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Edited Transcript of ZNGA earnings conference call or presentation 7-Nov-17 10:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Zynga Inc Earnings Call

San Francisco Nov 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Zynga Inc earnings conference call or presentation Tuesday, November 7, 2017 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank Gibeau

Zynga Inc. - CEO & Director

* James Gerard Griffin

Zynga Inc. - CFO

* Rebecca Lau

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Conference Call Participants

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* Benjamin Ari Schachter

Macquarie Research - Head of TMET Research

* Brian Thomas Nowak

Morgan Stanley, Research Division - Research Analyst

* Christopher David Merwin

Goldman Sachs Group Inc., Research Division - Research Analyst

* Colin Alan Sebastian

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Dae K. Lee

JP Morgan Chase & Co, Research Division - Analyst

* Douglas Lippl Creutz

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Evan Todd Wingren

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Michael Joseph Hickey

The Benchmark Company, LLC, Research Division - Research Analyst

* Michael Joseph Olson

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Timothy Larkin O'Shea

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for your patience. You've joined Zynga Third Quarter 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Director of Investor Relations and Corporate Finance, Ms. Rebecca Lau. Ma'am, you may begin.

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Rebecca Lau, [2]

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Thank you, and welcome to Zynga's Third Quarter Earnings Call. On the call with me today are Frank Gibeau, our Chief Executive Officer; and Gerard 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 our future performance. Actual results may differ materially from the results predicted.

Please review our risk factors in our most recently filed Form 10-Q as well as elsewhere in our SEC filings for further clarification. In addition, we will also discuss non-GAAP financial measures. Our earnings letter, earnings slides and when filed, our 10-Q, will 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 as a substitute for or superior to our GAAP results. This conference call is being webcasted 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.

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Frank Gibeau, Zynga Inc. - CEO & Director [3]

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Thanks, Rebecca. Good afternoon, and thank you for joining our call. We had a strong Q3, delivering our best revenue and bookings performance in over 4 years.

This past quarter, revenue was $224.6 million, above our guidance by $14.6 million and up 23% year-over-year. Bookings were $213.5 million, above our guidance by $8.5 million and up 9% year-over-year. Our mobile user pay hit an all-time high for both revenue and bookings, up 44% and 20% year-over-year, respectively. Mobile now represents 87% of our total revenue and bookings.

We delivered significant growth in profitability in the quarter, achieving net income of $18.1 million. This represents the first time since we went public that Zynga has delivered 2 consecutive net income quarters. Our adjusted EBITDA in the quarter was $44.6 million, up $41 million year-over-year and above our guidance. Our year-to-date cash flow from operations has more than doubled to $68.2 million, up from $32.3 million a year ago. We remain on track to deliver our improved margin goals by the end of 2018.

Our quarterly performance was due to the continued strength of our live operations, anchored by our forever franchises Zynga Poker, CSR2 and Words With Friends. Specifically, our strategy of innovating and growing our franchises through bold beats continues to pay off.

There are 3 great examples in Q3 where bold beats helped drive significant performance in our forever franchises. First, Zynga Poker delivered its highest quarterly mobile performance in franchise history, with mobile revenue up 78% year-over-year and mobile bookings up 81% year-over-year. The games' results were driven by the team's continued focus on innovating on 2 of Zynga Poker's most popular bold beats: Challenges and Leagues.

Second, CSR2 had another great quarter, driven by a series of bold beats and exclusive events for players. CSR2 grew sequentially in Q3 with mobile revenue up 8% and mobile bookings up 12%. The performance was largely due to our latest Fast & Furious event, which featured the Dodge Demon from The Fate of the Furious film. The team also marked Ferrari's 70th anniversary in CSR2, with 6 supercars developed exclusively by Ferrari for the occasion.

Third, Words With Friends, which celebrated its eighth anniversary in September, delivered strong performance with mobile revenue up 9% sequentially and mobile bookings up 10% sequentially. This past quarter, we introduced a new bold beat in the game with the launch of Social Dictionary, which added 50,000 new words to the game, many inspired by pop culture and player feedback. Since launch, the new words in our Words With Friends Social Dictionary have been played more than 33 million times.

