saw in the first half of the year. So just curious if you're starting to see you know trends normalize back towards those pretty level pre coded levels that that you touched on in your opening remarks or just anything you can say you know broadly about about engage.
Men.
And then Jay or you know heard in your opening remarks that that you said no new games are in the Fourq guidance should we interpret that as you know a new game launch or is it just safer to to not including the guide and then and then see what happens. Thank you guys.
Hey, Alex I'll start with the discussion on the the beat we have look we had a strong quarter. We were up what was it 55 or 59% year over year and bookings and it was a choppy quarter just in terms of how it was going to unfold with co bid, causing a big audience increase in.
The late spring early summer, how that was going to pattern out it's been kind of a big topic at the company. What we are seeing in the data is that we are seeing engagement and monetization and retention trends as well as conversion really stay elevated while we've seen a return of kind of the top.
Like you growth, it's kind of more normal growth on those other factors remain elevated which I think points to the fact of why the the beat on bottom with so much larger we saw a lot of leverage in the business because people were playing longer they're monetizing at higher rates converting and as we as we scaled the business.
Looking at the overall AD market, we thought real opportunities to continue to drive the business organically without having to spend you weigh on and that's why you see our kind of our second consecutive quarter of.
EBITDA percentages on a non-GAAP basis, the 25, 26% so while the beat on the top I think we beat our guidance and as we look forward into Q4, you know the 670 is going to be up 55% year over year.
It's a really predicated on a couple of key things. We've got continued strength in life services that we're forecasting forward. We've got the momentum from Harry Potter that it started very strong at the end of Q3, it didn't contribute anything really in the quarter, but going into Q4, you're going to really start to see that play a role and then as as we.
Integrated peak in Raleigh, and we're going to start to see some interesting dynamics as we head into fall I'll start a little bit on kind of the philosophy around the second question on new game stuff and then hand off the chair for the guidance you know.
One of the one of the things that we had at Zynga is the strong foundation of life services, which gives us a lot of flexibility on how we develop and bring new games to market. It's a it's a real luxury frankly to be able to take your time and test the games onto that to their maximum quality and to really deliver on long term engagement on mobile is very competitive.
Category on there's a lot of competition there, but as I think you see with the Harry Potter launch along with the strong start that we're seeing there. The time that we spent in test market going through engagement retention and monetization as well as quality was time, well spent and we continue to hold that philosophy as we look at farm build three public combat.
In the future pipeline of Star Wars, Cityville more games from Graham at peak, we were when we launch a game we wanted to really want it to be a hit and we want to be able to add to the portfolio and get contributor for multiple years going forward. So that's that's the Philips management philosophy behind how we're introducing new games, but I'd now hand off to Jerry.
Give me more detail.
Thanks, Frank Yeah, I think you nailed it yeah. When you look at the the the guide for for Q4 EPS.
We're seeing some really strong momentum with the launch of Harry Potter and were definitely doubling down the marketing or we had implied in our guidance when we set our guidance back in Q2 against against this title. So if you. If you think back if you if you sort of looked at the implied guidance that we set back on.
The Q2 call we were talking somewhere in the ZIP code of bookings of 662 million and 20% flow through.
Which obviously implies some de leverage because we're we're going to launch a games our a game what our guidance assumes now is that the the the the focus is on Harry Potter and were definitely investing against that title, which is why you see de leverage from 26% in Q3 down to just over 20% and.
In Q4, because as.
As you guys know as as you as you launch a game the engagement metrics well, we'll we'll obviously trend ahead of the demonetization and the pinch points and obviously, we'll be investing marketing into that one where we see momentum and which is the case of of Harry Potter and so we're we're doubling down there. In addition to we have some.
Yes, obviously, we're coming into the holiday season. So there is a little bit more against the the the live services as well, but the primary driver when you. When you look at the guidance from an EBITDA perspective is Harry.
And that's.
