Q3 2021 Zynga Inc Earnings Call
Thank you for standing by and welcome to Zynga third quarter 2021 results 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 a question. During the session you will need to press star one on your telephone please be advised that today.
This conference is being recorded should you require any further assistance. Please press star zero I would now like to hand, the conference over to your host Vice President Investor Relations and corporate Finance Rebecca Lau. Please go ahead.
Thank you Keith and welcome everyone to think of third quarter 2021 earnings call on.
On the call with me today are Frank do Bell, our Chief Executive Officer, and Jarrod 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 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.
Our earnings letter earnings slides in our 10-Q 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.
This conference call is being webcast and will be available for audio replay on our Investor Relations website in a few hours.
Now I'll turn the call over to Frank for his opening remarks.
Thank you Rebecca.
Good afternoon, everyone and welcome to our Q3 earnings call.
We delivered strong quarterly results, including record Q3 revenue and bookings and better than expected operating leverage today.
Today, we are raising our full year guidance and are on track to finish 2021 with Zynga as best ever annual top line performance and the largest mobile audience in the company's history.
We are well positioned for 2022 and beyond with multiple growth catalysts in place to drive our continued expansion.
Starting with Q3, our life services delivered strong results ahead of our guidance, including our highest ever third quarter revenue of $705 million up 40% year over year and record Q3 bookings of $668 million up 6% year over year.
This was a tremendous performance by our teams against a difficult comparison from a year ago.
Our top line beat was driven by strong advertising results in particular by another standout quarter from Royal Lakes hyper casual portfolio.
This performance capped off Rollick phenomenal first year at Zynga and also helped drive our average mobile D. A use to 38 million up 21% year over year and average mobile M. A use to a 183 million up 120% year over year.
Moving to Q4 and next year I'd like to highlight some of the thing as near term growth catalysts.
First we expect our live services to build momentum as we head into 2020 two.
We recently closed our star Lark acquisition, the talented developers of golf rival.
This adds another fast growing franchise to our highly diversified live services portfolio.
We also see more opportunities to further accelerate golf rivals growth by leveraging Zynga has best in class product management data science and user acquisition capabilities.
In addition, we have an outstanding slate a bold beats prepared for Q4, including the introductions of alliance quest in empires, and puzzles fantastic vies in Harry Potter puzzles and spells Dragon missions in merge Dragons and Piggy bank in tuned blast.
Second our new game pipeline has never been stronger lag.
Last week, we launched Farmville three worldwide a re imagination of one of the thing is most iconic franchises for the mobile platform.
The game is off to a tremendous start and has already reached the number one and number two top free downloaded game positions in the U S iPad and iPhone App stores, respectively.
[noise] player feedback has been very positive as well and we expect farmville three to be a strong growth contributor in 2022 and beyond.
Next week, we are releasing our first cross platform play franchise Star Wars hunters into technical soft launch in select mobile markets.
The title features unique new characters in the Star Wars Universe, and we are unveiling several new gameplay modes that will be available when the game launches in 2022.
We also have two additional new titles that are performing well in soft launch both games are developed by studios with proven track records of creating hit franchises.
Gram games makers of the popular merge category are developing pirates evolution, a brand new title, where players explore mysterious islands and engage in player versus player Sea battles.
Peak the talented puzzle makers that brought US chart topping games like tuned blast and toy blast is creating their next blockbuster match three game Star blast.
Over the coming quarters, we will steadily ramp up the production of both these titles and also expect to make meaningful progress on additional games in development across our global studios.
Third we expect our expanding portfolio of hyper casual games, one of the single fastest growing categories to deliver strong growth in our advertising business.
In Q3, we grew our advertising revenue in bookings by 99% year over year and on a trailing 12 months basis, we have now surpassed half a billion dollars.
Moving forward, we expect to drive more advertising growth from our life services, New game releases and the positive momentum from Raw X portfolio.
Hyper casual is one of the largest and fastest growing game genres on mobile and relics unique development process enables us to repeatedly design and publish new hit titles.
We are now introducing bold beats within our key hyper casual franchises, which are deepening and sustaining player engagement.
To build on this momentum we are expanding relics first and third party developer network and are enhancing their publishing platform with new tools and technologies.
Fourth our integration with chart boosts is well underway and we are making significant progress in building a next generation mobile advertising platform.
As the mobile App ecosystem continues to evolve the integration of the thing is first party content and data with an at scale advertising platform will be an increasingly important competitive advantage.
By leveraging chart boosts demand side platform, we are meaningfully enhancing our ability to more efficiently acquire high value players at scale.
We are also building out chart boost supply side platform and mediation product, which will enable us to improve the yields on our large portfolio of owned and operated advertising inventory.