As we look forward to 2018 and beyond, we expect to grow Zynga in 4 ways. First, we'll continue to focus on growing our mobile live services through our innovative bold beat strategy. Zynga utilizes a unique combination of art and science to develop new content and features designed to increase long-term engagement and expand our audiences. We believe this commitment to growth in live services will provide a more predictable and recurring revenue stream for Zynga over the long term. In any given year, the vast majority of revenue and bookings comes from our portfolio of live services.

Second, we plan to build on our strong foundation of live services through new game introductions, with the goal of creating new forever franchises. Our approach to development will combine strong game teams with new intellectual properties, reinvigorated Zynga brands and new strategic licenses designed to appeal to global audiences. We're taking a rigorous approach to how we're developing new games, with extensive consumer and soft launch testing to ensure that we're engineering potential hits.

As part of that effort, I'm excited to share that this week, we're launching Words With Friends 2 to global audiences. This is a new sequel that builds on the 8-year history of this popular franchise by adding some of the most requested features by our players. This includes a new Solo Challenge, giving players a chance to progress and improve their skills while they're waiting for their friend's next move. Additionally, we're introducing Lightning Round, featuring team versus team competition that speeds up the pace of play and offers an all-new way to play Words With Friends.

We've also updated the player experience to increase accessibility and modernize the look and feel. We anticipate Words With Friends 2 will steadily ramp in the months following its launch, and our team is planning an ambitious bold beat strategy to keep the game fresh and fun for players. We're proud that this forever franchise has become a daily part of millions of people's lives around the world and look forward to supporting the brand for years to come. In addition, we're actively developing new games in Action Strategy, Casual and Invest Express, and expect to launch new titles in some or all of these categories in the second half of 2018.

The third way we're going to grow Zynga is by investing in new emerging gaming platforms like chat and augmented reality. We believe platforms like Facebook Instant Games and Apple's iMessage have the potential to reshape the accessibility and social nature of mobile gaming and is an ideal fit with our mission of connecting the world through games. With AR in particular, we're excited by how it's captured the imagination of gamers around the world. Apple's ARKit and Google's ARCore will allow the teams at Zynga to create innovative new augmented reality experiences. Later this month, we'll be launching a bold beat in CSR2 that leverages Apple's ARKit to bring players' in-game car collections to life by blending virtual cars with real-world environments.

Fourth, we intend to use the strength of our balance sheet and positive cash flow from operations to explore M&A opportunities that accelerate our genre leadership, drive audience growth and enhance value for shareholders. Our goal is to bring talented teams and proven franchises into Zynga that align with our strategic direction.

Today, we're pleased to announce that we've entered into an agreement to acquire the mobile card game studio of Peak Games. This studio will add successful games such as Spades Plus and Gin Rummy Plus, the largest spade and rummy mobile games in the world, as well as the popular Okey Plus franchise to our portfolio. Combined with the recent growth of Zynga Poker and Solitaire, the addition of Peak's mobile card games will give Zynga the world's largest portfolio of casual card games upon closing.

These games have broad evergreen appeal to millions of people around the world, and they build on our strategy to continue growing our card portfolio over the long term. These additions will also enhance our audience, adding millions of DAU, and will be accretive to our near-term margin goals. We're excited to welcome this talented Istanbul-based team to the Zynga family.

As we approach the end of the year, we're happy with our turnaround progress, but know there's more work to do. We're excited about Zynga's growth potential and our ability to create shareholder value. We remain committed to achieving margins more in line with our peers over the long term.

And with that, I'd like to turn the call over to Ger, so that he can further discuss Q3 and our Q4 guidance.

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James Gerard Griffin, Zynga Inc. - CFO [4]

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Thanks, Frank. We delivered another excellent quarter in Q3, driven by strong top line performance from our live services and effective cost management.

Our revenue on bookings both exceeded our guidance. Revenue, which is comprised of the net change in deferred revenue of bookings, was $224.6 million, $14.6 million ahead of our guidance and up 23% year-over-year. The change in deferred revenue was a net release of $11.1 million versus our guidance of a net release of $5 million. Bookings were $213.5 million, $8.5 million ahead of our guidance and up 9% year-over-year. Our over-delivery in the quarter was driven primarily by the continued strength of our mobile live services, in particular Zynga Poker, CSR2 and Words With Friends.