That's the the basic assumption around the around the guidance as we fine tune that coming into the end of the year.
Great. Thank you Doug.
Thank you. Our next question comes from Miami with Barclays. Your line is now open.
Great I have a couple of questions one on the Harry Potter and one on the IDE yesterday. So the first one on Harry Potter I'm. Just wondering if you could provide some background on how that title the partnership bus line and in Japan came about.
I know you have a couple of titles within snapshot, but you think similar opic chain exist. That's your favorite franchises within similar social media apps here in the west.
Yes, I'll take the Harry Potter question, then we can jump to your idea to say.
When we looked at our go to market strategy for Asia.
You know last year, we launched empires and puzzles into Asia directly without partners and so for each title. We look at what opportunities there are to maximize success and the Harry Potter brand is particularly strong in Japan, and when we approached line about a potential partnership I'm. There was a lot of great collaboration and ideas for how we can.
Integrate some.
Some of the assets of Harry Potter into their social network that could drive promote additional installed you and connect players within the game. What you find when you play Harry Potters is quite a social match three game and there's a lot of gildan competitions, and so tapping into to the social network that line has really enabled us.
ER launch with a lot of momentum in Japan, as we look at other game launches in the future like farm build the Star Wars titles Oh it.
We'll take a country by country you look at what types of partnerships are available to us or whether going direct makes the most sense and then just you compare and contrast empires and puzzles one was completely direct without a partner and then with Harry Potter the brand affinity and the collaboration possibility and social was was up something we jump on.
You know, we have launched games on snap chat as a kind of an experiment that to see if we could launch a bespoke games that are fully operational inside of the social network. That's something that we remain interested in and believe in the potential opportunity for the company longer term.
Okay. Thanks, and then on one on I'd say, so I'm, hoping you can help bring sense the potential impact from the change next year no advertising revenue still going pretty strong Mr.
30% growth this quarter, but anything you can share in terms of the percentage of advertising revenue coming from iOS versus Android and then maybe on the user acquisition side.
For endgame bookings within a given period.
Is there like a average percentage coming from existing users versus new users that may be impacted by I guess Jay thanks.
Yeah, it's a it's going to be a shift in the mobile ecosystem that you know a lot of the companies are really starting to understand and build a new systems and approaches to a customer acquisition and how they potentially might run their AD networks and as we've as we've looked at it we have some particularly unique out that the thing that I think will enable us.
To.
Really managed through the idea they introduction and be in really good shape long term on the first is with regard to the franchise that we have is there very long life right words with friends is 12 years old CSR is coming up on eight years, you've got games like Zynga poker and others, where the.
Organic strength of the brand and and also the the the awareness and interest with brands like Harry Potter and farm Bill in Star Wars, There's a lot of latent demand out there. There's a lot of organic demand out there that you can really go after in a non idea. They way. In addition to that we have a unique asset in Raleigh, Raleigh is a very high and Mei yu.
A network of games that we acquire players not using idea phase at very low rates of acquisition cost that that can be then move into our network and potentially shown other gains or from to think the portfolio and if we're able to convert any of those players into a player of another game its extremely.
Levered leveraged for us. So we also don't think about with regards the amount of information that we gather about our players inside game, but then when they come into words with friends.
Who are they talking to you what did they playing so that we can serve them better. That's information that allows us to have better targeted AD or we can do a lot of inference and probabilistic targeting that allows us to continue to talk to advertisers about the demographics that are interested in reaching and how that translates into our network. So there's there's probably a dozen thing that we can do.
In our go to market platforms and in our acquisition platform that will allow us to continue to maintain effectiveness or without you know really degrading our capabilities by the loss of that attribution in terms of the iOS Android split in advertising, it's mainly iOS that about 60% Iowa.
40% Android.
Is one way to think about it and you know in terms of working with Apple on on what they're standing up in terms of their new attribution model an AD market, that's something that we're learning a lot about and believe that we can also use to acquire players. So I think for some companies. It's it's going to be painful I think for our company. We've got a really good.