We also expect that this will generate more value for chart boosters advertising partners as more brands and marketers turned to mobile advertising to reach large and highly diverse audiences. Our platform provides a significant opportunity to expand zynga as total addressable market and strengthens our.
<unk> in the fast growing digital advertising sector.
With that I would now like to turn the call over to Jeremy to discuss our Q3 results and forward outlook in more detail.
Thank you Frank.
In Q3, our live services delivered strong results ahead of our guidance, including our highest ever third quarter revenue and bookings.
Execution of our multiyear growth strategy has us on track to deliver as Angus best ever annual topline performance in the largest more mobile.
Audience in the company's history.
On behalf of the Sungard I would also like to welcome the talented team from Star Arc developer the hip hip franchise golf rifle, which is now part of our market leading live services portfolio.
Today, we are raising our full year revenue bookings and GAAP profitability outlook.
Outside of the update to the estimate change in deferred revenue. We are also maintaining our previously communicated non-GAAP profitability guidance for 2021.
With respect to our Q3 results.
Revenue was $705 million comprised of bookings of $668 million and in that release and deferred revenue of $37 million.
Revenue was 40 million ahead of our guidance driven by an 8 million bookings beat and a 32 million higher net release in deferred revenue.
Life services drove our Q3 results with a stronger advertising performance from relics hyper casual portfolio driving our top line beat.
Revenue was up 201 million or 40% year over year, driven by bookings growth of $40 million or 6% year over year and at 162 million difference in the net change in deferred revenue.
We generated user pay revenue of 571 million up 31% year over year, primarily driven by the impact of the change in deferred revenue.
User pay bookings were $534 million down 5% year over year against a difficult comparison due to the COVID-19, Lockdowns in Q3 2020.
Advertising revenue in bookings report a quarterly record of 134 million, both up 19, 9% year over year, primarily driven by the addition, and strong performance of relics hyper casual portfolio.
The net release in deferred revenue was $37 million and was primarily driven by merge Dragons empires, <unk> puzzles, CSR, two and toy blast.
We ended Q3 with a deferred revenue balance is $734 million versus $655 million a year ago.
Turning to Q3 operating expenses.
GAAP operating expenses were $476 million up $87 million or 22% year over year.
This represented 68% of revenue down from 77% of revenue in the prior year.
Non-GAAP operating expenses were $325 million up 46 million or 16% year over year and represented 49% of bookings up from 44% in the prior year.
Q3, FY 'twenty, one GAAP operating expenses included a one time cost of $67 million related to the impairment of the vacated lease related leasehold improvements and other property and equipment.
GAAP operating expenses increased year over year, primarily due to this onetime costs I, just noted and an increase in our non-GAAP operating expenses.
This was partially offset by a decrease in contingent consideration expense.
Non-GAAP operating expenses increased year over year, primarily due to the incremental expenses from our recent acquisitions and.
In particular higher marketing expenses from relics hyper casual portfolio.
This was partially offset by reduced spend across the balance of our live services.
Outside of this step up for acquisitions other drivers of our non-GAAP operating expenses were investments in our new game pipeline, including cross platform play projects in development.
Yeah.
We reported a net loss of 42 million, which included a onetime costs of 67 million related to the impairment of a vacant at least related to leasehold improvements and other property and equipment.
This net loss was 68 million better than our guidance and an improvement of $80 million versus a net loss of 122 million a year ago.
The variance to guidance was primarily driven by the higher net release in deferred revenue stronger operating performance as well as a lower than expected expense incurred from our vacated office lease and income taxes.
The year over year improvement was primarily driven by the impact of the net change in deferred revenue and lower contingent consideration expense, partially offset by the one time expense incurred from our vacated office lease.
Our adjusted EBITA was $197 million 47 million better than our guidance driven by a higher net release in deferred revenue and better than expected operating performance.
The year over year increase of $159 million was primarily driven by the difference in the net change in deferred revenue.
We generated Q3 operating cash flow of 99 million down 13% year over year, primarily due to the higher earn out payments this period.
As of September 30th we have approximately 1.3 billion of cash and investments, which we expect to use primarily to fund future acquisitions.
And October 21, we utilized $316 million for the upfront consideration for the acquisition of Star Lark.
We also have $425 million available on our credit facility, which had no amounts outstanding as of September 30th.
Turning to our guidance.
Overall for the full year 2021 we are raising our revenue bookings and GAAP profitability outlook.
Outside of our update to the estimated change in deferred revenue we are maintaining our previously communicated non-GAAP profitability guidance for 2021.
Our updated Q4 and full year guidance is as follows.
For Q4.
Revenue of $675 million up $59 million or 10% year over year.
And that increase in deferred revenue of $40 million.