Turning to our Q3 operating expenses. GAAP operating expenses were $138.7 million, down 16% year-over-year, representing 62% of revenue, down from 91% of revenue in the prior year. I would like to call out that our GAAP operating expenses in Q3 FY '16 were negatively impacted by an intangible asset impairment of $20.7 million, offset partially by a contingent consideration credit of $5.8 million. In total, these items represented $14.9 million or 8% of Q3 FY '16 revenues. There were no comparable items in Q3 FY '17 GAAP operating expenses.

Stock-based compensation was $15.6 million, down 36% year-over-year, representing 7% of revenue, down from 13% of revenue in the prior year. Non-GAAP operating expenses were $121.3 million, down 4% year-over-year, representing 57% of bookings, down from 64% of bookings in the prior year. The decrease in non-GAAP operating expenses was driven by lower R&D, offset partially by a higher marketing and G&A spend. All of this contributed to a net income of $18.1 million, $11.1 million better than our guidance and an improvement of $59.8 million year-over-year.

Our adjusted EBITDA, which includes $11.1 million net release in deferred revenue, was $44.6 million. This was above our guidance by $14.6 million and up $41 million year-over-year. We're pleased with the improvements we're making across the company as we progress through this turnaround year. We expect to end 2017 with a much stronger foundation for the future as we continue to focus on delivering improved margin goals by the -- our improved margin goals by the end of 2018 and achieving margins more in line with our peers over the long term.

Looking at our balance sheet. We ended the quarter with cash and marketable securities of $772 million, up from $739 million at the end of Q2 FY '17. This sequential increase was principally due to the $35.1 million we generated in operating cash flow.

Turning to our guidance. Our guidance for Q4 is as follows: revenue of $215 million versus $190.5 million in Q4 FY '16; net income of $13 million versus a net loss of $35 million in Q4 FY '16; and net release of deferred revenue of $5 million versus a net increase of $11 million in Q4 FY '16; bookings of $210 million versus $201.5 million in Q4 FY '16; adjusted EBITDA of $35 million versus adjusted EBITDA of $10.6 million in Q4 FY '16.

There are several factors to consider in our Q4 guidance. On a year-over-year basis, we anticipate user pay and advertising both to grow driven by our mobile live services. Quarter-over-quarter, we expect growth in advertising will be more than offset by declines in our Web and older mobile games. I would also like to note that Q3 FY '17 benefited from some one-time revenue in bookings related to the close-out of our NaturalMotion third-party technology licensing business. We expect our gross margins in Q4 to be in line with our performance in Q3, and we expect our operating expenses to be down year-over-year in absolute and percentage terms.

As Frank mentioned, today we announced our planned acquisition of the mobile card game studio of Peak Games. The purchase price for the studio is $100 million in cash, and we expect this asset will be accretive to our near-term margin goals. We're excited to bring this talented team to the Zynga family. We expect the transaction to close in Q4 -- late Q4, and it's not included in our Q4 guidance.

Looking at 2018. There are a number of points I'd like you to keep in mind as you tune your models for that year. Our top line will be driven by our mobile live services, which will be responsible for the vast majority of our revenue and bookings in 2018. We remain committed to sharpening our operating model, which should further enhance the sustainable profitability of our live services. We expect our mobile growth to be partially offset by the continued decay in our Web and older mobile games. We typically experience a seasonal decline in revenue and bookings in Q1 as compared to the Q4 previous.

As it relates to new games, we are actively developing new games in Action Strategy, Casual and Invest Express, and expect to launch titles in some or all of these categories in the second half of 2018. In summary, we're making great strides in unlocking the value inherent in Zynga. Q3 was another excellent quarter in what is shaping up to be a strong year in our turnaround. Looking to 2018 and beyond, we're excited about the opportunities that lie ahead of us.

With that, we're happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Tim O'Shea of Jefferies.

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Timothy Larkin O'Shea, Jefferies LLC, Research Division - Equity Analyst [2]

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Yes. So with the card studio from mobile Peak Games, it's -- this is the second card or casino-type acquisition we've seen in the past year. So with that in mind, I thought you could help us understand what's driving the optimism there behind the Social Casino genre and then maybe understand what's the strategy to integrate and drive leverage from these acquired assets? And then, just further, with M&A as one of the fourth growth pillars -- one of your 4 growth pillars, how should we think about the types of assets you're actively considering right now? Is it more deals like this one? Or might we expect something more transformative over time?

