Q2 2021 Zynga Inc Earnings Call
Thank you for standing by and welcome to Zynga, the second quarter 2021results conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask the question. During the session you will need to press star 1 on your Touchtone <unk>.
Allophone and please be advised that today's conference may be recorded should you require any further assistance. Please press star zero and I would now like to hand, the conference over to your host Rebecca Lau. Please go ahead.
Thank you Latif and welcome to Zynga of second quarter 2021 earnings call.
On the call with me today, our French of Bell, our Chief Executive Officer and share of Griffin, Our Chief Financial Officer. Shortly we will open up the call for live questions.
During the course of today's call, we 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 and 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 are.
Our earnings letter earnings slides and when filed our 10-Q1 include reconciliations of our GAAP and non-GAAP financial measures.
Please be sure to look at these reconciliations as the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results.
The ever Q2 revenue of 720 million up 59% year over year and record Q2 bookings of 712 million and increase of 37% year over year.
Our top line performance combined with positive operating leverage generated our highest ever Q2 operating cash flow of of $161 million.
Are strong Q2 results were driven by our diverse portfolio of leading mobile franchises and our lives services platform.
By leveraging our best and class data science product management user acquisition and advertising capabilities are teams are able to release innovative bold beads to engage and attract players.
For example in queue to the release of a new disco fever, bold beat and tuned blast and the introduction of of teams feature and toy blast drove strong performances and both of these franchises as we approached peaks first anniversary of Zynga.
And Harry Potter's puzzles and spells or release of of club based magical mischief event also provided a new way for players to engage and compete between teams.
Within our portfolio social Casino also continues to deliver incredible results.
Social slots achieved yet another all time best revenue and bookings quarter, while Zynga Poker also delivered it's best Q2 revenue and bookings performance in 9 years.
During the quarter. We also generated are all the time best advertising revenue and bookings performance.
Words with friends delivered it's best Q2 revenue and bookings and the franchises 12 year history, driven by its recent introductions of of rewards pass and new solo challenge content.
Rollick also delivered a record topline quarter and was the fastest growing hyper casual game company and the world measured by sequential growth and downloads.
And 1 which Jeremy will tell you more about shortly on this call.
As we look ahead, we are incredibly excited by our positioning within the dynamic and fast growing interactive entertainment sector and the multiple catalysts that we have in place to deliver strong topline growth and margin expansion in the years ahead.
Execution of our multi year growth strategy enabled zynga to drive recurring organic growth from our expanding live services portfolio and new game pipeline in.
In addition, we are investing and hyper casual games cross platform play international expansion and advertising technologies, all of which have the ability to meaningfully increase the thing as total addressable market and further enhance our competitive advantage and growth potential within the interactive entertainment industry.
Since our last update we have made notable progress across the following key aspects of our growth strategy.
First our upcoming new game launches will be meaningful organic drivers presumed in 2020.2.
We are and the final stages of soft launch for Farmville, 3 a brand new mobile experience designed to capture the imagination of players who have enjoyed farmville over the past decade as well as the enthusiasms for a new generation of gamers.
We now expect to launch Farmville 3 of the players worldwide and Q4 in.
In addition star Wars hunters has been hitting key production milestones and development and will soon enter soft launch on mobile and select test markets in Q4 the.
The titles multiplayer action oriented cross platform gameplay is generating exceptionally positive initial feedback and we are building on this momentum by creating new features and modes within the game.
Our global studios are also making strong progress on our exciting new game pipeline and we expect to test market more new titles in 2022.
Second Raul ex hyper casual games portfolio recently surpassed 1 billion total downloads worldwide.
This tremendous milestone further establishes ROIC as 1 of the largest hyper casual publishers in the world with 15 games that have reached the number 1 or and number 2 top free download of games position in the U S. App store as well as 3 titles her challenge high heels and tangled Master 3 D, which have each generate.
Over 100 million downloads worldwide.
As the style of gaming continues to evolve we see the potential for some of ROE ex most popular games to scale into sustainable live service franchises and we are investing and features to further engage and entertain these audiences.
For example in June High Heels featured a first of its kind partnership with Kenneth Cole debuted the iconic designer's Pride 2021 collection and gain to celebrate diversity and raise awareness for the mental health coalition.
And her challenge ROIC has also released its first major bold beat leaderboards, which drove and immediate lift and player engagement.
Third with the close of our acquisition of sharp boost we are meaningfully expanding our advertising and monetization platform.
Chart boosts enabled zynga to reach a new level of audience scale and meaningfully enhances our competitive advantage in the mobile ecosystem together Zynga and chart Booz possess all the elements of a complete next generation platform high quality content direct player relationships massive reach and full stack advertising.
All of <unk> that can be applied across Zynga game portfolio and chart boosts advertising partners.