Bookings of $750 million up $16 million or 2% year over year.
And that loss of $60 million versus a net loss of 53 million in the prior year quarter.
Adjusted EBITA of 122 million versus 19 million in the prior year quarter.
For the full year, we expect revenue of 2.78 billion up $805 million.
Our 41% year over year, and an increase of $55 million versus our prior guidance.
And that increase in deferred revenue of $34 million down 261 million or 88% year over year, and a $41 million lower than our prior guidance.
Bookings of 2.814 billion up $544 million or 24% year over year, and an increase of $14 million versus our prior guidance.
And that loss of 97 million versus a net loss of 429 million in the prior year and an improvement of 34 million compared to our prior guidance.
Adjusted EBITDA of $616 million up $350 million or 131% year over year, and an increase of 41 million to our prior guidance.
Okay.
Some year over year factors to consider in assessing our guidance include.
In Q4, our top line performance will be driven primarily by our live services and we will benefit from year over year growth in advertising, primarily from our Raleigh, hyper casual portfolio and the first full quarter contribution from sharpest.
In addition to initial contributions from golf rifle and Farmville three.
Growth collectively in our live services will be partially offset by declines in merge Dragons merge magic as well as older mobile and web titles.
First is our prior implied Q4 guidance, we have adjusted our bookings outlook to account for more gradual live service growth rate, reflecting lower user acquisition investments in Q3.
A more conservative view on Q4 advertising growth.
And a later launch of Farmville three.
That said with improvements in user acquisition yields we are ramping our marketing investments against our live services and new game launches in Q4.
And we expect this investment to contribute to our growth in Q4 and 22.
For Q4, we expect GAAP cost of sales as a percentage of revenue to improve year over year, primarily due to the positive impact of the change in deferred revenue, partially offset by amortization expense.
On a non-GAAP basis, we expect cost of sales as a percentage of bookings to improve slightly.
Primarily driven by a stronger advertising mix.
We expect Q4 GAAP operating expenses as a percentage of revenue to increase primarily driven by increases in R&D and G&A, partially offset by sales and marketing as a percentage of revenue.
We also expect Q4 non-GAAP operating expenses as a percentage of bookings to increase primarily driven by increases in R&D and G&A, partially offset by sales and marketing as a percentage of bookings.
As we look ahead to 'twenty two.
We are targeting low double digit topline growth year over year, which we expect will be driven by momentum in our live services, including full year contributions from Farmville three in golf rifle as well as continued growth in robotics hyper casual portfolio.
We also expect new games in 'twenty, two to be a strong growth contributor.
Including our worldwide release of Star Wars hunters and the potential for other new releases later in the year.
Why do we expect to expand operating margins over the next few years, we expect margins in 'twenty two will be influenced by the level of marketing, we invest on launching and scaling the next waiver releases from our new game pipeline.
As these new games scale, we expect them to become positive contributors to our live service portfolio.
In Q2 'twenty two we expect we expect to complete most of the outstanding earn out commitments.
After this occurs we anticipate a meaningful increase in our net cash flow generation.
Which we expect will be used primarily to fund future acquisitions to further accelerate our growth in 'twenty two M beyond.
With that I would like to turn the call back to Frank for his closing remarks.
Thanks, Jeff before we open the call for questions I want to provide additional context on how zynga is positioned as a leading player in the interactive entertainment industry.
We are on track to finish 2021 with Zynga as best ever annual topline performance in the largest mobile audience in the company's history. We are also excited about the long term growth ahead for interactive entertainment.
With new innovations devices and technologies more people around the world will be discovering deeply immersive social gaming experiences.
This will continue to expand our total addressable market and plays to Zynga has unique strengths. These.
These include our growing live services portfolio free to play expertise and a next generation advertising platform that lab Leverages, our first party content.
Zynga is uniquely positioned to engage this growing global audience and capture more market share within the sector.
We are focused on executing our multiyear growth strategy that has us well positioned for continued expansion in 'twenty two and beyond.
We expect to drive recurring growth from our live services Foundation as well as new game launches from our exciting new game pipeline.
In addition, we anticipate that our progress in hyper casual games Cross platform play International expansion and building an AD platform will each be significant growth contributors.
We are also investing in emerging opportunities, which will provide additional growth optionality.
Some of these include direct to consumer billing Nf teas in blockchain technology as well as games on popular social platforms like snap and Tic Toc.
The industry is undergoing significant consolidation within mobile and AD tech with our anticipated increase in net cash flow generation, we expect to acquire more talented teams franchises and advertising technologies to further accelerate our growth.
In summary, there's never been a more exciting time at Zynga. The interactive entertainment industry continues to be a dynamic and fast growing sector and we are confident in our ability to expand and scale zynga within it.