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Frank Gibeau, Zynga Inc. - CEO & Director [3]

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Tim, this is Frank. Let me start by talking a little bit about the overall category in cards. We've been investing in Poker over the last 1.5 years, and we've seen some great results. And what we've learned as we've invested in Poker is it's highly sensitive to new feature development, new content development, and we've learned a lot about the players. It's a global audience. It's an audience that plays a lot of different card games. There's a lot of crossover into adjacent types of card games like spades, like rummy. We also, when we looked at our Slots business and our Words With Friends business, saw that the Casual players in both of those categories also have an affinity for card games and there was crossover opportunities there as well. So when we look at the overall opportunity, by building a portfolio across multiple types of card games, we believe that we can engage players for a very long period of time, that we can give them the right offering at the right time as they're looking for something new to do or in addition to what they're doing. And it also builds a platform for advertising and enhances the overall audience size that we can go after from an advertising and from a cross-promotion and marketing standpoint. We also really liked this studio at Peak because they've been together for a long time. They're very talented. They're in a low-cost part of the world. And they've had a lot of success with both of their games that have been more global in orientation, like rummy and spades. But also in their local market, they've done very, very well with the Okey franchise. So we like expanding both globally, but also looking for regional hotspots that does have an affinity with some of the other products that we have already in the mix. I think longer term, you're going to see that, from the standpoint of the types of assets that we're looking for, first and foremost, we're really interested in talent. We're looking for talented teams that have been together. We're looking at teams that have franchises that we can bring into our portfolio that are in the same kind of direction that we're going strategically as a company. And then also, beyond that, whether it's a tuck-in or a transformation, we're not really seeking assets based on that kind of delineation. What we're looking for are talented teams with franchises. And if they're at scale, that's even better. In this particular case, with Peak Games card studio, that's -- it's a multimillion DAU asset, which plugs in nicely into our overall mix.

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James Gerard Griffin, Zynga Inc. - CFO [4]

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And I'd just add to that. When we looked at this studio, obviously, we're getting a talented studio, a great group of developers with a very interesting portfolio of games that have strong affinity with our existing portfolio. From a financial perspective, this deal worked for me in the sense that it gave me a portfolio of games that are already live and are generating a decent bookings contribution. And from an EBITDA perspective, they're very much accretive to our overall goal of breaking into 20%, as we define that internally, some time in '18. So when we looked at it from a creative perspective, it made perfect sense. And from a financial perspective, the multiples and economics here were very attractive to us. So from our perspective, it -- this was a good addition to the portfolio. Looking forward, as Frank said, the key in this business is to have a strong creative platform. And we believe from a transformation perspective, we have a lot of that already internally. But we will look to enhance it with opportunities that we see in the market. Similarly, if we see an emerging platform, whether it's in chat or Messenger, creative teams that can help us in that way, that's obviously an option. But what I will say, overall, we're going to take a very structured and robust approach to evaluating any M&A transaction. And you can see over my tenure here, I've been here now just over a year, I can tell you that the fundamentals of the company I've been really impressed in how we've managed to evolve over the last year, but we did 2 deals. And both of them are very natural acquisitions to how we're trying to evolve our Casual card portfolio over time.

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Operator [5]

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Our next question comes from Mike Olson of Piper Jaffray.

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Michael Joseph Olson, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [6]

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On the Peak mobile cards studio acquisition, I'm not sure if it was in the remarks or press release, but can you share this point how much that will add to revenue or at least what the run rate for that business was? And then, second, regarding 2018, I realize it's early, but excluding the impact of the Peak mobile cards studio, it sounds like you'll have some new titles later in the year. Is there reason to expect anything different in 2018 than kind of the high single to low double-digit growth we've seen over the past couple of years?

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Frank Gibeau, Zynga Inc. - CEO & Director [7]

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We didn't disclose the exact economics other than I did indicate that the contribution we expect from Peak on an EBITDA basis will be accretive to our near-term goals. As you think about '18, '18 will be driven fundamentally by our live service portfolio. And I'm characterizing the Peak portfolio as part of that live service portfolio on the basis that we'll close this deal in Q4. As it relates to new, the way to think about new, as I say, we are building new games. And we do intend to launch a number of new games in the second half of the year. For me, the key there is that we launched those games successfully and they will be a contributor, to a certain extent, in '18, but it's a small part of our overall bookings. But more importantly, they will obviously be contributors as we take our live service momentum into '19.