A strategy in place to be able to kind of move through it and and for from our perspective privacy is really important for our players and win new regulations or requirements come out like idea fey or im sorry, like GDPR or are the California rules, we adapt our services and are able to build.
Deliver great gameplay on great services and still acquire players in a way that makes sense for the continued growth in zynga.
Great. That's very helpful. Thank you.
Thank you. Our next question comes from Colin Sebastian with Baird. Your line is now open.
Great. Thanks for taking the questions.
In the letter you talk again about the potential for more acquisition. So just wanted to clarify that for now is it safe to assume you're just you're still taking a breather between between deals as you integrate <unk> role in it.
Still a bit of ground and then on player engagement at the sequential increase from Q2 to Q3 is that all related to the integration of the acquired users or is there also some engagement.
Improvements above the system.
Portfolio. Thanks.
That color on the the integrations for peak was was completed in Q3 and with the closure of the deal and Raleigh in October 1st integration is well underway with with Raleigh.
You know as we as we look out into the future our M&A performance over the last few years. It has worked out and we like the studios that joined US. The talent is fantastic. The franchises have been really added to the portfolio, but we are very selective about the deals that we pursue and and the.
But he that interests us and and from our perspective right now we're focused on delivering a great launch with Harry Potter and scaling into Christmas looking at life services portfolio growing that and continuing the integration of of peak Raleigh and also you know looking at the Gram of that that Jerry talked about so.
You know you never say never but as we think about the fall we're in pretty good shape, but as we look to 21 and beyond we want to be in position for being.
Being able to partner with companies globally that could add to the growth.
And I think that's a really important strategy for us long term and we will continue to pursue that in terms of the elevated engagement. That's not just from the acquired do you that's actually from the existing franchises. If you look at.
Two games in particular.
It's our two and words with friends or they had a record Q threes on the social slots casino. Those games are 567 years old they're doing a terrific and that's because we're seeing people as they went into shelter in place as they come out they're playing mobile games longer they're playing more mobile games.
And there are retaining in a in a very positive way I mean, they're seeing the value of playing and socializing. So there are monetizing. So it's not just they are an addition from peak, it's actually a portfolio wide.
Great. Thanks, guys.
I think yeah.
Next question comes from Matthew Thornton <unk> Treasury Securities. Your line is now open.
Hey, good afternoon, Frank Good afternoon, Josh a couple if I could follow up on the idea of Fab. Just curious you know over the past three months. Obviously the industry is kinda had little more tied to gets its its arms around that the changes I'm curious if you've seen.
Seen a change and and maybe the M&A opportunity as you think out with it over the next couple of years because of idea <unk> said differently do you feel like there is more.
Perhaps every subscale players that want to come to the table and have conversations just it just curious may change there. So that's question number one.
And then just secondly, maybe for Jay or you talked a little bit about you have the visibility to for Q versus versus last quarter.
And those are really hard, but when you think about how much Cove is shelter at home lift is still kind of in the industry do you feel like exiting Threeq Q. There, we're kinda back to a normalized run rate or are you still not willing to kind of make that make that call yet <unk> any color would be helpful. As well. Thanks again guys.
Yes, so starting with the idea of a question any impact on the overall industry. Yet you know scale is going to really matter I in terms of a post I guess, a world really having a large audience, having a lot of them may you I'm, having a lot of relationships and information inside your network is going to be critical.
And if you're a subscale player it's going to be very difficult to make some of these you a decision and the lack of efficiency for subscale companies is going to be more painful and so from my perspective, we think that you know from a trend line standpoint, those types of opportunities are going to be more plentiful as you move into 21 and beyond at the same time.
You know, we're very very excited about services and gains that have high audience counts.
And bringing them into the thing that network. So I think on both sides of it theres going to be new opportunities versus where we were at an industry over the last couple of years.
Sure.