With that we would now like to open up the call for live questions.
Operator, you may begin.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The pound key we ask that you limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
Our first question comes from the line of Brian Fitzgerald of Wells Fargo. Your line is open.
Thanks, guys I wanted to ask a couple of things on in terms of marketing a cross platform titles like Star Wars hunters and and how does that differ if at all in terms of how you address the marketing playbook for that for our cross platform titles, specifically, maybe given the given the franchise name associated there how does your playbook.
If at all.
Hey, Brian This is Frank the the playbook right now is is getting development, but it has a lot of fundamentals that are common between mobile and console.
We will be using our UA will be using a lot of PR channel marketing first party marketing both titles are free to play. So the performance marketing is a huge component of how we'll scale those games there could be differences in the marketing mix might lean a little bit more into TV for Nintendo we might lean harder into paid acquisition.
On the mobile devices, but we've seen enough a cross platform.
At form launches now over the years to see where the heat is and we feel confident that we'll be able to bring those to market in terms of the fall.
Got it thanks, Mike appreciate it.
Thank you. Our next question comes from Mario Lu Barclays. Please go ahead.
Great. Thanks for taking my questions. The first one on blockchain.
You guys announced today that might work.
Is gonna be V P of watching gaming.
And that it's going to be.
And your existing games and new games from the ground up.
Just curious like which games or genres. In particular, you think blockchain blockchain gaming is best suited for and what the rough timeline is these initiatives.
Okay Mark good question. The the first place that we look at is wholly owned IP because it gives us more flexibility in terms of how to approach the opportunity.
Lot of this early stage development and work that we're going to do is about really understanding the category the dynamics, where the heat is so we want to use wholly owned IP for maximum flexibility in terms of the categories that we think are most interesting are the builder category. Certainly is one where you have real estate you're building.
<unk> in a farm for example, I'm also looking at collecting cars Rpgs collection mechanics, RPG mechanics, and builder mechanics, we feel like are the probably the first places that are that will look it is early days. We just yes, as you mentioned announced the hiring of the leader of this new endeavor, but theres a lot of people internal.
To think of some of our best Engineers and Pms are really interested in this category. It's a it's a popular topic at our board of directors in terms of how to build this opportunity out. So we're very excited to to make our commitment to this public today.
Okay. That's helpful. And then just a follow up on on guidance.
Any color you guys could provide in terms of the contributions from the recent acquisitions such as star like in sharpest endorsed for Q and two.
2022.
In terms of from a bookings perspective, you know as we said before.
Chart boosts.
In the quarter as broadly speaking of roughly around $10 million so quarter on quarter. It's it's it's it's obviously a less of a pick up from a growth perspective, and then as it relates to golf rivals the our guidance assumes roughly $20 million for the quarter.
Great. Thank you.
Thank you. Our next question comes from Matthew Thornton of true of Securities. Please go ahead.
Hey, Frank Hey, Gerry.
I guess.
Kind of a three part question all related.
There's obviously a couple of endemic gaming AD networks that are vertically integrated with first party content sufficient.
Significant first party content out in the market now and obviously theres a valuation applied to that minutes. It looks different from from zinc goes and so my question is I guess do you look at kind of where zinc is going in that in that context, and see that as an opportunity to kind of close that gap.
Secondly, I guess given the disconnect in valuations there I guess do you think about a worry about M&A.
M&A are being may be vulnerable to M&A, I'm, giving kind of the delta between valuations at current and then finally again again Relatedly I'm just kind of curious how youre thinking maybe this is for jarrod, but how you are thinking about buybacks.
As you get through <unk> and kind of the fact that the final earn out isn't as cash starts to kind of.
Ballooned from there how do you think about buybacks in that context any color there would be great. Thanks, guys.
Thanks for the questions, Matt I'll start with the first two and Jarrod can come in on the third one I you know I think from the perspective of what's going on in the mobile ecosystem. The the the vision that we believe in that Zynga is that they're the next generation of mobile game companies and successful companies are gonna have a platform component to what they do.
We are an app developer and publisher and we started building out our AD platform and publishing platform and our view is that that symbiotic nature between first party content and data when combined with an at scale AD platform can create a powerful competitive advantage and as you noted there are several examples of companies that are starting.
To bring that to life as a concept that's something that we've been thinking a lot about and we've been as you know from the chart boosts acquisition, we've been working against now for a good bit of time. The interesting thing is the destination is the same for those companies for US. We're just starting out it from being a game company for the last 10 years building an AD platform versus.
As being an AD platform, that's buying gaming assets. So there's a lot of commonality and there's a lot of similarities we would like to be positioned in that are in that conversation and frankly see our future as bringing that to life and manifesting the full power and competitive advantage of having a platform as part of our overall <unk>.