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Frank Gibeau, Zynga Inc. - CEO & Director [8]

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The only thing I would add is if you -- Mike, if you look at the -- you listened to the opening remarks, we've talked a lot about kind of the 4 ways we want to grow the company. And the first is, as to Ger's point, we're going to grow live services, we'll be -- the Peak business as well as the Words with Friends 2 launch will be contributors to that next year. The new games as we called out will be in the second half, but the vast majority of the revenue will come from live next year. We do have an optimism long term around chat and AR. I wouldn't think about those contributing next year in any significant way. But from a long-term standpoint, we're very excited about those. And frankly, on an M&A front, if opportunities present themselves, we will be aggressive about them. We will make sure that they conform to the requirements and commitments that we've made as a management team to our investors, but it's a dynamic market out there. There's a lot of opportunity, and we're moving aggressively across multiple genres and those opportunities could present themselves.

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Operator [9]

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Our next question comes from Brian Nowak of Morgan Stanley.

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Brian Thomas Nowak, Morgan Stanley, Research Division - Research Analyst [10]

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I have 2. Just on the -- the first one, the live services for next year. Was wondering, Frank, can you give us a couple of kind of blocking and tackling examples of your core franchises, where you still see live service incremental opportunities to improve the overall user monetization? Then the second one, on Peak Games, it sounds like part of this is driven by cross-marketing. Just in your years of mobile game and mobile game management, Frank, can you just talk about some of the challenges to that and kind of what gives you confidence you're going to be able to kind of cross-market these Peak Games users?

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Frank Gibeau, Zynga Inc. - CEO & Director [11]

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Sure, Brian. On the first point, we think that we have opportunities in all of our live services. If you look at how we're sequeling Words With Friends to Words With Friends 2, we're adding all new ways to play that game that we believe is going to open up new opportunities to come out with bold beats next year. In the case of CSR, we've seen really nice growth this year, but we still feel like there's opportunities to add more depth to the PvP function. So there's more player versus player opportunities as well as continue to add more car manufacturers and challenges. Poker is an example where we just released Jackpots as a new feature just over the last week or 2. We're excited to see how that will impact. And if you kind of go down the line from there, whether you look at Dawn of Titans or Magic Match from our Wizard of Oz Match 3 game, we're bullish on being able to impact those titles. And it's largely because we've created a new process and system here about how we approach it. We really go after a more long-term view of bold beats. A lot of companies look at bold beats on a quarter-by-quarter basis. We're looking multiple quarters up to a year or more in advance and resourcing and staffing accordingly. We're doing the consumer research to make sure that these are the right choices. We're getting into position so that they can compound and build on each other as the quarters unfold next year. So we feel like we're actually just getting started with this process and this approach, and it's really unlocked a lot of value inside Zynga. We treat live game development like new game development. It's that cool and innovative internally as we think about it. In terms of the cross-promotion piece, look, the absolute important component of cross promotion is that there needs to be an affinity for the thing that you're putting in front of them. It's very hard to take a really distant RTS Action Strategy game and put it in front of a Casual card player. So you find very low percentages of cross promotion in those cases. But if you put Poker and Solitaire together with a Words With Friends or Slots player, you do see in the player behavior and in their consumption curves and how they interact with them, that there is the ability to get them to move over, especially if the offer and incentives and social dynamics are strong and positive. So that's what's driving the decision-making and the strategy there.

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Operator [12]

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Our next question comes from Colin Sebastian of Baird.

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Colin Alan Sebastian, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [13]

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I know this isn't particularly original as a question, but I'm just hoping you could describe how much room there still is to sharpen the model or rationalize the expense base when you're also pursuing some interesting growth opportunities. In particular, more live services and events as well as, I think, growth internationally and, of course, the new platforms. But does that mean there's going to be perhaps lengthening the period it might take to hit some of those out your margin targets? Or is there enough room to dial down the expense base as you get through the year?

