Q4 2020 Zynga Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Zynga is fourth quarter and full year 2020 of financial results Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session basket question. During the session you will need the press star one on your telephone please be advised the today.
The conference is being recorded.
Part of any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Rebecca Lau, Vice President of Investor Relations and corporate Finance. Please go ahead ma'am.
Thank you, Josh and welcome everyone to think of fourth quarter and full year 2020 earnings call.
On the call with me today, our French of ball, our Chief Executive Officer, and chair of Griffin, Our Chief Financial Officer.
Shortly we will open up the call for life question.
Before we cover the Safe Harbor. Please note then in an effort to keep our team members healthy each member on today's call of 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, we will make forward looking statements related to our business plan and strategy as the loss expectations for our future performance.
The results may differ materially from the results predicted.
Please review the risk factors in our most recently filed form 10-Q as well as elsewhere in our SEC filings for further clarification.
In addition, we will also discuss non-GAAP financial measures our earnings letter earnings slides and when filed our 10-K will include reconciliations of our GAAP and non-GAAP financial measures.
Please be sure of look at these reconciliations of the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results.
Yeah.
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 over the call it of Frank for his opening remarks.
Thank you Rebecca.
Good afternoon, everyone and thank you for joining our Q4 earnings call.
'twenty 'twenty was an unprecedented year of uncertainty loss and change. It was also the year when more people than ever before turned two games for entertainment social connection and a sense of community.
I could not be more proud of how Zynga has responded to the challenges of the global pandemic with focused execution strong teamwork and delivering high quality of light services to our players.
Our team seamlessly transitioned to work from home in early March and continued to deliver on our mission to connect the world through games, while achieving one of the strongest performances in Zynga history.
Our execution in Q4 and throughout 2020 has added meaningful scale to our live services platform expanded our global footprint and strengthened our position as one of the leading mobile game publishers in the world.
Q4 capped off a truly transformational year for zynga in the quarter, we achieved our highest revenue of $616 million of 52% year over year and record bookings of 699 million of 61% year over year.
Our results were well ahead of guidance across all key financial measures led by an all time best revenue and bookings quarter for words with friends.
In addition, we delivered record Q4 performances by empires, and puzzles and CSR too as well as our social slots and casual cards portfolios.
Building upon its successful launch in September Harry Potter puzzles and spell of continued to gain momentum as players engage with its highly social and innovative gameplay.
Advertising in Q4 was also a key growth contributor driven by strong seasonality in advertising yield as well as an excellent performance from ROIC in its first full quarter at Zynga.
In 2020 strong organic growth across our live services, coupled with contributions from our acquisitions of peak and Rollick drove our highest annual revenue of 197 billion.
Up 49% year over year and.
And record bookings of $2, two $7 billion up 45% year over year.
We also generated our best ever annual operating cash flow of $429 million of 63% year over year.
And added $794 million in net proceeds through a convertible notes offering in December ending the year with approximately $157 billion.
Of cash and investments.
Execution of our multi year growth strategy has driven our tremendous results to date.
Providing strong momentum for additional growth ahead.
In 'twenty 'twenty, one and beyond we are focused on continuing to drive recurring growth from our live services Foundation and launching new titles from our exciting new game pipeline.
In addition, we are investing in new transformational growth opportunities based on key Megatrends within interactive entertainment.
These initiatives include our investments in hyper casual games.
Ross platform play.
International expansion.
And building an advertising network all of which have the ability to meaningfully increase zynga as total addressable market, while adding new capabilities to further grow our business.
First we are continuing to drive recurring growth from our live services Foundation.
One of the Zynga of core competitive advantages is our ability to create forever franchises that are highly engaging and can predictably deliver sustainable growth over long periods of time.
A great example of this as words with friends.
In 2020, the franchise delivered its best ever annual revenue and bookings performance in more than 11 years since its launch in 2009.
A key driver of this performance was our steady release of new bold beats, including an innovative rewards path, which gives players themed path to play and rewards to unlock.
Looking ahead, we are entering 2021 with a much larger and more diverse portfolio of live services.
Now anchored by eight forever franchises, including CSR racing empires, <unk> puzzles merge Dragons merge magic tuned blast toy blast words with friends and Zynga poker.
We are focused on executing our bold beat strategy across our portfolio and are confident in our ability to drive recurring growth collectively across our live services.
Second we are launching new titles from our exciting new game pipeline.
Our goal is to create new forever franchises to add to our live services portfolio and our latest release Harry Potter puzzles me spells is off to a great start and will be of meaningful growth contributor in 2021 and beyond.
Coming up next from our new game pipeline or puzzle combat and Farmville three.
Both titles have been progressing well in soft launch and are on track to release worldwide in the first half of 2021.
We also expect our first star Wars game to enter soft launch in early summer with the potential to release by the end of the year.
Going forward, we expect new gains to be a meaningful growth driver and have additional games in development at natural motion Gram games small giant peak and Zynga Studios.
Third we anticipate hyper casual will be one of the fastest growth opportunities for zynga.
