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Edited Transcript of ZNGA earnings conference call or presentation 31-Oct-18 9:00pm GMT

Q3 2018 Zynga Inc Earnings Call

San Francisco Nov 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Zynga Inc earnings conference call or presentation Wednesday, October 31, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank D. Gibeau

Zynga Inc. - CEO & Director

* James Gerard Griffin

Zynga Inc. - CFO

* Rebecca Lau

Zynga Inc. - Director of IR & Corporate Finance

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Conference Call Participants

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* Brian Thomas Nowak

Morgan Stanley, Research Division - Research Analyst

* Colin Alan Sebastian

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

* Douglas Lippl Creutz

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

* Eric James Sheridan

UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

* Justin Post

BofA Merrill Lynch, Research Division - MD

* Michael Joseph Hickey

The Benchmark Company, LLC, Research Division - Research Analyst

* Michael Joseph Olson

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

* Raymond Leonard Stochel

Consumer Edge Research, LLC - Analyst of Interactive Entertainment

* Ryan Gee

Barclays Bank PLC, Research Division - 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 welcome to the Zynga Third Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Rebecca Lau, Vice President of Investor Relations and Corporate Finances. Ma'am, you may begin.

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Rebecca Lau, Zynga Inc. - Director of IR & Corporate Finance [2]

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Thank you, Joelle, and welcome, everyone, to Zynga's Third Quarter Earnings Call. On the call with me today are: Frank Gibeau, our Chief Executive Officer; and Ger 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 the risk factors in our most recently filed Form 10-Q, as well as elsewhere in our SEC filings for further clarification.

In addition, we will also discuss non-GAAP financial measures. Our earnings letter, earnings slides and when filed, our 10-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 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.

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

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Thanks, Rebecca. Good afternoon, and thank you for joining our Q3 earnings call. We delivered Q3 results ahead of our guidance across key financial measures with revenue up $233.2 million, up 4% year-over-year, and bookings of $248.9 million, up 17% year-over-year. We achieved our best mobile revenue and bookings performance in Zynga history, driven by record mobile advertising and continued strength in mobile user pay. Mobile revenue was $212.5 million, up 9% year-over-year and mobile bookings were $229.9 million, up 23% year-over-year. We also generated positive operating cash flow of $41.1 million in the quarter, up 17% year-over-year.

This quarter, we delivered a major milestone for Zynga as we surpassed our near-term margin goal. This achievement reflects the successful execution of our turnaround strategy to sharpen our operating model while enhancing our live services and investing in future areas of growth. Our focus on growing our existing live services through innovative bold beats has improved our player experiences and created a strong foundation for us to layer on new franchises. Later on this call, we are excited to provide more information about some of the new games we have under development for 2019 and beyond, which includes new licensing partnerships with Warner Bros. Interactive Entertainment for Harry Potter and with HBO for the Game of Thrones.

First, looking at Q3 in more detail. Words With Friends delivered an exceptional quarter with mobile revenue up 42% year-over-year and mobile bookings up 53% year-over-year. This performance was driven by increases in average moves per DAU, advertising network optimizations and continued adoption of user pay monetization as players enjoy our in-game Boosts and Solo Challenge features.

In Q3, our teams introduced 2 popular end-of-summer themed events and updates to our Daily Goals feature to include a brand-new look and feel as well as a variety of fun new challenges. We also launched Tile Styles, the first feature in Words With Friends 2 that enables players to collect, customize and express themselves on their game board with a variety of tile colors and patterns. Our players continue to adopt these new styles into their everyday gameplay, and we look forward to launch more styles over the coming quarters.

CSR2 had another solid quarter, driven by a series of exciting bold beats, including the exclusive Bugatti Divo and a collection of iconic Porsches. While mobile revenue was flat year-over-year, mobile bookings grew 7% year-over-year. As CSR2 closes out an impressive 2018, we are excited to launch a new expansion later in Q4 called Legends. Inspired by CSR Classics, this new gameplay mode allows players to restore, customize and race legendary cars spanning from the 1960s to the late 2000s. We expect Legends to ramp over time as players collect these classic cars and bring them back to their former glory.