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James Gerard Griffin, Zynga Inc. - CFO [14]

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Yes. The way we're looking at sharpening the operating model is, in particular, as we start revolving into '18, it's more managing the operating model. We've done a lot of what I would call the low hanging and heavy lifting sort of turnaround work over the past 18-plus months. And as we are looking at our plans for '18, it's very much around prioritizing our R&D investments against live and against new innovation into new games, new technology. And there's areas where, in -- we've looked at areas where we've taken out spend. And rather than it flowing directly to the bottom line, we've said we need to invest more in Words With Friends or we need to take more experimentation into chat or into other areas. So what I would say is, we feel we've got the right operating model and focus to prioritize where we need to spend. And in terms of levers, in terms of flexibility, when you look at my operating spend, the largest component of my operating spend is people and the majority of that's against developing our games and building the bold beats into live or into new games. Secondly, the next largest expense is marketing, where we've got a very nimble and smart group of people that look at how we're investing that money on a day-to-day basis and a weekly basis. So there is some flexibility in terms of how we manage that. We've made a lot of progress over the last year as -- towards our near-term margin goals, and the aim is to continue that momentum. The sort of key to it is fundamentally managing the middle of the P&L. We will be investing, as I say, in R&D into '18. But you shouldn't be expecting any hockey stick growth in any of my operating lines. The major growth will come in marketing, and that will be more as a percentage of bookings. And the only step-change you should expect to see is when you have an acquisition, where obviously you're resetting the bar. But we feel comfortable that we've got a handle on how we're prioritizing our spend. And as long as we're managing the middle and we're delivering what -- moderate growth in live services can bring us towards our near-term margin goals.

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Colin Alan Sebastian, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [15]

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Maybe 1 just quick follow-up, Ger. You're looking at the M&A markets overall and you guys are still looking at -- it sounds like are you seeing that valuations are now in a more rational level and that's opening up more possibilities? Or how would you describe the market environment overall?

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James Gerard Griffin, Zynga Inc. - CFO [16]

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I think the market is -- it's still a little bit all over the place. So we have a very active Corporate Development team that are looking at a lot of opportunities. I think there's still a lot of companies out there that -- in particular, if you think about startups that have high expectations in terms of their worth. And so we spend a lot of time looking at obviously the teams, the IP they're building or the technology they're building into. So I think it's a dynamic marketplace. I wouldn't say it's rich with immediate opportunities. And we're going to take our time to look for the right opportunities that fit within the areas that we're looking to strengthen or enhance.

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Operator [17]

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Our next question comes from Christopher Merwin of Goldman Sachs.

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [18]

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I just had a couple of questions. First question is, revenue per DAU, was that a little bit year-on-year but was more than offset by improvements in conversion. So do you see room to drive bookings per paying user higher over time? Or do you think conversion will be the bigger lever? And then you also announced the Words With Friends launch for next year. I think recently you talked about moderation and advertising demands. So can you just talk about the strategy to maximize the advertising opportunity for this title? And are you looking to do more in direct sales with advertising over time?

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Frank Gibeau, Zynga Inc. - CEO & Director [19]

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Yes, Chris, this is Frank. There is more room to maneuver in player conversion and in the revenue per paying user -- average bookings per paying user. So we're going to start to introduce new modes. For example in Words With Friends 2 that launched this week, we have new opportunities with Boost and the new IEP economy that we're starting to build out there that will complement the advertising on that game. The majority of the revenue will still come from advertising in the case of Words With Friends in the near term. But over the long term, we'd like to create more value in the game for players to be able to exchange against. If you look at advertising overall, yes, the first part of this year was a little slower on the pricing level because there's a lot of inventory that came into the market. We've been upgrading our information systems to be able to provide advertisers with more information about consumers inside of the services, which is a distinct advantage that a Google or a Facebook has relative to everyone else. And so you're seeing us make investments to continue to maintain advertising as a key component of our company. But overall, we're down from 26% of our total revenue last year to around 20% this year, and that's okay by me. From my perspective, I think that value that we create inside the game that players transact with us is the best way to grow the company. And advertising will continue to be a source of strength and an investment area for us, but I don't have a problem with the overall percentage going down. When you look at next year in terms of advertising, as we start to add more DAU to our mobile mix and that platform, that should help. And these investments that we're making in some of the new video-based display units, the deal that we did with Unity, for example, those different tools should allow us to continue to have a robust advertising business.

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Operator [20]

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Our next question comes from Doug Creutz of Cowen.

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Douglas Lippl Creutz, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [21]

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Just a small one. You called out a revenue benefit from, I think, you said a shutdown on some NaturalMotion technology business in the quarter. Can you give a sense of how big that was?

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James Gerard Griffin, Zynga Inc. - CFO [22]

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A few million.

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Operator [23]

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Our next question comes from Douglas Anmuth of JPMorgan.