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The second piece on <unk>.
M&A vulnerability I guess would be the summary on on your question. There you know from our perspective, we focus in on growing our business and that's where we come in every day. The gaming business is a dynamic one sometimes youre hot sometimes you're not but the overall trends are such that we are long on gaming and we are long on zynga.
And we believe that organic growth augmented by inorganic growth is something that we can bring to life in in 'twenty, two and beyond and continue to add to shareholder value. We don't really think about whether we're vulnerable or not on that front. We just we're just thinking about creating more value tomorrow than we had today.
So now I'll hand off to chair for the the third question.
As it relates to you know once we get through the the the next tranche of earn outs, which are the most material and in Accenture will be done other than some small ones. You know when you. When you think about our cash generation in particular going into 'twenty three it's going to meaningfully expand and you know while I did say in my in my remarks that.
It's primarily for acquisition, we do have the optionality to actually.
Do buybacks or some other return of cash to shareholders, but I will say based on our own analysis.
No.
Just to build on what Frank said, we still we still see a lot of unique opportunities to bring talented teams and capabilities into zynga over the next few years. So that will be the primary use of our cash but absolutely. There's there's room to to deal with buybacks as as we get through Q1.
The next year.
Thank you. Our next question comes from Clark Lapping a b P. I G. Your question. Please.
Thanks, a lot.
I have one on marketing spend for next year. So you guys have a number of titles that are either sort of launching or scaling up right now I think between sort of three or four if we're counting something like golf rival and maybe you could puzzle combat.
Under that umbrella I'm curious, if you'd give us a sense for whether the fourth you implied marketing run rate and sort of how we should think about the way that might trend over the next couple of quarters or is there a potential that perhaps chart could mitigate some of that upward pressure.
Second question I have is on switch I saw in the shareholder letter you guys mentioned that countries is about a week away from soft launch.
The switch hardware base last I saw is approaching about 100 million installs right now and I was curious if you could give us a general sense for how additive.
Which might be relative to the current mobile device space.
Hi, This is Jeremy I'll take the first question as it relates to marketing I'm going to answer in the context of our full fiscal if if you think about.
The current fiscal we.
Essentially this year has been our life services year yeah.
Yes, ramping Harry Potter during the year and to a lesser extent puzzle.
Puzzle combat and we've just launched a farmville three and we're entering a star wars hunters and technical soft launch.
You also have pirates evolution and.
You'll start plas, so as I think about next year.
The the the level of what I would say launch marketing and scaled marketing against those new new titles is going to be more significant than what you've seen obviously in the current year.
To your point, we have levers to improve our operating leverage in marketing I E sharp boost and optimizing our overall U S spend across our live services, but I think overall.
Our expectation is there there will be a stronger leaning into investing against these new launches and by definition you know that'll put some pressure on on our our margins as it relates to 'twenty two versus.
'twenty one.
The strike out Clark I'll take the second question. We you know we are very excited to be a partner of Nintendo's and see the switch and it's a very complementary platform to the Android and iOS versions of Star Wars hunters.
We definitely see it opening up the younger audience, a little bit more who are playing that device relative to on the phones and that is an example of something that we're going to test a lot in consumer research over the summer. We also like some of the change of pace that you can get with a switch you can play it on the big screen in the living room you guys.
Can be on the couch. It allows more people to mix and match and play together lots of research that we've gotten from Nintendo talks about this party mode of how use are getting together, whether it's at recess or on the weekend and playing together and being able to have your phone available on the switch we think it just opens up more user scenarios.
Very complementary.
And we think that the game is going to look great on switch.
Thanks, a lot.
Thank you. Our next question comes from Doug Kratz of Cowen Your line is open.
Hey, Thank you when you guys gave guidance on the last call you you seem to be bracing for some potential for out of weakness.
The idea of Fei and as it turned out you wind up having actually a very strong quarter.
Can you talk about you know why sort of things trended better than you were expecting.
And to what extent do you think you benefited from people seeking alternative AD platforms relative to some of the big ones that were obviously impacted by the effects. Thanks.
Yeah, Doug this is Jerry.
Overall.
We indicated we expected to see some some some weakness in Q3 and potentially into Q4 later than we had previously expected with the whole idea of Fei rollout.
So as it relates to the Q3 Q3 performance.
You know as as we highlighted our our hyper casual portfolio is doing really well and that that portfolio continues to grow and drive momentum in our overall.
Dressel advertising audience space and that plus.
So yields were actually a little bit better in Q3, three than we expected and we expect that momentum to continue into into Q4, but as I indicated.
We do see we did see a little bit of softness in October are coming through the end of October it was picking up again. So we expect Q4 will be a very strong advertising quarter as well just a little bit less than what we would've implied in our guidance when we set up at the last earnings call.