Fourth today, we are announcing our agreement to acquire Star Lark, the China based development team of golf rival the fast growing and second largest mobile golf game in the world.
This acquisition brings to Zynga, a talented team with proven ability to create a global casual hit with additional new products and early development start.
<unk> also expand Zynga as international presence by establishing a China based studio with access to the regions creative talent base.
Together, Zynga and <unk> are well positioned to grow Gulf rival faster together following the expected close of the acquisition in Q4.
In summary, we remain incredibly excited by the ongoing growth trends within the interactive entertainment as well as Zynga has unique position as 1 of the leading mobile game developers and publishers and the world our investments to date have added meaningful scale to zynga portfolio, while also expanding our studios enhancing our platform.
Capabilities and amplifying our collaborative culture.
While we are navigating some short term market dynamics, we remain confident that ongoing execution of our multiyear growth strategy will position us for continued topline growth and improved operating leverage in the coming years.
This in turn will generate more long term value for our players teams and shareholders.
With that I would now like to turn the call over to Gerry to discuss our Q2 results and forward outlook in more detail.
Thank you Frank.
The capped off a great first half performance with strong Q2 results ahead of our guidance delivering our best Q2 revenue and bookings in Zynga history.
We've also made great progress and key aspects of our multi year growth strategy.
And the talent front I would like to Echo Frank and welcome the charters 10th of Zynga and look forward to unlocking the growth and synergy opportunities within our advertising platform and 2022 and beyond.
Today, we were also pleased to announce that we've entered into the agreement to acquire China based star of arc developer of golf rifle.
51% year over year, and user pay of bookings of $579 million up 27% year over year.
Excuse me.
This was driven primarily by our mobile live services include and full quarter contributions from tuned blast toy blast, Harry Potter puzzles and spell partially offset by declines primarily and merge Dragons empires and puzzles and merge magic as we lapped heightened levels of engagement and monetization, we experienced in Q2.2020.
Advertising revenue and bookings were both a record of $133 million.
Up, 110% and 111% year over year, respectively.
Primarily driven by the year over year addition of and ongoing momentum and relics hyper casual portfolio as well as year over year strength and advertising yields.
The net release of deferred revenue of $8 million was primarily driven by merge Dragons and then person puzzles, partially offset by the recently launched Harry Potter puzzles and spells and puzzle combat.
We ended Q2 with the deferred revenue balance of $775 million versus 523 million a year ago.
Turning to Q2 operating expenses.
GAAP operating expenses were $392 million down $10 million of 2% year over year, while non-GAAP operating expenses were $350 million up $128 million of 57% year over year.
Year over year, GAAP and non-GAAP operating expenses increased due to the step up driven by the incremental expenses from our acquisitions and 2020 and Q1 'twenty 'twenty 1.
And particular, the increase was primarily attributable to development and marketing expenses for tuned blast and toy blast as well as relics hyper casual portfolio.
Outside of the step up for acquisitions. Other drivers were the increase and growth marketing on Harry Potter puzzles, and spells puzzle combat and a slight ramp and R&D investments and our new game pipeline, including cross platform play of projects and development.
On a GAAP basis. The increases. This these increases were more than offset by the year over year decrease and contingent consideration.
With GAAP operating expenses significantly down to 54% of revenue from 89% and the prior year.
Non-GAAP operating expenses increased to 49% of bookings from 43% with greater operating leverage and R&D and G&A, largely offset by higher marketing investments year over year.
We reported net income of $28 million 58 billion better than our guidance and an improvement of $178 million versus our net loss of $150 million a year ago.
The variance to guidance was primarily driven by the impact of the net change in deferred revenue lower contingent consideration expense and our stronger operating performance, partially offset by higher income taxes and net other income expense.
The variance to prior year was primarily driven by lower contingent consideration expense the impact of the net change in deferred revenue and our stronger operating performance, partially offset by higher amortization of acquired intangibles stock based compensation and net other income and expense.
Our adjusted EBITDA was 174 million 59 million better than our guidance and an increase of $104 million year over year.
The variance to guidance and prior year was primarily driven by the net change in deferred revenue and our stronger operating performance.
We generated record Q2 operating cash flow of $161 million up 11% year over year.
As of June 30th we have approximately $1.5 billion of cash and investments, which we expect to use primarily to fund acquisitions, including the recent close of sharp boost the future close the star of arc as well as payment of existing contingent consideration obligations.
And Q2, we executed and the amended purchase agreement for Rollick, which eliminates the existing earn out mechanism and accelerated the purchase by Zynga of the remaining 20% of Rollick.
Robert because now of wholly owned subsidiary of Zynga, which allows us to fully integrate the business and gives us greater latitude to vest and against future growth opportunities.
The total agreed cash consideration is $60 million with 20 million paid in July of 'twenty, 'twenty, 1 and the remaining $40 million to be paid in February 2022.