Hyper casual games are highly accessible driven by simple concepts that are easy to play and appeal to large and diverse audience of players many of whom made the first time mobile gamers.
With our acquisition of Raleigh, we enter 2020 with three of the top 50 downloaded U S. iPhone games and so far in Q1, two of our new hyper casual titles high heels and blob runner. Three D have already reached the number one and number two top downloaded U S gained positions on Android and iOS.
Yes.
In 2021, and beyond we will build on relics momentum and expect this new hyper casual audience to supercharge Zynga live services platform by meaningfully expanding our user acquisition funnel cross promotion opportunities and advertising inventory.
Fourth we are actively developing cross platform play games, which will further expand our total addressable market.
Gamers have been excited to seamlessly play across mobile PC and console for a long time and recent innovations in technology, including five G make this a reality.
Today, many of the largest interactive entertainment properties in the World are free to play cross platform play experiences.
Zynga is well positioned to successfully enter this category because one we have iconic licenses and brands to our teams have strong multi platform experience. Three we are already using proven cross platform play tools and technologies, such as unity Unreal and AWS.
And four we have over a decade of experience building and operating free to play live services.
Executing on this opportunity has the potential to meaningfully increase our total addressable market and drive stronger topline and overall operating margins.
Fifth we are expanding our live services portfolio in international markets and see this as a tremendous growth opportunity.
In 2020, we grew our international revenue and bookings to their largest scale in Zynga history.
A key driver of this performance was our growth in Asia, where we continue to enhance our ability to self publish titles, including two glass, which was the most downloaded game in Japan on Android in 2020.
And empires, <unk> puzzles, which continued to perform well throughout the year.
More recently, Harry Potter puzzles, it's spelled it's showing positive engagement in Japan, and South Korea.
Over the coming years, we see more opportunities to expand into international markets as we execute on our growth strategy.
Fifth we are investing in new technologies and solutions to build an advertising network.
At the core of Zynga of live services platform is our first party data network, which captures key insight about how our players are interacting with our games.
We use this data to deliver highly engaging interactive experiences for our players optimize our user acquisition and determine how best to monetize our games, including advertising.
In Q4, 2020, we more than doubled our average monthly mobile active users year over year to $134 million significantly expanding our first party data network and player insights.
This increase audience scale, coupled with our diversified portfolio of life services and best in class data science capability gives us every confidence in our ability to navigate upcoming privacy changes and to continue to grow our advertising business.
Furthermore, by building an advertising network, we will unlock more value from our portfolio of games and capture more of the economics and the mobile advertising ecosystem.
Overall zynga is uniquely positioned to capitalize on key megatrends in interactive entertainment by executing on our growth initiatives of life services, New game development Hyper casual games Cross platform play International expansion and building an advertising network, we see an.
<unk> opportunity to more than double the value of our company.
Finally, we see more opportunities to acquire talented teams technologies and franchises to further expand our capabilities and accelerate our growth.
We have a strong track record of executing accretive acquisitions, including Gram games small giant games peak and Rollick, which have each strengthened our life services platform and demonstrated our ability to collectively grow faster together.
Looking ahead, we see more opportunities to continue to be a leading consolidator in the destination of choice for developers in this dynamic interactive entertainment industry.
I am extremely excited for Zynga, the next phase of growth and I'm confident in our ability to generate more value for our players teams and shareholders over the long term.
With that I would now like to turn the call over to Gerry to discuss our results in more detail as well as our outlook for the coming year.
Thank you Frank.
Q4 capped off a transformational year for Zynga as we delivered our highest quarterly and annual revenue bookings and operating cash flow and sank of history.
Our Q4 results were well ahead of our guidance across all key financial measures driven by strength in our live services, coupled with strong advertising results.
Revenue was 616 billion of $52 million year over year comprised of bookings of $699 million up 61% year over year offset by a net increase in deferred revenue of $83 million up 187% year over year.
Revenue was 46 million ahead of our guidance driven by a $29 million better than expected bookings performance and a net increase in deferred revenue of $17 million lower than our lower than expected.
Live services drove our record results.
With stronger than anticipated performances from relics hyper casual portfolio empires, <unk> puzzles words with friends and Harry Potter puzzles, the sales driving our topline beat versus guidance.
We generated our highest ever user pay revenue of $499 million up 54% year over year and user pay bookings of $582 million up 64% year over year.
We delivered record of advertising revenue and bookings of $117 million up 47% year over year.
Our stellar advertising performance was driven by strong advertising seasonality and yields as well as an excellent performance from relics hyper casual portfolio and its first quarter at Zynga.
The primary drivers of our net increase in deferred revenue were bookings from tuned blast toy blast and Harry Potter puzzles and spells.
We ended the year with of deferred revenue balance of $748 million versus $434 million a year ago.
Turning to our Q4 operating expenses.
GAAP operating expenses were 393 million up of 135 million or 52% year over year.
While non-GAAP operating expenses were $331 million up 124 million or 60% year over year.