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Dae K. Lee, JP Morgan Chase & Co, Research Division - Analyst [24]

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This is Dae Lee on for Doug. My question is around your decision to launch the sequel to Words With Friends 2 instead of introducing updates to the existing title. I realized you've seen the successful launch in the sequel with CSR2. And then, is this something that you have in plan for your other forever franchises like Poker? And then, secondly, could you share your strategy around reengaging past users to try your new bold beats in your forever franchises?

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Frank Gibeau, Zynga Inc. - CEO & Director [25]

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Sure, this is Frank. When sometimes you get a collection of features and content that rises above the level of a bold beat and moves into a place where you can actually sequel a game and frankly, chart a new course for it. So with CSR2, you saw that. There was new technology, there are new modes. It was such a critical mass of content features and technology that it was the time to sequel. And that was the case in the conclusion that we came to as we looked at solo play, team play, a new user interface, a bunch of new event harnesses that we've added to the game. So we felt that, that had risen to the level of a sequel-level quality product. And it was critical to us to put that together in a new offering because we believe that, that would reactivate players that had lapsed. It would appeal to new players that had never played Words With Friends in a new way that a bold beat might not. And it would also activate more engagement potentially with our existing players. One important thing that I would point out is, though, in a successful sequel in the case of Words With Friends, what we didn't want to do is divide the community. So in fact, players that are in new Words With Friends right now, they can play Words With Friends games against people who are playing at Words With Friends 2. And they can migrate at their own pace and in their own time when they feel ready to do that. We didn't want to do an abrupt migration and risk breaking up the community and the audience, and that felt like a risk that we didn't want to take so we actually spent a fair bit of time getting the games to be able to be backwards-compatible, if you will. In terms of reactivations, any bold beat that we build, we look at 3 key segments. The first is, will the bold beat appeal to a new user base? Can we go out with new marketing, new merchandising and bring in a player that hasn't been in the game before? Two, does the bold beat get existing players to play more or do something else inside the game that's beneficial to them and to us? And then, third, are there players that, for whatever reason, stopped playing a game, this bold beat will reactivate and bring them in? And we do a lot of lapsed player research to talk to Poker players or Words With Friends players, hey, you love the game, you left. Tell me why. And then, we weave that into the creative decision-making and the development strategy for how we come out with the bold beats. So when we talk about our bold beat strategy being a process and a system, these is -- these are the types of steps that we go through as we think about what bold beats a game could use over the course of the next year or so. And not all games are ready for a sequel. Poker is doing quite well and is not in the need of a sequel for probably a very long time. But there's other franchises in our mix like Words With Friends 2 this week that the timing just felt right and the content, the players said was a great opportunity to level up.

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Operator [26]

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Our next question comes from Ben Schachter of Macquarie.

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Benjamin Ari Schachter, Macquarie Research - Head of TMET Research [27]

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Could you guys just talk about how the analytics platform is evolving over time? What is needed there and what pieces are you outsourcing still? Just broadly, how are you thinking about analytics these days and how important is it for the business?

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Frank Gibeau, Zynga Inc. - CEO & Director [28]

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When I came to Zynga, I was really blown away with the quality of the product management and data science capabilities and the talent inside the organization. And if you look at how Zynga thinks about products and from the very inside out, both socially as well as from a quantitative analytics standpoint, it's pretty awesome. And I've been really excited to be a part of that team. I've learned a great deal over the last 1.5 years. We are constantly making investments in that platforming and finding new ways to optimize building out our own proprietary testing systems that allow us to go in and test features and understand what the impacts are and looking at the expected outcomes. So there's a lot of interest right now in expanding our machine-learning capabilities. We do use that in many places inside the business. We think we can expand that. We're also looking at new ways to understand the relationship with players on a social level and across games. So there's a lot of opportunity inside of our data sciences and our product management processes that would allow us to continue to expand our capabilities and to enhance our bold beat strategy.

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Operator [29]

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(Operator Instructions) Our next question comes from Mike Hickey of Benchmark.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [30]

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Just 2 questions. I guess, the first one, if you could help me to characterize the construct of your pipeline in terms of market opportunity. It seems like the majority of your bets here are sort of singles and doubles. And of course, that makes sense, given the history of the industry and maybe -- and the company in terms of new game releases. But I guess if that's true, maybe you also have something that can get us excited in terms of a home run. Obviously, we don't want to lose track of all the work that you've done in optimizing OpEx and so forth. But obviously, you have some pretty big historical franchises. And obviously, mobile is a massive market. And then, the second question is on Social Casino. Seems like it's always been a good category, but kind of feels left for dead here. Are you still managing or mapping resources to try to grow that asset base? And obviously, we're seeing at least one of your competitors looking to make a big bet in that area. So just curious on your thoughts on how you sort of manage to grow that asset.