And July 2021, we also executed the final earn out payment of $75 million related to the acquisition of Gram games.
The effective August 4th we closed the acquisition of sharp boost for a total purchase price of approximately $250 million and cash.
We also have 40.425 million available under our credit facility, which had no amounts outstanding as of June 30th.
Now I would like to outline some additional points related to our acquisition of star of arc developer of the hit franchise golf rival.
This acquisition brings to Zynga of talented China based mobile game studio and of hip global franchise.
Golf rifle has rapidly grown to become the second largest mobile casual golf game and the world with approximately 6 million downloads in 2020.1 alone.
The purchase consideration is 525 million comprising approximately $350 million of of cash and approximately $210 million of tsang of common stock.
Issued at approximately $10.50 per share.
Being the average closing price per share over the 30 day trading period ended August 2nd.
The final closing consideration will also include customary closing adjustments and we expect the transaction to close and the fourth quarter of 2021.
There is no earn out associated with this acquisition.
We estimate that the purchase price represents a meat and mid to high teens EBITDA multiple based on the initial financial estimates for the business for 2020, 1 and 2022.
Given the transaction has not closed our updated 2021 guidance whichever lifeline shortly does not assume any contribution of benefits from this acquisition.
Once integrated we expect this acquisition will be immediately accretive to <unk> topline.
Not the guidance.
And the guidance include.
Our top line performance will it be driven by our life services.
While while we will billet benefit from positive year over year editions of relics hyper castle portfolio as.
As well as of full quarter contribution from Harry Potter puzzles and spells.
We anticipate this will be partially offset by declines and merge Dragons merch magic as well as older and older mobile and web titles.
Outside of hyper casual game launches our top line guidance does not assume the launch of any other titles and Q3.
From and advertising perspective, given the broader adoption of apples privacy changes, which occurred at the end of June we expect that we expect short term pressure and advertising revenue and bookings to be more pronounced in Q3 and and Q2.
We expect gross margins to be sick significantly up year over year, primarily true to the year over year change and deferred revenue.
We also expect our cap operating expenses as a percentage of revenue to be sick to significantly improve year over year, primarily true to the net change and deferred revenue and lower contingent consideration expense, partially offset by higher stock based compensation and the acquisition related expenses.
Given the ongoing evolution of our workplace model, we are taking the opportunity to optimize our footprint footprint and the bay area, the better fit our needs and enhance our operating leverage.
As a result, we plan to exit and some of these are primary off the space and San Francisco and expect the book a charge of approximately 82 million in Q3.
Which is primarily related to the impairment of our existing lease and related leasehold improvements.
Outside of these factors, we expect that improvements and euro for your operating leverage and R&D and she and it will be more than offset by higher marketing expenses as we continue to invest against growth opportunities, including where Alex hyper casual portfolio of international expansion of our life services and new games.
Our update of 2021 guidance is as follows.
Revenue of 2.725 billion up $750 million and 38 per cent year over year.
And increase of $25 million versus our prior of guidance.
And that increase and deferred revenue of 75 million down 220, 20 million or 75 per cent year over year, and 125 million Lord and our prior guidance.
Bookings of 2.8 billion of 530 million of 23 per cent year over year, and a decrease of $100 million versus our prior guidance.
And net loss of 135 million versus and net loss of $429 million and the prior year and in line with our prior guidance.
Adjusted EBITDA of 575 million of 309 million or 116 per cent year over year, and an increase of $125 million to our prior guidance.
As I noted we have updated our full year guidance to reflect our latest life services outlook and revise timing for new game launches.
While we of revised our top lying expectations for the year, we are maintaining our profitability outlook in line with our prior guidance.
We expect life services drive the vast majority of our top line performance.
Key drivers of year over year growth will be full year contributions from tomb blast toy blast Rolex hyper casual portfolio and Harry Potter puzzles and spells.
Partially offset primarily by merge Dragons and merge magic as well as declines and older mobile and web titles.
A revised guidance now assumes the worldwide launch of Farmville, III and Q4.
While our full year of guidance now includes chart boost we do not expect it to be of material revenue of bookings contributor and 2021, we.
We do expect sharp booths to unlock more meaningful growth opportunities and marsh and expansion synergies and 2022 and beyond.
A full year of guidance does not include any contributions from guy from golf rival given the are announced acquisition of Star of luck has not yet closed.
We anticipate of modest increase and our gross margins do 2 of Laura net change and deferred revenue as well as a higher mix of advertising for us as use of pay partially offset by higher amortization expense from required and tangible assets.
While we expect to deliver strong absolute year on year growth and profitability and expansion of GAAP operating margins, we anticipate moderate compression and non cap operating margins as we continue to invest and our growth strategies.
In particular marketing of our new game launches and hyper cash will portfolio as well as cross platform play a game development.
We continue to expect improvements and operating leverage and R&D and G and a which will be more than offset by hiring of marketing investments against growth opportunities.