The primary driver of the year over year increase in GAAP and non-GAAP operating expenses is the step up driven by incremental expenses from our recent acquisitions of peak in Raleigh.
Outside of the step up for investments excuse me for acquisitions. The other drivers were the launch marketing for Harry Potter puzzles, and spells and a slight ramp in R&D investments and our new game pipeline.
Year over year GAAP operating expenses were broadly flat at 64% of revenue and non-GAAP operating expenses decreased to 48%.
From 48% to 47% of bookings.
For both GAAP and non-GAAP operating expenses, we delivered stronger operating leverage from R&D, and G&A, largely offset by higher marketing investments year over year.
Our strong operating performance and lower than expected net increase in deferred revenue was the primary driver of our better than expected profitability, where we delivered a net loss of $53 million 39 million better than our guidance and adjusted EBITDA of 90 million 55 million better than our guidance.
We generated record quarterly operating cash flow of $206 million up 119% year over year.
In December we issued $875 million of convertible notes the strong investor demand.
Providing net cash proceeds of $794 million after the cost of the capped call transactions and the associated the issuance fees.
We also entered into a new 425 million credit facility with an expanded syndicate of banks, which replaces the existing $150 million facility.
We ended the year with cash and investments of 1.57 billion, which we anticipate will be used primarily to fund future acquisitions and strategic investments to further accelerate our growth.
Turning to guidance.
We have developed our Q1 and full year 'twenty one guidance based on the information available to US a day February 10th 2021, and on a similar methodology to prior quarters.
Given the higher level of volatility and uncertainty around the COVID-19 pandemic. There is the potential for a wider range of outcomes, both positive and negative as it relates to our ultimate business results.
That said 2021 guidance is as follows.
Revenue of $2 6 billion up $625 million or 32% year over year.
And that increase in deferred revenue of $200 million down 95 million of our 32% year over year.
Bookings of 2.8 billion up $530 million or 23% year over year.
And that loss of $150 million.
Versus the net loss of $429 million in 2020.
Adjusted EBITDA of $450 million up $184 million.
Our 69% year over year.
We expect live services to drive the vast majority of our topline performance.
This will be driven primarily by full quarter contributions from two blast toy blast relics hyper casual portfolio and Harry Potter puzzles, the spells as well as modest growth across the remainder of our live services.
These gains will be partially offset by declines in older mobile and web titles.
Our guidance also assumes moderate initial top line contributions from puzzle combat and Farmville three.
Which are targeted to launch in the first half of 2021.
As well as the potential launch of our first Star Wars game by the end of the year.
From an advertising perspective, our guidance assumes that the upcoming changes of two IBSA will create some pressure on advertising yields, but we expect this impact to be short lived.
Our teams of multiple strategies that should more than offset this potential headwind, including yield optimizations and the opportunities to expand our advertising inventory.
All in we expect to meaningfully grow our advertising revenue of bookings driven by primarily by a full year contribution from our hyper casual titles as well as growth across the rest of our portfolio.
We anticipate an increase in our gross margins due to lower net increase in deferred revenue and higher mix of advertising versus use of pay.
Partially offset by higher amortization expense for acquired intangible assets.
In 2021, our ultimate operating leverage will primarily be of function of our live service performance user pay versus advertising mix level of investment against the new growth initiatives the <unk>.
<unk> of new game launches and the level of marketing investment applied to scale new titles in our live services.
While we expect to deliver strong absolute year on year growth in profitability and expand our GAAP operating margins, we anticipate moderate compression to non-GAAP operating margins as we invest in the launch marketing to scale New games launched in 21 continue to invest in our new games in development and ramp investment in the.
The number of key growth initiatives in particular cross platform play development hyper casual games as well as advertising technologies and solutions.
With that said, we expect to see improvements in operating leverage from R&D, and G&A, which will be more than offset by higher marketing investments.
Our guidance also assumes that we will see higher operating margins in the second half of the year as greater top line scale provide stronger operating leverage.
In absolute terms, we expect to deliver significant improvement of profitability.
The net loss of $150 million $279 million better than a year ago, and adjusted EBITDA of $450 million up 184 million of 69% year over year.
Execution of our 2021 plan will deliver another year of double digit growth.
It will also position us for continued growth in 2022, where we expect low double digit topline organic growth as well as improved operating leverage from our live services, which will include full year contributions from our 2021 new game launches.
Over the next several years, we expect to continue progressing towards achieving our longer term operating margin goals, while generating stronger operating cash flow.
Now for Q1 guidance, which is as follows.
Revenue of $635 million up 231 million of 57% year over year.
Net increase in deferred revenue of $45 million versus $21 million a year ago.
Bookings of $680 million up 255 million or 60% year over year.
And that loss of $50 million versus the net loss of $104 million in the prior year quarter.
Adjusted EBITDA of 100 million up $32 million or 46% year over year.
Our top line performance will be driven by continued strength collectively across our live services as well as year over year additions of tuned blast toy blast, Harry Potter puzzles, the spells as well as existing of new hyper casual games from Rollick.
These gains will be partially offset by declines in older mobile and web titles.