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Frank Gibeau, Zynga Inc. - CEO & Director [31]

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Yes, Mike. Let me start with the first question about how we think about our pipeline going forward. And what's been absolutely critical in thinking about the pipeline going forward is making sure that we have the right talent base to actually build the games that we really hope to go after. We absolutely want to build home runs, but we don't want to ever be beholden to them. So one of the strategies that we've been very aggressively pursuing is getting the operating model in a position where live operations generates a predictable recurring return, both on a revenue and profitable basis on a growth basis, so that when we do get to a home run, it layers in perfectly on top of that and never puts the company at risk. We have a saying around here, we don't sell hockey sticks, right? So we take a very methodical, very careful approach to making sure that we have the right talent, the right team, going with the right global intellectual property. And we take our time with it because it's so hard to break into the mobile market that if you try and just make a lot of quick shots or if you put something together that doesn't have the right -- that's just missing a key component, it's all for naught. And so from our perspective, we're building ourselves towards a pipeline of strong titles that have great talented teams, coupled with intellectual properties and brands, like you said, we have Zynga brands here, especially in the Invest Express category with The Villes that have very large audience opportunities. We are going in that direction for sure, but we don't believe that we should put the company in a position with our investors, where we have to have one of those work in order to deliver on our margin and our growth goals. And that's why our focus in this first part of the turnaround has been kind of relentless on building out live ops. When you think about the genres that we're in, we are really looking at some key genres like Invest Express, like Action Strategy, Casual as personified with what we doing with Words With Friends and Social Casino. Social Casino is an important category for us. Our Slots and Poker business is a very competitive business. We haven't talked a lot about the Slots business. We have been investing in it. But in terms of new news there in terms of new product releases, we wanted to take the portfolio of Slots games that we had, whether it was Wonka or Wizard of Oz or Hit It Rich!, Black Diamond and really build those out as opposed to adding a lot more slot machines games alongside of it. So the team has been adding a lot of depth, a lot of features that drive long-term engagement in that category. And yes, it's a very competitive genre, but it's not one that we are retreating from at all. And in fact, we're investing in the game development for those titles. So in terms of the new pipeline that's coming in the second half of '18, '19 and '20, we're actively investing in AAA teams with big ideas, so that we can produce some hits.

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Operator [32]

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And our last question comes from the line of Evan Wingren of Keybanc Capital Markets.

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Evan Todd Wingren, KeyBanc Capital Markets Inc., Research Division - Research Analyst [33]

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So Poker overall bookings growth accelerated to the highest rate all year, and you called out Challenges and Leagues as a key driver. Is it fair to say that the year-over-year bookings growth and engagement is being primarily driven by this beat specifically? And then, secondarily, can you help us understand how you're thinking about jackpot's potential scale in the context of Challenges and Leagues? That would be helpful.

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Frank Gibeau, Zynga Inc. - CEO & Director [34]

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Yes, Challenges and Leagues were the real growth drivers for that year-over-year performance that you saw. They were 2 really big features that drove engagement, reactivated players and we were able to successfully use advertising to acquire new players and stole some share from competitors. When you look at Jackpots, I think it's a little early to tell how big it can be. But Jackpots isn't our last idea. We are actively working on additional bold beats inside the Poker business. And because it's entertainment, some bold beats are bigger than others. Some work harder than orders. And so our commitment is that we're going -- we are staying at it. It's a forever franchise. It's 10 years old this year. We're seeing awesome growth, but we're going to continue to add to it. Jackpots might be a great growth driver, but it's too early to tell. And there will be more ideas coming.

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Operator [35]

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At this time, I'd like to turn the call back over to Rebecca Lau for any closing remarks. Ma'am?

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Rebecca Lau, [36]

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All right. Thanks, [Lutif]. We want to thank everyone for joining our earnings call today, and we look forward to connecting with you over the weeks to come.

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Operator [37]

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Thank you, Ma'am. And thank you, ladies and gentlemen. This concludes today's conference. You may disconnect your lines