Yeah in terms of in terms of Cowen <unk>, you know Matt.
You're right in the sense that if you think about Europe right now my my mother country, Ireland's going into complete lock down. The Brits are following suit. So there is a there is a lot of volatility in terms of what's going on in the world in terms of shelter in place.
But as it relates to the quarter our base assumption was we're going to see some level. The normalization continue but again, it's too early to say you know one of the reasons. We characterized at the start of the guidance that Theres a lot of puts and takes is.
In a world where were back in in a in a in a full locked down it's intuitive that there there would be more engagement against games, but TBD. So.
There is something there, but it's it's not really something that we built into the forecast.
Thank you. Our next question comes from Akshay, then with you. Yes. Your line is now open.
[noise], maybe coming back to the user acquisition and monetization question Thats been asked a couple times are the key investments you guys are trying to make either in your data science teams are either internally or working with partners externally to sort of do a full or look at like what the opportunity might be unusual acquisition to backs mice for ROI and are prepared.
I'd say the same question not only from a user acquisition, but also but then im game monetization, how should we think about positioning the product and making adjustments broadly of data science stocks.
Hey, Eric the the the answer is yes, we are making investments in data science as well as product management to really diagnose and look at where the opportunities are and what the new ecosystem is going to look like where attribution is going to shift in terms of how it works and what types of information are available.
One of the benefits of our company is the diversity of the studios that we have just speaking about Raleigh. They joined on October Onest and the amount of learning that we're getting from their perspective on how hyper casual market works, how they acquire how they monetize from an advertising standpoint same thing with peak in terms of how they.
Look at long term engagement in the frankly, the impact that they had on on Harry Potter as it finish that diversity in our studios in our Cetone arc product management and our data Sciences is really a big strength of ours and we are investing in a lot of modeling and testing right now and building out some new capabilities that are not only improves the services and things that we have.
Now, but im and invent new ones and starts to look more upstream in terms of how the AD markets are working and understand that dynamic and be able to harness that more to our advantage. So it's one of our core competitive advantages information superiority because of product management data science. It's one of the things we will continue to recruit great talent leverage our drug or studios.
Again.
And we are building out new capabilities techniques there.
Maybe if I could just guess one follow up if possible you or how do you think about addressing the situation Inorganically do you ever think about looking out into the broader digital advertising ecosystem and thinking about acquiring data analytic capabilities. We are thinking about inorganic our deployment of capital against the opportunity broadly for in game monetization.
So much.
Yes. The answer is yes, we do look at you know not only just game studios, but as we think about the longer term as a platform or network.
Those types of opportunities or something that we have been considering and continue to consider it's something that is super important in terms of maintaining our strength in data science and product management and as we embark on new capabilities. We're looking at build versus buy we look at our talent base and try and figure out if there's opportunities to find those.
Out there in the marketplace and we haven't done any deals like that yet, but we don't rule them out.
Thanks, so much.
Thank you.
Next question comes up did it kind of skews with JP Morgan. Your line is now open.
Oh, Thanks for the question right can you expand a bit on the rapid prototyping approach you highlighted in the letter puts up the games would fall under this strategy should we think of them as having the potential of being forever franchise or would you maybe smaller gains that you know higher quality.
Yeah. They did the there's a couple of areas, where you see rapid prototyping from Zynga I'm. The first is in Raleigh, where they are.
Releasing a dozen games a month almost in terms of the prototypes, what they're looking at the gains that they're bringing into the shoot and testing. Some they will proceed with some that they won't proceed with they'll make adjustments so very high product velocity from Raleigh, and the ideas that we see there sometimes have applicability back into the main part of the business and that's something we're just starting to.
Learn from his how hyper casual can help inform the larger games as well as continued to drive more and more ideas in these instant on AD driven games that have very large audiences. That's one area you see rapid prototyping in other areas.