We expect to generate a net loss of 135 million and lie with our prior guidance, but now including of charge of 84 million primarily related to the impairment of our existing San Francisco off this lease and related leasehold improvements.
And Q4, we expect to see sequential growth and our top line performance, primarily driven by stronger life services advertising seasonality and our launch of Farmville, 3 as well as modest first quarter contributions from Chartist.
The stronger topline performance combined with ongoing cost management is expected to deliver improved operating leverage and profitability and Q4.
Our execution of our growth strategy and 2021 positions and go for continued growth and twenty-two where we expect low double digit topline organic growth from our life services and your game launches.
Over the next several years, we expect to continue to progress towards achieving our longer term operating margin goals, while generating stronger operating cash flow.
With that we will now open the call for your questions.
As a reminder to ask a question you will need to press the star 1 on your Touchtone telephone and again that's star 1 on your Touchtone telephone to ask the question.
To withdraw your question press the pound key we ask that you restrict yourself to 1 question and 1 follow up.
The standby, while we compiled the Q&A roster.
Our first question comes from the line of Micing of Goldman Sachs. Your line is open.
Hey, good afternoon, and thank you very much for the question and I was just wondering if you could expand the little bit more on what you're seeing today in terms of the cost to acquire players as it relates to the Apple privacy changes and you know you mentioned scaling back on <unk> sales and marketing towards the end of the the second quarter and.
How are you approaching that now for for 3 Q and then the rest of the year take care of much.
He might get you know obviously, there's there's a variety of channels that we operate and given the diversity of our portfolio and and the scale of are you a but we are seeing it you know, obviously improvements and and channels.
And now versus what we're seeing as we were going through the the latter half of Q2.
Yeah, we have scaled back or are you a because you know as as as as you know we're we're looking for opportunities to get returns and investment that are in line with our target of returns and so we continued to calibrate our investment against channels, where we are seeing improvements, but and over and over the coming quarter, we expect to see that trend continue the.
And for us to see and as as we've moved through July and started to move into August and we're starting to see more networks respond to the changes and <unk> and starting to be able to demonstrate improving returns.
And that gives us encouragement for why we think these are short term in nature as we move into the holiday as we move into the back half of the year. We've already started acquiring new players and starting to spend into some of our franchises on a category basis.
In this period of time, social casino did really well I think you'd see that and our numbers that we talked about towards the end of Q2 poker had an amazing quarter in that period, we saw those hanging in there very nicely hyper casual did well.
Some of the areas, where you saw weakness was and our merge titles.
And that's where we saw the audience drops that we're probably most pronounced in terms of our portfolio.
Thank you. Our next question comes from Eric Handler of MK and partners. Your line is open.
Good afternoon, and thanks for the question.
Wonder if you could talk a little bit about the merge games is there anything you're seeing there that's it.
Housing some weakness how's your rollout schedule for add on content.
And what your plans are with with those games.
Yeah. Eric. This is this is a category that Graham created honestly, the merge category and really didn't exist until they launch Dragons and and and then followed it up with merge magic and they saw.
The opportunity to really grow those franchises without any competition. They really they grew up and are in a wide open marketplace.
As competitors and others saw that this is a category that was emerging that was very popular a lot of people dove into that category with new products copycats and the spending really drove the CPI is up and the category and what we've seen with Graham is there growth slowed as a result of that very intense competition competitive response, and what we've been doing it.
Ram is really retooling, our live services teams to get into position with new bold beats that are planned in Q3, and Q4 that starts to bring the games back to to a degree of growth and they really leveled out over these last few quarters largely because of the competition that we've seen and the drive up the CPI and the category, we remain very bullish on the mechanic.
And we think the merge mechanic still has a lot of potential for innovation and the merge Dragons franchise. In particular has a very large audience space and is still the number 1 game in the category.
So as we start to transition out of this period of of intense competition. We've seen some of that start to fall away and we're doubling down our investment in the bold beats and get into position to grow our merged.
Merge Dragons and and and the second half of this year and into 'twenty 2.
The other thing I agree.
Sorry, the other.
I would add if you look at our portfolio.
1 of 1 of the power of the powers that Zynga hasnt capabilities. As you know there can be times when the live services are.
Our weaker than than you would expect and the situation like ground and we had the same situation with poker a few years ago and we brought it back to some of its best results and.
And in the last quarter.
While it is it is something that we're focused on and win and we need to get after what I will tell you is the the project management teams, we havent zynga are more than capable of dealing with these kinds of challenges.
Great and then just as a follow up.
Mobile App DAU.
Little over 18 cents and the quarter.
Lowest it's been and about 2 years.
Can you talk about some of the dynamics that youre seeing there.
And that's related to the hyper casual portfolio of getting to scale that that vast large now has really made it caused the jump. If you if you pull out rollick, it's it's much higher than that.