Our topline guidance does not assume any meaningful contribution from our games currently in soft launch.
We expect gross margins to be down year over year, primarily true to a higher amortization expense for acquired intangible assets and the net increase in deferred revenue first.
Partially offset by the impact of of higher advertising mix.
We expect our GAAP operating expenses as a percentage of revenue to significantly improved year over year, primarily due to lower contingent consideration expense, partially offset by higher stock based compensation.
Outside of these factors, we expect improvements in year over year operating leverage in R&D, and G&A, which should be more than offset by higher marketing expenses as we continue to invest in our live services, including growth marketing on the Harry Potter puzzles and spells as well as investment against our existing and new hyper casual games from Rollick.
We also plan to spend modest test marketing on our titles in soft launch.
In absolute terms, we expect to deliver significant improvement in profitability.
The net loss of 50 million 54 million better than a year ago, and adjusted EBITDA of $145 million up $32 million of 46% year over year.
In conclusion.
We are very pleased with the progress, we're making against all aspects of our multiyear growth strategy and look forward to continuing that momentum in 'twenty 'twenty, one with another year of double digit topline growth and strong year over year of growth and profitability.
With that we will open the call to your questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw.
The question press the pound key please stand by with some part of the Q&A roster.
Our first question comes from Colin Sebastian with Baird. You May proceed with your question.
Thanks, and good afternoon, everyone two questions from me please.
First off on Harry Potter, you talked about the strong start to the game that it'll be a meaningful contributor to growth in 2021, if you could perhaps expand a bit on the life services and what's driving both usage of monetization in the way that gives you confidence in the outlook and then secondly.
On the investments in advertising Tech and solutions are those internally developed initiatives or do you need to acquire some of that infrastructure and in the meantime, Jerry how much of an impact from the pending Apple changes are you embedding in Q1 and full year outlooks.
Okay.
Hey, Collin this is Frank I'll take the first two questions and I think the.
Third point about the.
The AD impact gerrick and finish up with.
In terms of Harry Potter, what we're seeing is.
Inside the the game service is very strong engagement and retention metrics.
And very good conversion of monetization. We have several features in the product that have really really excited players and driven very high levels.
Of interaction and competition and we have a very strong calendar of bold beats planned for the rest of the year. So based on the Kpis of the trends that we're seeing the weighted the cohorts are acquiring and retaining.
We feel very good about the start and the sustainability of that start for Harry Potter and we're not yet calling it a forever franchise, but it's certainly on trend in that direction.
In terms of the second question about how we're going to build out of our advertising network.
Right now, we obviously have a very robust set of inventory inside of our games and an optimization layer for engagement, but as we look to build out from there we're going to be looking at key components of the technology related to the demand side and supply side. The exchange also looking at contribution in <unk>.
Of these are going to be a.
Technology that we build internally.
Some of them are going to be off the shelf incorporation of existing technologies, but we're also looking at.
Acquisition as a potential opportunity to accelerate in key areas.
And also the potentially add additional scale.
Through this initiative that we think will be a powerful growth driver for us in 'twenty, one and beyond.
Sure.
Yes in terms of.
The the impact from changes Apple is planning to rollout in terms of Q1 there isn't.
Much of an impact in that quarter.
As it relates to the rest of the year, we're expecting modest pressure, but we do expect to grow our advertising business with or without rollick. So from from that point of view.
It's one of a number of dynamics going on in our business, both positive and negative but it's we believe there's there's modest pressure, but it's something that we we believe we can cover with all of the other levers we have out of our Beck and call.
Okay. Thanks, guys.
Yeah.
Thank you. Our next question comes from Mario Lu with Barclays. You May proceed with your question.
Great. Thanks for taking the questions I have one on cross platform and why not just on subscription.
For the first of all of our cross platform. You guys mentioned you guys are investing into it. So any particular studio at Zynga that are creating those games and are they completely new games or existing zynga. The titles that will be made of cross platform and then on subscription more and more companies are.
Implementing share subscription models by Fort Night crew and roadblocks premium.
What are your thoughts on subscription overall and do you think staying of titles.
Empires <unk> puzzles can see something like this implemented.
Frank It looks like Youre on mute Hi, Mario This is the question on the cross platform.
Natural motion is our lead studio for that effort.
We are driving a lot of the development.
We undertake a number of these projects there.
They are very they they've published gain immunity Unreal day have a very high percentage of the development community, having worked on console and PC games in the past.
The titles that we're contemplating here, our new titles to Zynga.
And we'll be starting to look at those titles rolling out more towards the end of 'twenty, one and then scaling up from there.
In terms of your second question about subscription the Pla.
That we are experimenting a great deal is with the season passes the rewards path that you saw in in words with friends that came out in Q4 and was the key driver of that success is the state of where we're at on subscriptions. We think that eventually subscriptions are possible in our business, but it's one of the.
The things that were easing into as we expand the number of season passes across our businesses, which was initially successful in empires <unk> puzzles, and we've expanded it to Graham, whereas the friends and we're looking at future opportunities in addition to that.