For example at Graham, we do put a lot of prototype games into soft launch better testing a few things like a core loop and engagement occurred and if we see heat or we start to build on it I mean, if we don't see any pull it back in and call. It a day with that type of development model has proven to be pretty successful.
For a lot of companies and we think that as we look across our portfolio, there's going to be you know times and places for the big licenses like the Harry Potter and the Star Wars, but we're also going to be nimble in launching new ideas testing them quickly and if theres. He we can double down on them or not we can pull back and we think that that evolution of our studios.
It's a good thing.
Okay and then the letter mentioned some testing of the new features for emerge magic and driving to enhance the long term player experience, maybe we're all reading into it too much but just wondering what's driving the initiative and does that create any kind of near term headwind to monetization or engagement.
Well I think one of the things that the merger.
Merge magic emerged Dragons benefits from is that we have a lot of gains that are older than they are in a scaled to a performance levels that demonstrate the need for a deeper social systems or systems that are more collaborative and and and competitive in the elder game.
So those are some of the features that were learning from an in person puzzles and words with friends.
Obviously, you see some of that taking hold in Harry Potter. So we as we work with Graham on their Roadmaps for the next four quarters for each of those games, we inject new ideas from different parts of our businesses and right now what we'd like to see is a merged dragons and merge magic invest more in it systems and.
And gameplay features that really drives that long term elder game, where the players really are the content playing together cooperating competing and we think that the universe is in the games I'm really lend themselves. There's lots of near term event like Dragon's Inn prices. We've got the holiday season, we have a really cool on kind of features that we're launching.
And the season passes that we have introduced for those games, we had some strength and so this is just part of ongoing development for light services gains as you as you grow them year after year, you're constantly adding new features and looking for areas inside the service, where you think you can do better and in this particular case long term player engaged.
That is where we're focused on those two titles.
Okay. Thank you.
Thank you. Our next question comes from making with Goldman Sachs. Your line is now open.
Great. Thank you very much for the question.
First I just want to ask about just the broader mobile game advertising environment.
You know I think advertising came in a little bit better this quarter certainly than what I expected what are you seeing there and.
You know is wrong like still pacing towards that $100 million annualized that you had originally talked about or is it because of better or worse given.
Heightened engagement with Gamesmart broadly thanks.
Yeah. This is Jerry I'll take that one we you know we we definitely saw improvement in demand in Q3 would end went in advertising broadly and that obviously.
Sean true in terms of our performance for advertising in the quarter.
You know it was obviously a year a year year on year and we grew sequentially. The in terms of Raleigh Kralik is still on pace you know the.
<unk> <unk> <unk> the implied a estimate for for guidance is still in that 100 million range in terms of their their bookings.
And so from that perspective, we <unk> to Q4 generally speaking is is if we see a.
So our growth in terms of advertising from a seasonal point of view, we do expect implied in our guidance and guidance as moderate growth from Q3 into Q4.
Obviously, excluding broadly chronic itself is a full quarter contribution.
And they're they're they're off to a great start as part of our San got there in case, what are our advertising teams did a science team. So I think from our perspective on the integration of Roddick into sank is going very well.
Great. Thank you and just a separate question on Harry Potter and new game profitability could you just remind us how long it typically takes for a new game to.
You know go from.
Loss generating to profitability, which point you.
Do you see Harry Potter bookings and say Oh, you know we have to some shipping a sufficient number of users and we're in good place in terms of marketing spend to start letting that.
Profitability flow through to the bottom line.
Yes, generally speaking you know.
The first quarter games are out depending on when it doesn't really matter whenever that turn up in the quarter. John are you see the the actual gross margin flow through is less than the marketing in particular, if you see a gambit Scott he and its showing the right metrics from an engagement point of view and adoption. So.
So our expectations is that Harry Potter will start becoming a you know a it flow through to to the bottom line in its second quarter going going into its third quarter. The key the key here is when you have a game like Harry Potter or any of our games, which have that long term engagement hook, what we're investing in right now it's not just.