Thank you. Our next question comes from the crudes of Cowen Your line is open.
Thanks.
Just looking at your guidance, you're guiding bookings down about $50 million sequentially can you just give a sense of how that splits between online game bookings and bookings given your comments about advertising being softer as well.
Yes, I would.
The large element is as is and user pay us.
For the for the factors that we experienced and the second half of our late in Q2.
I would characterize it as broadly speaking.
And.
You know I would say, it's roughly a third of it you could attribute to advertising with the balance to user pay.
Yeah.
Okay and then just this is just a real detail, but and the headlines.
And Reuters.
And your share holder letter came out there as of <unk>.
Statements, saying company believes are seeing initial indicators of bookings trends are beginning to stabilize but I couldnt find that phrase.
And the actual shareholder letter. So I mean is that is that a statement that you are comfortable with.
I think listen we've got of like if you look across our portfolio, we are seeing improvement and in some of our games. It's too early to obviously, it's early indicators, but what I think is more interesting for US is we're seeing improvement and in the the CPI and yields that we're achieving and user acquisition.
Cause Doug is if you step back from it and when we look at our core cohorts and these are cohorts that were widows pre COVID-19 actually cohorts that joined the Assurant COVID-19. Those cohorts are engaging of monetizing strongly so the ammo against those cohorts is to continue to drive engagement.
And drive bold beats and obviously monetization the next phases, Okay. How do we bring new cohorts and now we've calibrated our user acquisition spend this quarter and last quarter and into this quarter, but given the.
And what we saw in terms of yields as we as we see yields ease up.
That means we'll be able to invest more against channels that and outperforming and that should enable us to drive.
And obviously, a stronger bookings performance, which is it's essentially implied as we get into Q4, we are assuming some moderate improvement in our and our live service bookings into Q4.
Thank you. Our next question comes from Matthew cost of Morgan Stanley. Please go ahead.
Hello, and thanks, Thanks for taking the question. So I guess between reopening and then the changes to the the marketing ecosystem.
Can you break out sort of the magnitude of the impact of of each of those elements.
And then and the decline and the guide versus <unk> and then just looking out from here.
Obviously, the reopening of passing thing the changes and the marketing ecosystem of our permanent but for both of them.
And what what steps are you taking to work through those issues and particularly on the marketing side and how confident are you in and their ability to work and get your marketing efficacy back to where it's been historically.
Yeah, I think if you look at the 2 factors that were dealing with in terms of the reopening with audience Choppiness and then idea of Fei.
When we talked about idea day before we had said that it was gonna be of short term headwind that we would work through because of our advantages in scale and advertising and product management and we remain committed to that.
And what we're already seeing an improvement and early UA trends really what has to happen was new tools, new AD products. The networks need to retool, we needed to look at real data in terms of the supply and demand factors and that's what when when iOS hit 80% and June that June period in July is really working through that and we've seen the.
That improvement and in late July and going into August where we feel very confident that idea of Fei is something that we're working our way through.
And has had an impact but again of short term nature type thing that we communicated and long term, we don't see it as as the negative it's something that we just have to adjust for and we started to do that by looking at different networks. We've started to buy on networks that we werent buying on before because they've done a good job improving their products as an example, <unk>.
<unk> is the network that has done a good job adjusting the idea of Fei and in addition to that we'd use some other techniques in terms of how do we value of player.
What types of calculations were doing in terms of looking at the spread between our install and LTV. So it's the it's a variety of different techniques that you experiment against you see the results you see if the predictive and then we saw force start deploying those so I'm very confident and feel very good that you know the idea of Fei issue as well in hand and are operating.
Within expectations.
The the softness in the cohorts that we acquired and 21 that Choppiness has had more of an impact on the run rates that has been where we've seen a little bit more of an adjustment that we've had to make with regards to how they were operating versus earlier cohorts in COVID-19. They seem to have been less committed.
To the games, they had been and the games for a less period of time and.
And as things reopen and they were able to go back outside of go do other things we saw that tradeoff in in time spanning games towards other things start to increase so that's where we saw the impact mainly and that again was something that started to happen in late may and carry forward now usually what you would do is you would additionally, you would see.
Spend money to acquire new users with good rois and that would offset it unfortunately with idea of Fei happening at the same time of that softening, that's where we hit this turbulence in inside of our run rates against live services. That's lasted from late may through through July.
And the the thing that we're encouraged by is the cohorts outside of those late additions had been strong and and they've been very engaged and they've been very lucrative and they've been very committed and in addition to that with idea of Fei <unk>.
Turning to improve in terms of the UA trends improving and that's why we're confident that these are short term factors and that we're moving through them.
And is it as we look forward into our more long term growth strategy and 'twenty, 2 and beyond our business fundamentals are strong our investments are sound and.