Great. Thanks, Frank.
Thank you of our next question comes from drew Crum with Stifel. You May proceed with your question.
Okay. Thanks, Hey, guys. Good afternoon. So Frank you listed five separate studios I think that are working on new games that you haven't revealed what any of those or does that suggest these are just very early stage.
<unk> will not be part of the 2022 plan.
And then any more detail or you're willing to provide.
Star Wars game, and then separately for chair of the.
2020 to low double digit growth rate you're forecasting.
Given all of the investments, we're making and new initiatives on top of the eight forever franchises.
Is that low double digits rate of reasonable longer term notional model for the business. Thanks.
Thanks.
Yeah.
Thanks drew for the first question.
We did list the number of the studios that are working on titles are these are titles that are in various stages of development.
Until we have affirmed fix on when we would be able to enter soft launch for those gains we typically don't talk externally about them.
But the idea of really was the call out. The fact that we have a multi year new product pipeline, we're really looking at not just the releases in 'twenty, one, but 'twenty two 'twenty three and 'twenty four and and have starts in all of these different studios against that it's some of them are new brands. Some of them are brands that people would be familiar with.
So it's a we feel very good about the mix and as we get closer to releasing some of these titles the soft launch and test.
Be more explicit about with those titles are in from where they are coming in terms of star Wars there'll be more news on the Star Wars title as we progress into the first part of this year, but at this time.
That's about what we're going to disclose.
Drew in terms of <unk>.
Thinking about the out years, our ambition every year is to is to grow our live service in there.
They are in new games into that live service space.
Time based.
Based on what Frank just said in terms of the new game pipeline. So from an organic perspective, yes. The the the ambition each share would be to deliver double digit growth for the foreseeable future.
And particularly when you start layering in the potential also from the hyper.
Hyper casual cross platform and an international so the way we think about our business is we have a variety of fairly exciting levers too to lean into in terms of of driving topline growth and ultimately expand margins as well. So that's the game plan. We obviously do have the opportunity to use the balance sheet to go.
Bring some more talented teams to think of overtime.
Great. Thanks, guys.
Thank you. Our next question comes from Matthew cost with Morgan Stanley You May proceed with your question.
Hi, guys congrats on the quarter. Thanks for taking the question two if I could you mentioned in the letter you expect modest growth on the on the remainder of the portfolio in 'twenty, one that's excluding peak Rollick and Potter obviously.
Obviously, 'twenty with such an incredibly strong year.
The definitely for it for kind of that.
The legacy portfolio and some of those core games that have been in there for a long time, how would you how do you get comfortable.
Thinking about the drivers of growth into 'twenty, one given the comps out there against and then how should we think about that and then the second one is just on the international side of great quarter with international at 57% you guys of.
Obviously made a lot of progress there in the past year or two.
What are the key challenges that you're still up against the in Asia and in sort of key execution point of view you feel you still need to negotiate to really have it be one of your main drivers of growth going forward. Thanks.
Hey, this is Jeremy I'll take the first question is as it relates to.
The growth across the live services.
Absolutely you know 2020 was a was a very strong year for Zynga in our live services, both from an execution on the bold beats.
But obviously with the.
With the shelter in place.
As well, but as we think about next year and it was the same in Q4 and as we go into this year.
Our our strategy since day, one has been focus on the players in the games, we have in the marketplace focus on driving meaningful bold beats into those games and continue to innovate in those games that's fundamental to.
Our strategy of it.
Effectively drove most of the the growth outside of acquisitions for the first phase of our growth and that's going to be continuing to be the same situation going into next year. So while the baseline absolutely was.
It was raised.
Based on some of the the shelter in place dynamics. It was also raised based on our execution of bold beats and you know.
Each of our games has its own cadence unplanned bold beats and we take each of these games in each of these bold beats with the same focus in terms of talent and execution that we do against our new games and so that's why we feel good about being able to obviously your whole hold serve and deliver.
Growth into.
You know the core life business.
Yes, Matthew in terms of international.
I think we tend to think of it in terms of opportunities, it's really a function of of getting the title.
In terms of the new game pipeline really in a position where they're fully culturalize.
That we have a very specific go to market strategy for each country.
And then the good news long term is that a lot of the the territories in Asia or moving to much more of a performance marketing model. So it's a lot easier for accounts.
Company like ourselves to come in and be able to acquire users and work with local partners to drive success, that's what you've seen with the.
The the success that we had this year with the peak titles in Japan, as well as the empires <unk> puzzles and the good start that Harry you started the Harry Potter starting to see longer term I think the opportunity is.
We need of strategy for China.
Now, we do well in Japan, and South Korea, Taiwan, and Southeast Asia understanding how and will operate in China is really a function that I think long term will be positive for us in the short term. We're just navigating the the particular dynamics that are of play there and then further out as the India.
Use the double its gaming market every year, we see that as a real opportunity for us to leverage our local studio. There. We have almost 600 developers in India that I think will give us a long term edge in terms of being able to build out of business in India that will contribute to us thinking further afield, we used the opportunity.