What's going to happen next quarter, it's what's going to happen over the lifetime and we're building we're pulling those levers of players into the game.
And what we're seeing right now is really strong engagement in the game, we're seeing a lot of positive feedback on the game. So.
When you when you see that you invest against that horse and it's definitely going to be a dilutive impact was in Q4 for obvious reasons. Because engagement is ahead of monetization and obviously marketing is ahead of both.
So from our perspective Q4 will be dilutive. It was implied that way you know whether it's one game coming out in Q4 two games. The original implied guidance for Q4, we work on to see pressure on margins and more like 20% so still above our.
Our 20% hurdle, but you should see contributions from a margin perspective, absolutely from hereon in the full fiscal 2021, but starting in Q1 and Q2 of next year.
Excellent. Thank you.
Thank you. Our next question comes from Eric Handler with MKM Partners. Your line is now open.
Yes, good evening and thanks for the question I apologize. If this has already been touched on with regards to M&A and as you think about possible a debt raise I'm. Just curious how are you thinking about leverage over the next couple of years and.
To what extent, you're willing to add debt and you know as you look at the deals that are out there right. Now are you seeing any big changes in acquisition multiples.
Eric This is a journey.
As it relates that that leverage broadly speaking I'm thinking somewhere in the two to three times your pro forma EBITDA.
So that's that's how we think about a big picture in terms of you know the the multiples on on on acquisitions.
Again, if you look at our our track record to date you know we generally are targeting in on on on companies, where there's an obvious win win for the studio to join Zynga and leverage our capabilities and vice versa that you know we know we can we can apply <unk>.
The opportunity to grow that asset beyond whatever multiple that come in at so while well there's always a.
In particular, when there's banks involved is always a potential for they ask for higher multiples you know we haven't ever been.
Driven to multiples that would make us feel worried about our ability to deliver shareholder value for presented to shareholders. So from that perspective, I think we're feeling uncomfortable we're still a destination for independent studios and it was asked earlier on the <unk> on this call about you know the challenges of idea if et cetera. When you look at what Sangha is in terms.
Our you know our portfolio forever franchises, social slots Ah portfolio. The casual cards. That's an aggregation of very talented studios that are have creative independents and the ability to leverage the data science and publishing capabilities and Sangha and that's our that's our sales pitch. We we're not we're not here to change you. The minute you join you were here to.
Amplified the strengths that you bring to the table leveraging our strengths and there's no shortage of opportunities out there for acquisitions to the mobile.
Mobile landscape is vast and you know we're looking for.
Talented teams that can bring IP, our capabilities to saying it to help us continue to accelerate our growth over the next few years.
That's helpful and at this point and you look at your portfolio are there any particular holes that you'd like to fill.
We don't we.
We don't.
Focusing on a specific sean or or or type of game as Frank mentioned earlier, where we are looking at you know we're looking for talented teams that can bring games that can either obviously continued to build on our investment in hyper casual product are they build long term engagement a French.
License within the portfolio are give us additional capabilities as as it was referred to earlier, if we find opportunities to enhance our advertising capabilities, our data science capabilities, I'm true technology extensions or or vertical integrations were interested in that as well.
Beyond the mobile platform, we have said, we see the opportunity in the future to expand or games on to.
From a free to play perspective on to other platforms be it mobile and so that's another area, where we do focus in terms of looking for talented teams that can enhance our capabilities there.
Thank you.
Thank you. Our next question comes from Brian Fitzgerald with Wells Fargo. Your line is now open.
Thanks, guys, we've heard about brand AD budgets for turning in some of the other calls this quarter to date and tear it sounds like that is showing up in your AD business well what are you seeing or the risk perspective pricing. There is is it getting more competitive and that that goes for both your customer.
Position channel, but also be the pricing you're seeing inside your head as well.
In terms of the uncle brand advertising in general is better yields so from that perspective, it's it's better than you get from the pure performance based advertising.