Thanks.
Okay.
Thank you. Our next question comes from David Konarski of J P. Morgan Your question. Please.
Thank you just on user acquisition and he cited improving yields just curious if you can expand on what you saw through the quarter in terms of UA channels, and then where do you think you are in the process of navigating the idea phase change and then maybe related to that how do you kind of think in general about launching and scaling new games as the process fundamentally more difficult.
It was prior and how does that maybe change the way you view your pipeline or even M&A.
M&A. Thanks.
Yeah, David the the UNH UA market has improved to the point, where we felt comfortable enough to launch Farmville three last week. So that's a title that is currently.
Releasing with with very good momentum, we're starting to layer in our user acquisition spending. We're also gradually building up the live services spends as we head into Q4, leaving leaving this quarter. There was a period of time as you know that we pulled back on spending and really looked at how the systems were operating with all the changes.
And we felt comfortable that as we got into October and early November that really the worst so that was behind US right now we feel like the tools and the techniques that we have allows us to successfully released new games.
And scaled them it really.
Android, obviously is still operating as expected but.
We're getting very comfortable with the changes that have happened on the Apple side, and we feel like that that's going to be something that we can use as a as a growth tool as we go into next year and launch new games like Star Wars Hunters and star blast and pirate evolution. So we feel we feel good about that.
Thank you.
Thank you. Our next question comes from Eric Handler of M. K M partners. Please go ahead.
Thank you very much what are you could talk a little bit about the M&A environment.
Are you seeing a bit of a disparity at the mobile team public multiples in the private multiples and.
Oh, that's impacting how you're thinking about your capital.
Allocation decisions right now.
Yeah, No I'm, Eric I would say you know, where we continued to be highly active in evaluating opportunities out there in the marketplace and I.
I don't we don't see any any anything dramatic in terms of changing changing in the valuations obviously the public markets are for everyone.
C, but as it relates to you know right now I think there is.
A lot more energy around consolidation and I think in terms of your if you are talented studio right now and you're looking for a home, saying there's still is a destination that is is on that list and as high up in that list. So from a from our perspective, when we look at targets, where we are.
We're very much focused on on the talent on the IP and what we can do to unlock further value if we bring that a studio that capability into zynga.
And yes. There are there are obviously, there's different pockets of of of targeted M&A, whether it's IP, whether its capabilities and there's some disparity there but overall, we don't believe that at least from a zynga perspective that the competition has got any any more intense.
Thank you.
Thank you. Our next question comes from Michael Wang of Goldman Sachs. Your question. Please.
Hi, good afternoon, and thank you very much for the question and I was just wondering if you could talk a little bit about that.
The magnitude of new game contributions to.
The low double digit outlook for next year.
And as a follow up I was just wondering if you could also just talk about.
How big some of those new soft launch games like pirate evolution and starve loss could be a for instance are these 100 million dollar bookings games in a steady state. Thank you.
Yeah, Michael that you in terms of low double digit.
The.
You know when you when you think about a low double digit in the context of a fully fledged Star Wars Farmville three peak peak blockbuster game, if if if if if it arrives in the quarter plus the ground game.
The bookings is it something that.
Should not be a challenge you Big picture, if you think about it from a from an opportunity perspective.
Overall, the the guidance assumes that the.
The large the.
The majority of the growth you're going to see year on year is going to come from obviously from Guy for golf rifles.
Farmville and <unk>, the new other new games that we haven't declared that are.
As effectively as as launched in 22 also I think the next major lever will be the continued momentum we see in Raleigh and in our advertising, we do expect that to be a strong driver of growth and you know the overall live services portfolio like for like we do expect we can grow that but again.
As we've said in the past that will be the fundamental bedrock foundation of the company and will be at a lower growth rate than obviously, new and our advertising momentum.
Great. Thank you Jeff.
Thank you. Our next question comes from drew Crum of Stifel. Please go ahead.
Thanks, Hey, guys good afternoon.
If you could comment on your view in terms of the amount and timing of cost synergies from the chart boost acquisition has that changed from your update earlier in the air and then separately on the new game pipeline, maybe for Frank do you have any other games in development that are cross platform or do you need to see how star Wars.
Hunters performs before you green light any other titles. Thanks.
Sure. This is J R.
Our our our guidance previously as we expected somewhere between 20 and $30 million of contribution and synergies from charterers and we still believe that that's a good number.
Obviously as we scale new games, there is the potential that that that will benefit us as we you know we leverage sharp boost to help launch those games, but for the moment, that's we're going to hold to that prior prior number and we'll obviously give more color on that as we get into the February earnings call.
And then drew in terms of new games on on cross play.