We just had the we've adjusted for market turbulence related to Covid and we feel like we're working our way through that and that was part of our adjustment today for the second half.
Trend line inside of life services.
Great. Thank you.
Thank you. Our next question comes from David kind of skew of Jpmorgan. Your question. Please hi.
Alright. Thank you Frank maybe just ask a longer term question on the impact of idea of Hey.
Historically your bookings have been more skewed towards iOS versus Android given the relative difference and the platforms around privacy and some of the challenges you are seeing do you see a need or opportunity at all to optimize their games and new game launches maybe more towards the Android.
Yeah. It's an interesting question as we look at platform mix I can tell you that we have been investing in Android.
As we've seen the dynamics unfold inside of iOS.
And the Android has always been of parity platform for us. It is the strategic platform for US. We we don't do anything necessarily special for Apple versus Android and so from that standpoint, I think we'll continue with that strategy, but for sure. We have been spending more money on Android platforms to acquire users there in the short term and we are in.
And we've seen explosive growth of Rollick hyper casual on on the Android platforms is very pop failure and you see of mix more towards that I think longer term as we see the innovation in AD products start to offset the the changes and and in the ecosystem I think it will start to come back around world.
Moving out as we get further end of the year and into the start of 'twenty, 2 but right now I think youre seeing a lot of people put money and Android right now, which obviously is driving prices up but in general that that that part of the ecosystem is functioning very much normally.
The other thing.
Alright, and the other thing I would add as you think to your point about think of beyond 'twenty, 1 and into 'twenty 2 once once we get going.
With the.
And the enhancements and the bringing together of sharp boost and Zynga, we see we do see opportunities to obviously use that lever to improve our our leverage and yield capabilities within and user acquisition across all platforms. So.
When you look at the the size of our audience and you look at the the scale.
The scale, we have and our and our AD Tech platform I think that's going to be an important driver to as we think about it.
The user acquisition efficiency going forward.
Okay, and if I could ask 1 and star lock.
The portfolio has largely stayed away from sports games to this point. So I guess why is now a good time for sports and and.
And just the genre, where you want to expand your presence more either through the games or M&A. Thanks.
Yeah, when we looked at the.
And the opportunity to work with <unk> and we played golf rivals it really is a highly social casual PDP experience.
And and the fact that it's in the Gulf genre is important but at the same time it really it really appeals broadly and it's a very fun fantasy based experience. So we're not really looking to enter the sports simulation category. What we're entering in is the social Pvp.
Casual game category and that that is why we really were attracted to this design and also to the development team.
And so for a long term and we look at their pipeline I think what you can expect from us is.
And highly engaging pvp experience is that our social in nature and with features and and monetization that's optimized for that kind of growth and that type of player behavior, but it's not necessarily a hardcore sports stimulations. If you play golf rival it it's definitely not a realistic simulation of golf and so that's why we think of it.
And that casual category as opposed to were starting to put down more investment in a in of sports genre.
Thank you. Our next question comes from Mario Lu of Barclays. Please go ahead.
Great.
The first question is on the games so.
Now the IBSA has rolled out does this open the door to implement advertising and both toy and tune blast I believe that was 1 of the low hanging fruit once you acquire them. So any update there would be helpful.
Yes, we're continuing to.
The evaluate and and plan to bring advertising to the games, it's more of a function of of.
The timing and making sure that we deliver the kind of AD and experiences that are per positive for for the peak games and we have done testing with peak and demonstrated that actually the advertising when you when you tune it the right way as we can and is actually of retentive mechanism. When you did.
A variety of to players, where they actually receive value and return.
As a very positive experiences. So it is still and our roadmap to deliver obviously, it's not something that's coming by the end of 2021, but it is something we're looking at into 'twenty 2 and beyond.
Great. Thanks.
Quick question on the Star Wars title.
And you guys said and <unk>.
Training, well well into the test markets and for Q.
Does that mean, there's still a possibility that the game launches and.
2021 or.
Does that assume that 2022 titles as well thanks.
Yes, the hunters will go into test in Q4, it's more likely to release and the early part of 2022. So that's why we don't have.
Hunters and our forward look and from a financial standpoint, the games games doing really well, but we'd like to get it into test.
And see what we hear and learn and we're.
We're adding a lot of new features because of the early response has been so positive on iOS Android and switch.
Got it thank you.
Thank you of our next question comes from Martin Yang of Oppenheimer. Your line is open.
Hi, This is Andrew speaking on behalf of Martin Yang So for your recently launched puzzle combat what is the initial audience reassessment of.
The reception of the game and what are some of the key learnings that you can apply to for future gains or versions of the game and what what do you expect the game to achieving around a year's time, given the tougher the normal year over year comps.
Yeah, Angie Thanks for the question puzzle combat is off to a good start from the standpoint of player reception.