As it relates to performance based advertising across the industry as a lot larger.
But we're seeing improvement in the yields are we did see improvement in the yields in Q3, which is more market than anything we were doing from an optimization point of view, which has been a trend in the past where we've we've we obviously feel we've got a pretty strong.
Capabilities in that area.
As it relates to you know what I would say if you think flipping over to the user acquisition side. You know we've got a obviously a very large and diversified portfolio. So we are seeing pressure in some channels, but were seeing opportunities. Another so I know that's it seems like a very Irish answer, but it is we were continually looking to optimize.
The user acquisition investment into channels that we feel will deliver the right level of long term return as you saw in Q3, we were very happy with the overall engagement within our portfolio and that helped US obviously optimize our user acquisition spend and deliver a stronger quarter from a profitability point of view.
As you see with Q4, we see the opportunity to invest both in our live services and Harry Potter, So you're going to see the little bit of a pressure on our margins in Q4, but for the right ambition to drive stronger growth as we come out of Q4 into into into 2021.
Got it thanks Jerre.
Thank you and we have time for one last question and that question comes from Matthew cost with Morgan Stanley. Your line is now open.
Hey, guys. Thanks for taking the question I've two so on the expectations for 2021, obviously, you guys reiterated kind of the double digit.
Top line growth number that you gave last quarter I was wondering if you could dive a little bit deeper into the drivers of growth that you're expecting in that number kind of between the.
The existing portfolio and then the new games with a peak and with ROIC and then secondly, just on the slot portfolio I think you guys mentioned that.
The the another record quarter thrashing, you know bigger than than last quarter for the for the social slots portfolio. I'm. Just wondering what is what has been driving that and when do you expect to see you know normalization in sort of data that specific sub sub segment of the portfolio. Thanks.
Yeah, I'll take I'll take slots first I think slots the slots portfolio is obviously still benefiting if you could use that word from the dynamic of shelter in place just purely because you there for the sloughs players are very passionate about their games and they're obviously highly engaged players and one.
Do you have strong cohorts in these games they stick with these games for a long time, they're very they're very much touched the brands in terms of their their the ritas and what we've seen is whether it's hit a rich some of the existing games and our recently launched while a year ago, We launched a game of Thrones slots is performing really well.
And so the portfolio is.
From when Frank joined or I joined the.
Six months afterwards, compared to where we are now. This this is a highly performing portfolio of slots games, there both topline and bottom line and it's very much driven off you know engagement bold beats, adding any new content into those games and the addition of game of Thrones slots. Obviously it was a it was a big deal for that portfolio because it.
Added a new title, that's a leading eating that growth between it and hit a rich they are probably the two games that are having the strongest.
<unk> impact.
In terms of you know the.
Your question on 2021 expectations, obviously, we expect as we did back in Q2 earnings to see double digit growth and you know the obvious thing to say is full year, a full year contribution from Raleigh and from a peak is going to be a major driver of that but we do expect to grow our life services income.
Looting Harry Potter is part of that overall like service.
Portfolio and so that we expect that the gross while the overall like service. If you think about it from a same store sales of us use the old the old for us or like for like there there will be some challenges as you get into the second half of the year in terms of just your you know that what I would call the the amplified impact of coal, but on bookings year over year, but we see.
Believe collectively that we're still going to see growth, obviously, given the size of the portfolio coming out of.
Q4, 2020 into the year. The other thing I would say also is.
You know, we we will we will we still have games in development in terms of our pipeline. So the expectation is we will see additional games come out and just to clarify one thing as it relates to cope with the biggest bang from corporate was obviously Q2, we've seen normalization through the rest of the year. So.
TBD, what that will mean.
But as we sit here today, if you look at the fundamentals of our life services.
The recently launched Harry Potter the acquisition are all like.
The full year contribution from a peak plus the pipeline of new camps that we selevend development, including the ones in soft launch we feel comfortable that we can we can grow the business year on year.
Great. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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