Yes, we have a handful of additional games under development.
For cross play capabilities in fact, Farmville three has a version that works on Macs that are we're going to start rolling out more.
More significantly as we go into the end of this year, but there are several unannounced games that fully embrace console PC and mobile game play together that we haven't announced and in fact at trough. The developer that joined US last year is an example of one of them.
Development teams is working on one.
Thank you. Our next question comes from Matthew cost of Morgan Stanley. Please go ahead.
Hi, guys. Thanks, Thanks for taking the question so in terms of like the AD revenue business.
When you think about the success you've had scaling that up with Rollick I guess, where do you think about the next leg of growth coming from it is there is there a greater opportunity to scale up the hyper casual business can you do more with ads in your non hyper casual games and then and then how do you see that kind of interacting with the AD platform that you you talked about emissions.
For the future and then just secondly.
Can you talk a little bit about your decision to put some games into soft launch through the end of the year is that an acceleration versus your prior expectations and if so what drove that decision. Thanks.
Yeah, Matt I'll start with a look at the AD business, we definitely see contributors to the AD business grows coming from hyper casual we think that Rollick has a system that is repeatable that can continue to put out hit games and we have further expansion from a territory standpoint from the types of products that we're building. So we believe that that is going to be one.
One place to look for growth. The second is our core games. There are additional inventory opportunities inside of our existing live services portfolio, where we can put more watch to earn inventory and enable other games that haven't quite yet integrated with zynga fully into the AD stack.
Also with the core games, our new releases have advertising contemplated in them. For example, Farmville three has watched earn already operating in it so between expansion of inventory and live new games, releasing hyper casual that's going to account for a lot of growth, but in addition to that are growing the third.
Party AD business through chart boost and through other parts of the network that we're going to build out we believe longer term that can be an important part of our business overall for sure.
Starting at a at a level that is.
<unk> is not contributing a significant amount right now, but as we head into 'twenty, two and we start to expand our chart boosts integration into Zynga as well as the rest of the industry. We think that that can be very helpful to us the.
The other parts of the platform that we're looking at near term, we continue to augment and integrate the DSP the demand side piece, but we're also looking at mediation and supply side technologies and products that will expand the overall capabilities of the platform and further attributes beyond that and we're investing a lot in machine learning.
<unk> and other components that will drive yields and look at other components of the platform that need to level up in order to really start to hit scale.
In terms of the second question about our soft launch titles were.
Soft launching a lot of titles all the time.
The progress that we saw in pirates as well as in and Star Blast. We felt was notable and worth communicating there are other titles that we are in soft launch on and that we that were in development that are going to go into soft launch shortly that we're excited about so there really hasn't been an increased cadence. It's just they the new.
Pipeline is really starting to come together and pick up momentum as you know it takes a long time to build out studios in and getting new games off the run off the ground and it feels like that's really as I mentioned in my remarks really hitting its stride in and showing a renewed strength that will contribute more growth going forward than it has in the past not that we haven't had good games like Harry Potter.
And game of Thrones slots contribute.
But in fact, when we look at 'twenty, two 'twenty three and 'twenty four.
Feel really good about our lineup.
Thank you. Our next question comes from Colin Sebastian Baird go.
Go ahead.
Great. Thank you this adult none for calling on just looking at the improvements that you saw an AD for end user acquisition yields quarter over quarter. Just wondering how much of that came from the addition of chart boost versus some of the other shifts in your strategy and maybe moving around different channels and related to that with the launch.
A farmville and the early success you've seen so far just wondering if you can comment on some of your user acquisition on Facebook, specifically, given how tight that that game is to that platform and what you've been able to do versus last quarter to drive stronger yields there. Thank you.
In terms of this is Gerry Colin.
Yeah on the advertising side charters to us obviously, it's in the building and is getting integrated but there wasn't much of the improvement there I would I would I would tag against sharp boost in Q3 or Q4, because it's early days, yet I think as I said earlier.
We will see as I said to you to Drews question, we will see a more material improvements and opportunities from sharp who says as we get into 'twenty two and beyond.
So from that perspective, if you look at Q3 with the profitability.
Beat and if you look into Q4, we did see towards the end of Q3 as we said at the last earnings call, we've seen across the across the board improvements and in the in the UA landscape.
The benefits from not spending as much in Q3, we have layered into Q4 from an investment perspective, because we see the opportunity to not just drive farmville, but obviously lean in against.
Some of our life service titles.
In terms of the marketing strategy around.
Farmville it it's across the board, it's not it's not it's not fixated on any one platform. Obviously the historical legacy of Farmville was very much linked to Facebook, but we're now in a in a in a very diverse marketplace, where mobile is beyond Facebook, it's everywhere, so where we're actually invest.