The the quality scores of very high the the cohorts that are in the game are highly engaged and enjoying it because of the the reaction that we've seen an idea of Fei and terms of some of the tools. The scaling of the game is going a little bit slower right now.
And so we're taking the time to really maintain and approach where we're looking at the telemetry from what the players are telling us, adding new features tuning things and so it's scaling a little bit slower than we want because of the the idea of Fei impact over the summer, but as we get into more normalized conditions I expect that we'll be able to scale it more aggressively as we get it.
And to the fall and we're very excited about the game the change of content from fantasy to more combat and it's been well received we've added some new sub systems around collecting equipment and we're adding new features like robots, Max and I think that is going to be very well received so and we're very excited about the tie.
It'll we remain committed to making the title of the hit product and it will be a big contributor for us and 2022.
Great. Thank you.
Thank you. Our next question comes from Brian Fitzgerald of Wells Fargo. Your line is open thanks.
Frank maybe just a follow up to some of your previous comments. When you think about cross platform titles like hunters can you give us a sense of the the difference and the development cost of a dramatically different.
Do they hit at different cadences, or maybe is the greenlight process of the soft launch process different.
For those cross platform titles, and then I had 1 follow up and idea effect. Thanks.
And in terms of development early on and the costs are incrementally that high the issue is when you get to soft launch you have to test the games differently. Because you have very different test marketing conditions, you can't really it's hard to test launch of switch game for example versus and Android or iOS, where you can really break it down by region or a specific country.
So really where the difference and start to get pronounced is in the test marketing and also in the live services updates you can go very very fast with the mobile game.
There's a lot more requirements to work with the first party and get it tested on the on the console side, they're just it takes a little bit longer and so those are some of the things that we're mastering right now.
You do not see a lot of big increase and costs related to the engines because we're using common engines like unreal unity. The art translates pretty nicely. There are a few extra things that we'll do with regards to resolution or a specific platform capability because of the processors and slightly faster or you're on a big screen TV.
But in general those costs or not.
The excessive.
And the depth of the games can be a little bit different and mobile you probably don't need the same degree of depth and some of the shooter mechanics. For example, but that's something that we're very focused on making sure that the the experiences of our high quality, both on mobile and console. So that theyre very playable together, we never want to release of game.
That isn't cross play capable like where Theres a mobile version of that can't talk to the switch version from the very go from the very beginning we want these games to be fully interoperable simultaneously playable and at of quality level, where 1 doesn't look like an afterthought and so were we.
We're very excited by the reaction that we're seeing right now and hunters from not only our first party.
Teams, but also from the consumer testing that we're doing.
And it's gonna be it's gonna be really interesting and see what the testing material tells us and Q4, but we're very excited to get those games out.
Awesome and then the quick follow up on idea of pay it was just.
Are you are you seeing any ROI differences by by genre and anything of material way based on how do you think of it.
It may be no, but just curious.
Not material you do see some subtleties in some categories like social casino and some more broad based casual stuff has seen has held in there on the rois. The the problem is is theres a lot of of Muddying. It and the data for example, so if you.
If you include organic attribution it looks a lot better than if you pull it out and are more strict way to measure. Your returns is to take the organics out and if you do that the CPI has bounced around a little bit and that might be of literally overly technical but there's depending on how you account and that's where the category of differences can be become very pronounced but during idea of Fei.
<unk> social casino of hung in there nicely.
And again some of the franchises that have more narrow arbitragers, where you need more detail on who you are buying those ones of suffered more and that's where you've seen some of the weakness for us on on games like merge Dragons for example.
Thank you. Our next question comes from Mike Hickey of the benchmark. Please go ahead.
Hey, Frank and share thanks for taking my questions guys.
To clarify on the merch titles.
The sort of expect a sustained.
The downturn here and women's and can you remind us sort of the size.
Of those games.
Revenue.
A quick follow up.
Yeah, I don't think I think we've kind of hit bottom on the merge games in terms of their performance over these last couple of quarters. We believe that we're going to be in a position that they'll start to collectively grow as we as we head towards the holidays and start to release some of the bold beats that we've been working on.
In the in the first half here. So as you know of Graham was a very successful acquisition for us and had explosive growth they've leveled off a bit here and there.
Now what we're doing is retooling and doubling down so that we can start growing them again much like what we've done with other live service franchises like whether its been words with friends or or Zynga poker over the years and.
Terms of Mike in terms of the overall size, obviously and you merge Dragons is still.
Of our very strong and large franchise north of 200 merge merge magic is is the smaller franchise and the it is.
And south of a $100 million.
Thank you.
I guess im on the hyper casual side, Frank I think I heard you talk about may.
And maybe transitioning some of those games and live services.
I could be more.
And more about the opportunity there I guess and you could also.
And look to do M&A and that category, but that sounds interesting and then.
With and hyper casual both of you.
The opportunity there for some of the remarks services. Thank you yes.
And with with what we're experimenting at ROIC is.