In the Middle East.
In the Americas as.
As well as even budding markets in Africa, where long term. This is part of the the beauty of mobile as these are high performance networks, you're getting high performance inexpensive smart devices going out youre seeing increased purchasing power and we think that our brands and products long term will succeed there and it's the matter of of really creates.
The right go to market strategies and maximize the local conditions. So very very excited about the opportunity to grow further there.
Great. Thanks.
Thank you. Our next question comes from Mike, England Goldman Sachs. You May proceed with your question.
Hi, good afternoon. Thank you very much for the question.
Just wanted to ask about hyper casual, which you cited out a day.
Transformational growth opportunity.
Could you just talk about what you learned about the hyper casual category, particularly in this last quarter.
That the merits of this additional investment is there something strategic about the category as it relates to either user acquisition or building out the advertising network that gets you excited about it and then as a follow up to that.
Is there an update for how much rowlock is pacing in terms of annualized revenue. Thank you.
Okay.
Yeah, Mike I'll take the first question Gerrick can take the second in terms of what we like about hyper casual.
The team at ROIC of spectacular the they have an absolutely fantastic culture of great leadership.
And their knowledge about the category is really phenomenal we've learned a great deal from them and they've been leveraging a lot of the systems Inc.
And technologies that we have the to even grow faster some of the things that we've learned about hyper casual players that we really are excited about is that.
Many of them are first time players to mobile.
So being able to acquire players into our network through a game like high heels or Bob runner three D. And then over time introducing them to other zynga games.
We think of the real opportunity.
The second thing is is that these players play a lot of games and they just play hyper casual titles are also playing I'm talking about different segment of players. They also play a lot of of regular mobile games. So there the high consumers of titles they tend to be younger than the typical target that we have at zynga and we like that kind of incremental growth there.
Well and as you think about the user acquisition funnel. These are of players that are being acquired for.
Pennies.
That are not sensitive to the idea of a high.
And are able to be brought into our network and as you think about the arbitrage and the long term nature of the relationship that we're going to build with them at the very positive thing for our company. Overall. So we we are you know when we've been looking at the category for many years and a lot of folks thought that hyper casual with the fad early on.
And I honestly think of the new form of entertainment on the phones at the.
They dominate the.
The chart in terms of free to play game there instantly on their simple ideas. They are fun to play there.
Work off of advertising, so theyre very accessible over time, I think they will evolve into a bigger gains maybe games of like IAP they'll expand internationally more so than they have so we like the early indications here, we like the player profiles, we're seeing we like the behaviors, it's incremental and I think when you start to think.
Our expansion of our advertising network having.
Having this at the top of the of the funnel and being able to bring them through the significant advantage for us versus non.
Not having a hyper casual part of our portfolio.
Sure.
Yeah in terms of yes, we're very happy with the pacing.
ROIC is pacing it obviously had a very good first quarter with the company.
We don't give out specific.
Individual title or a portfolio of growth rates, but how I can answer your question as you know we expect the overall shape of the 21 bookings to be 85% user pay and 15% of advertising.
And you know the majority of the advertising growth youre going to see year on year is going to come from Rollick. We do expect to see some growth from the rest of the portfolio of but the majority is going to come from royalties. So that'll give you a good indicator of its growth rate for the year.
Great. Thank you Frank Thank you here.
Sure.
Thank you. Our next question comes from Mike Hickey with Benchmark Company. You May proceed with your question.
Hey, Frank Chair, Rebecca Congrats guys on the from a quarter of great job.
Two questions from the first one with whom you sort of social.
Poker slots business curious, how the outperforming them up.
I'll now I'm hearing from here I apologize the Michigan is one of the Michigan just legalized.
Online gaming went live January February just curious, if you're seeing sort of the impact.
From the IMG operators in that state on the social portfolio.
And I guess same question.
You guys have considered strategic.
Strategic alternatives to your slots and poker business.
It seems like these are really compelling assets from the RMG operators in terms of the user acquisition.
Second question from me.
If you will curious your thoughts on Glu mobile I think ranking on Nick and his team.
<unk> really well it seems like the big broke out of the great culture.
Good portfolio of games.
Lot of casual games, the same G L cost synergies.
So just curious why you didn't compete all.
For that asset it seems to make a lot of sense. Thanks guys.
Well, Hey, Mike Thanks for the questions and the comments.
First question about social casino and poker.
This year in 2020, we've seen a very.
Pause the performance from the the gains that we provide there whether it's a game of thrones our hit it rich and in fact, our poker title has been coming on strong.
So overall of that category has been performing very strong we're not seeing any impact from the expansion of of real money gambling.
In Michigan or in the other states, we typically find that the players of our social slots in social casino game enjoy the way that they play they're not really necessarily in it for the making of the money all of the real money part of it the social nature of it the fun game play.
The engagement and the retention is really what's driving a lot of their behavior. So it's more traditional game behavior than what you might've seen from you know in online gambling site. For example, so we think that that is the and an enduring thing there.