Sting and end user acquisition across multiple channels.
Thank you. Our next question comes from Gerrick Johnson of BMO capital markets. Please go ahead.
Good afternoon, and thank you.
First off on ROIC as the growth in AD revenue expected there from road going forward is that more from additional game installs or better productivity.
Productivity per game and my second question games, like Cisco local and revamp.
He's been meaningful contributors or are they more a novelty. Thank you.
Yeah in terms of in terms of Rollick it'll be all of the above guard in terms of the core the core business. What we talked about this on the last earnings what we're actually seeing with some of the you know the key franchises is that they're actually starting to behave behave more like a sustainable live services.
As opposed to in and out a hyper casual games.
So from that perspective, the team is looking to build sort of iterative sort of events and bold beats into into some of the franchises.
But we also have continued to expand the first party and third party network of developers that we work with and we plan to continue to do that into 'twenty. Two so you will see obviously, a strong flow through of games coming true right.
Owned IP developed and and and obviously third party partner games.
And or ultimately over time as we leverage our our AD Tech platform, we'll be able to drive even stronger flow through of those bookings into into zynga.
Yeah, Gary the strength the efforts on snap and also now with what we announced today on tick tock.
Its new platform experimentation in development. So you know the history of the industry from our perspective is a lot to do with platform transitions and getting in early in and learning a lot. So that you can hit scale. So we.
We're not really doing it for novelty sake at all it really is the thesis that we're a social gaming company. These are highly engaged social platforms interactive entertainment could work in those environments and so we wanted to experiment with that and see if there's heat. So we're not betting the company on it for sure but at the same time, we're putting brands do.
A work and were putting teams to work to see what we can learn about these environments. It also helps us understand the networks as it relates to virals and how to market. Our other games. So there are secondary benefits to developing on these platforms that affects the mainline part of the business in addition to being.
That's on whether or not these can actually be viable platforms and if they are then we're in early and we're in the right positions. So that's the that's the way we think about it.
Great. Thank you very much.
Yeah.
Thank you. Our last question comes from the line of Martin Yang of Oppenheimer <unk> Company. Please go ahead.
Good evening, good afternoon, and thank you for taking my question.
First question is maybe can you elaborate on your direct to consumer strategy thoughtful book geography, we should target first and second question is related to your.
And F T and blockchain getting hiring.
Why now and at what stage are you.
Regarding developing games for.
There are associated with blockchain.
Yeah Martin. Thank you for your question in terms of.
The direct to consumer ideas. It takes a couple of different forms.
Obviously on the PC, we can go direct to consumer so we can work with other platforms to distribute a bill may handle customer service and all the other services that you potentially get from our mobile platforms. For example, our console platform. So look for us to part of our <unk> strategy and Mac strategy start to develop.
These muscles and these capabilities for D to see if the the mobile ecosystem opens up at some point in the future for.
For direct to consumer billing then we have the ability to do that it would obviously be a tailwind for our business, but it's it's difficult to forecast that event given the activity in the courts, but our goal is to be in position for D to C and includes things like building out our zynga identity system that we.
Haven't place using email and we're accumulating in building out those capabilities across our live services, where we can and on new platforms that we're building out in terms of the geos.
Just highlight.
Frankly, all of them and we're doing this in North America, Europe, as well as Asia, where we can go direct especially on the on the the games that we start to release that our cross platform that'll be an increasingly important opportunity too.
In terms of your second question why now on the N F Ts.
I think from our perspective, we have a lot of interest internally in this category as I mentioned earlier on the call at the board level and.
Within the game teams.
And you know along the way, we met Matt Wolf and I had worked with him in the past and we just came to the conclusion that this was the right time to start to put together some ideas how do we start to bring N F T's and blockchain technology into Zynga as existing portfolio our owned IP.
Develop games from inception that are built with Nf Ts as part of the core gameplay loop, we like the the timing of this obviously, it's a category that's getting a lot of capital and talent right. Now we felt like this was the right time to unveil.
Unveiled something that we've been talking a lot about internally and start to make it and.
Operating facet of our company going forward way too early to ascribe any value.
Any any components.
Components to guidance or how long twenty-two will unfold, but this is an area, where we think that blockchain and entities can be part of the fabric of interactive entertainment for the long term and one of our core values of the company is zynga speed and we'd like to hit things fast and go at it. So once we got the leadership and the talent in place. We think we have some ideas that we can start.
To bring to life and that's what we intend to do.
Got it thank you Frank.
Thank you at this time I would like to turn the call back over to Rebecca Lau for closing remarks.
Thank you. Thank you Latif, we want to thank everyone again for joining our earnings call today and look forward to connecting further over the coming weeks.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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