Expanding the development community. So that we can bring more games into the Rollick network because it is a combination of.
Small external teams and internal teams and over the last few quarters. We've been acquiring small teams that have built some of the games that have been hits. So we've been adding to our internal capability by bringing in some of these Ips and teams recently, we launched in her challenge. The first time, we put a bold beat inside of the hype.
The casual game.
And we saw really nice pick up and engagement and so youre going to see from US over these next couple of quarters, where we're going to start adding bold beats to some of the hyper casual games to elongate the engagement curves, which will increase the the amount of monetization that we see and that should attract more expansive or are bigger scope game.
<unk> into that category, which is exciting to us and we think that that will attract more developers into the rollick network because of how successful they are and putting out hits and we put out of a really great string of products that have driven audience and and the advertising dollars that we've generated there had been a major contributor in Q2, we were up 111.
11% and advertising and that was a lot of that had to do with the with Raleigh.
The other Mike Mike the other thing I would add is we've spent a lot of time of borak and 1 of the reasons, we decided to accelerate the acquisition of the 20% was.
And there was a lot of energy on both sides to really.
Our focus and in some of these longer term opportunities and as you can imagine sometimes earn outs can be become too short term and nature for for some of the shareholders.
But as we think about ROIC.
We're thinking about some of the some of their games have have the characteristics of being franchises, where you can have a continued iteration of different different smaller events are different smaller games coming out over under the same banner similar like of words with friends or of CSR, 2 or any of our other franchises.
The other interesting point, which is as you think about user acquisition and you think about cross promoting into and some into some of the other franchises. We're also looking at some of our larger franchise and saying well if there were an opportunity of the credit smaller hyper casual versions of.
Of those games that could could actually sort of coalesce within the hyper casual universe and sort of be a.
Across filter there could be games onto themselves or they could actually be more promotion vehicles to bring players into the into other franchises.
Thank you our last question comes from Richard Greenfield of <unk> Partners. Your line is open.
Hi, a couple of questions I don't want to beat this idea of Fei thing to death, but just.
Frank are you sort of seem to be alluding to things certainly getting better and sort of you exited of July into August.
Could you just sort of like on a I don't know if its a 1 to 10 scale, but like.
And at some way of gauging, we were to think about where things were before.
The latest changes to where we are now are we 30% of the way back 60 per cent of the way back like how much better or worse or weak than before this all started and then second.
It seems like your acquisition of sharpest seems to be transformative in terms of giving you first party data and a lot more knowledge to the things like this won't impact you to the extent.
And they change again, maybe if you could just comment on how quickly you can ramp that acquisition to sort of take advantage of our leverage that data to improve UA as you look out.
And whether it may not the I guess, the third quarter of it but as you look certainly into 'twenty 2 how do you think it changes the the UA acquisition side of the equation yes.
And thanks for the question rich.
Giving it a rating scale is a little tough, but what I can tell you is we werent spending and in June and July and at a high expense and now we're starting to put money back to work. So I would say we definitely started on the road to recovery if you will.
But you know Android, we'd been spending and all of the whole way through on iOS, and we took a pause and now we started to see the yields improving on networks like Unity for example, where we're starting to put the money to work and we think that that trend will continue and and as we get into the holiday and early part of 2022 that short term headwind that idea.
Fei was will be in the rearview mirror and and we'll be moving forward.
The good progress and positive progress on that front as it relates to chart booth.
They just got and the building as it were on Tuesday and.
They really they really can't get to work fast enough because that vertical integration to AD tech on the DSP side, and and starting to have more Intel about whats happening and the AD market is going to be vital for us in the second half and beyond as we start to even out accelerate the normalized trends of getting back in the UA here. So.
We're very excited about the impact that chart, because it's going to have long term on the company theyre going to start to ramp up here August through December but the synergies case. The the revenue case, the third party AD business the <unk>.
More information and intelligence that will gather through the through the systems will make better decisions I'm.
And I'm very excited about having that capability in the.
Syed Zynga area of.
And just I would just add that we're still tracking as it relates to the synergies we expect in 2020.2.
Communicated back in the last earnings call. So we still believe that <unk> will be.
I mean meaningful deliver of synergies and 2022 and beyond so there's been no change and our expectations there and we're very happy to have them and the building now but now it's the the.
And get their legs under the table.
Thanks, so much for filling us and I think that type of it just seems like such an important part of the story to help Houston.
I'm sure Apple may change things and the future and so the bigger they get the faster they get the less of this becomes an issue going forward.
Thank you at this time I would like to turn the call back over to Rebecca Lau for closing remarks.
Thank you Latif, we want to thank everyone again for joining our earnings call. Today, we look forward of connecting with you over the coming weeks and hope everyones, continuing and stay safe and healthy during these times.
This concludes today's conference call. Thank you for participating you may now disconnect.
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