If you look at where categories have had significant real money gaming in Europe for example, and other regions are the <unk>.
Social side of it the free to play side of it has continued to be vibrant and very successful so I.
I think they can coexist.
And in our in some ways somewhat complementary with regards to looking at strategic alternatives.
We're very pleased with the performance of Zynga poker in social casino as part of our portfolio. We're very proud of the teams and the work that they do there so that's not something that the.
We're talking about in any great detail as it relates to the glu congratulations to Nick and the team they've done a fantastic job with glu over the years, we're very happy for them in this transition to being a part of electronic arts, we wish them well they've been of great competitors in a bit.
Part of the industry. So that just didn't go but at the same time, we're going to continue to keep the competing with their franchises.
As far as an asset goes we look at all kinds of assets when we're thinking about building our business Inorganically.
Inorganically, we just.
So happened that the way that Zynga is configured and where we're going with our growth initiatives and an advertising hyper casual cross platform play the acquisitions that we just executed with Wallach and Pete.
You know the the make the combination of our two companies, whether it's something that.
Really was the.
The thing that we chase it was it was a lot of of the timing and where we're going strategically so again wishing Nick and the gang well at Glu.
Thanks, guys. Good luck.
Thank you. Our next question comes from David Beckel with Baron Capital You May proceed with your question.
Hey, thanks, so much for the questions I have two pertaining to the advertising side of the business.
Jerry.
Or Frank whoever wants to take it I was hoping you could expand a little bit on a comment you made about why you don't expect any of <unk>.
To have a significant impact on your business not presuming it shouldn't necessarily but you did mention yield optimization strategies would you consider these workarounds to what Apple has in mind for implementation or are they.
Separate and apart sort of organic strategies that you've developed with your partners. If you could dive into that just a little bit and then secondly on the AD network side I'm curious what portion of your total AD inventory do you envision being sold I'll just use the term organically for lack of of <unk>.
The word through your own network and what type of savings do you envision on that portion of the inventory.
David in terms of.
The the strategies I was referring to the.
I know idea of Fei is getting a lot of airtime.
Book in the press and.
Across the industry, but practically speaking.
Our industry.
All of this has puts and takes that we deal with and from our vantage point, we just add at this one to two the the other the puts and takes and were continually working what are our advertising partners to optimize yields to find a different offerings that we can embed within our games that are clear friendly, but also it gives us new opportunities.
<unk> to deliver.
<unk> bookings and revenue and so from that point of view.
It definitely the screen a lot more discussions with our partners and how we can operate in the post <unk> world, but I have to say it's been for the most part business as usual in terms of us looking to optimize and grow our businesses.
So from that point of view, it's not like there was a separate set of specific initiatives. What I will say is having such a strong and diverse audience space that we do have from an advertising network point of view in terms of our games in our per basis.
It is absolutely helping us to be a lot more resilient than if we were a single game or we were a part of the you know the ecosystem that's purely focused on on the on tracking and profiling so from that point of view.
We feel good that we're obviously a diverse portfolio of games, we've got a diverse audience space and we've got probably some of the best in class data science and analytics in this area.
So where we're comfortable that we've got the debt you know the strategies and the the options too.
Deal with idea of fan continued to grow the business on the AD network side.
We're not went out of a point, where we would we will declare what percentage of our business will go through the network, but obviously our ambition is to is to.
It has to have a significant part of our business culture of our own network, because obviously from the from our point of view.
That makes a lot of sense, given the size of our our own audience space and the capabilities that we can build into expand our position in the ecosystem and it obviously will help us to increase our share of economics on the full value chain.
Great. Thanks, so much.
Yes.
Thank you. Our next question comes from Matthew Thornton with True Securities. You May proceed with your question.
Hey, good afternoon, Frank Good afternoon Jerry.
Most of mine have been answered, but maybe just a couple of quick housekeeping questions and then one bigger picture one for Frank.
Maybe jarrod just housekeeping wise.
The contribution from new titles in 'twenty, one and I apologize if I missed this but are you able to maybe just quantify or maybe box and a little further what what that means is that less than 5% of bookings or any color you can provide there.
Similarly, the long term operating margin.
Target I'm, just curious kind of how you're thinking about that.
These these days, whether thats, 30%, 35% or other.
Why does the ceiling, there, but any color there.
And then Frank just M&A landscape more broadly obviously, you talked about the <unk>.
The deal earlier this week, a little bit we've had a couple of new specs come out.
Probably more to come I'm.
I'm just curious how youre feeling just about the opportunities out of that as we go into 'twenty. One do you still see.
Attractive opportunity do you have kind of landscape out there any color there would be great. Thanks, guys.
Yes. This is Joe I'll answer the contribution we we've put a very small percentage and it's it's it's it's it's low single digits as it relates to.
New games.
Obviously, there's the potential for that to be larger depending on the timing of those games and how the scale, but as in past years, we we set up our guide for the year focusing on what we.
Can I have a stronger level of prediction against out of your of live services and obviously layering in some of the marketing that we're targeting against these new game launches.
And Matt what was the second of I didn't catch the second part of your two parter from for me.
The I don't think you or Frank but just long term operating margin just how youre thinking about that target you referred to kind of making progress towards that target I'm just kind of curious how youre thinking of what that target is and whether that's changed at all.
Given the scale.
Yeah.
I think he used the operative word it's all about scale and it's about execution and you know if you think about last year.
We came off of year end 2019, where we delivered 21% we had some really strong quarters and in.
2020, we started with 21% than 226 of US and we ended with a 25. When we we came close to delivering 25 per cent for the full Cisco, which is actually what is the next sort of target ZIP code for us is to get into the 25% operating range and then ultimately head towards 30.
How do you do that it is it is it is fundamentally scaling.
Your life services I E either true organic growth of the core base are continuing to bring profitable new games into that mix and also expanding our our advertising footprint whether it be in.
Hyper casual are our core business.
And expanding into some of the new areas. The Frank mentioned, whether it's cross platform, whether it's into expanding our addressable market internationally there all of the additional levers.
But as you've seen the growth we've.
We've taken the company from.
It was somewhere around 700 million, 2% flow through of up to the north of 2 billion of 25% last year and this year, we're showing some compression we're still we're still looking to deliver at least 23% this year, but in a year, where we're launching we plan to launch more new games, we plan to invest incrementally.
And to some very exciting new areas and if we execute against that that obviously sets us up very nicely for 'twenty two and beyond so that's that's the game plan.
And Matt in terms of your question about the M&A environment obviously.
The growth of interactive entertainment saw in 2020 has really brought a lot of attention the expansion of the capital market is certainly one factor.
When we when we think about zynga position in that overall context, we've been of successful consolidator over the last few years and I think it really comes down to the position. The company has in many ways. We like to look for companies that are it can grow faster as part of Zynga, we like.
The find companies that have compatible cultures that are looking for autonomy.
That are interested in independents, yet being part of the company, where they can really leverage the tools of our live services platform. We think of those opportunities are still out there and there's still a lot of of great developers.
That are small young growing.
I think that there's going to be an opportunity for us. The look further afield into capabilities related to cross platform play in terms of advertising.
And then also the hyper casual category is the place as it expands.
Theres a lot of interesting companies there as well so.
We believe in competition, we welcome it and when companies go public we think it's great.
These are companies. We typically competed again in the they were private Republic now everybody's public I think it's good for investors I think it's good for the company in the category I think it legitimizes.
To a greater degree interactive entertainment and as more of these companies come public I think it is the dynamic that will really create more growth and innovation overall and I think within the M&A space.
Seeing a lot of activity, but at the same time, we feel like we are of very strong organic growth strategy.
And so that means we can be pretty selective about what we go after permit from an inorganic standpoint and make sure that we continue to do the right deals at the right time, we do not have fear of missing out of that is not of dynamic at our company.
It's really it's really a function of focusing on growth execution and if we find a great team of the great culture.
We'll go for it.
Thank you and we have time for one more question Eric handler with <unk> Partners. You May proceed with your question.
Thanks, So much for fitting me in here two questions for you first as you think about you know.
Your key revenue drivers at least the on the mobile online game bookings.
Do you see this year.
Being driven more by the increase in players or D of use or more by the spending per per player.
I have a follow up.
I'll take that question.
Actually a little bit of bulk we are seeing an expansion in audience. Clearly you saw that in our numbers of lot of those are players from hyper casual so they come to be lower.
They monetize the advertising base and the gains of shorter in nature. If you go to our games like empires, <unk> puzzles or Harry Potter or words with friends, which now has a boost the economy tied the IP, we're actually seeing very good increases in conversion and an opt out so it's.
When you look at our overall mix, we have a lot of games now like hyper casual that bring down some of the averages.
But overall, we're seeing growth in the audience on hyper casual but at the same time and some of our traditional game of retention of engagements very strong and over the course of 2020 conversion and monetization did rise.
Okay, and then net.
Now that you sort of reloaded your dry powder for M&A.
And you also sort of investing in cross platform opportunities are we thinking maybe too myopically about just looking at companies in the mobile game space would you take a look at the company that Scott, maybe a good PC or console game and the ability to maybe take that to two of the mobile platform.
You know I think we're we're in interactive Entertainment company, we're mobile first and we've built our business there, but as we look ahead what were trying to signal to investors is that some of the biggest opportunities out are in cross play.
Style franchises, that's where you see a lot of billion dollar franchises and they're they're they're driven by free to play dynamics in life services, which we think we have a competitive advantage and so if we're able to find opportunities to partner with the development organization that might be on the different platform.
That we can combine with mobile.
That that's of a rich opportunity the to investigate I don't think you'd see it is just doing a console game by itself or a PC game by itself, we're really more interested in PC console and mobile game.
Of that are that are cross play their seamless that are of synchronous and all working together and in a free to play live services environment, and that's where we see the big the big win.
Great. Thank you.
Yeah.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yeah.
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