Turning to Zynga Poker. The franchise continues to perform despite some challenges in the quarter. While mobile revenue was down 3% year-over-year, Zynga Poker matched its best mobile bookings quarter ever, with mobile bookings flat year-over-year. In Q3, the game continued to recover from platform changes made by Facebook last quarter that affected players' ability to log in using Facebook Connect. We believe we have contained the issue and are actively reacquiring lost players. At the end of the quarter, we successfully introduced our World Poker Tour bold beat, which combines faster-paced, competitive tournament gameplay with a wide range of stakes and higher in-game rewards. The new experience has increased player engagement, and over the coming quarters, we plan to introduce additional WPT-themed events and tournament modes to players worldwide.

Lastly, we are pleased with our integration of Gram Games into Zynga as Q3 marked its first full quarter post acquisition. As we've said in the past, our approach to M&A is to acquire talented teams and franchises that can add to our portfolio of live services and expand our new game pipeline. Gram continues to meet our initial expectations, and we remain excited about our ability to scale the portfolio over time, in particular with Merge Dragons!.

Innovative bold beats in our forever franchises have improved our player experiences and enabled us to surpass our near-term margin goals in Q3. Now that we have established a strong foundation of live services, we're excited to start layering in a compelling pipeline of new games to drive bookings and profitability over the coming years. Our goal for developing new games is to create forever franchises by combining talented teams with strategic brands that captivate players around the world.

In addition to leveraging the wealth of owned IP within Zynga, we are pleased to announce new licensing partnerships with blockbuster brands that drive strong organic acquisition and have rich worlds of content. We're taking a rigorous approach to engineering new games with extensive consumer and soft launch testing to ensure that they engage players over the long term. Today, we're excited to provide more information about some of the new games we have under development for 2019 and beyond.

First, a key area we're investing in is the Match-3 category driven by its tremendous reach and popularity amongst our existing player base. Our teams are driving innovation by combining Match-3 and builder game mechanics with proven brands that attract global audiences. This week, we are launching our first Match-3 mashup title, Wonka's World of Candy. Soft launch feedback has been positive as players enjoy completing fun sets of challenging Match-3 puzzles to help Willy Wonka rebuild and customize his famous chocolate factory for its grand reopening. We expect the title to steadily attract and entertain new audiences over the coming quarters.

We are also pleased to announce a new licensing agreement with Warner Bros. Interactive Entertainment to develop and publish a new Harry Potter Match-3 mobile game. We're excited about this partnership and expect to launch the game worldwide in the second half of 2019. Additionally, our new multiproduct licensing agreement with HBO gives Zynga the rights to create 2 new Game of Thrones games. Based on the success this leading franchise has seen as a branded slots game on live casino floors, we have already begun development of the first Game of Thrones title as a Social Slots mobile game slated for the second half of 2019.

Within our Gram Games studio, we are actively working on a number of new Casual games, including a new expansion of the Merge! franchise, which is already in soft launch and expected to release in 2019.

For Invest Express, our highly talented and experienced teams based in Helsinki and San Francisco are building new FarmVille and CityVille mobile titles from the ground up. These renowned franchises have entertained large audiences throughout Zynga's history. We anticipate both games will be in soft launch within the first half of 2019, with the ability to at least release one game towards the end of 2019.

Finally, within Action Strategy, we recently announced a multiproduct licensing agreement with Disney to create a new Star Wars mobile game with the option for a second new game in the future. NaturalMotion's Brighton team has deep experience in creating high-production value games for mid-core players on mobile and has already started developing our first Star Wars title.

We look forward to layering in new games on to our growing live services foundation. When launching new mobile games, it takes time to scale audience to monetization. Therefore, we expect 2019 to benefit from a partial year of bookings contribution from these new games, with 2020 realizing the full year benefit. We are confident in our ability to grow bookings profitably and increase shareholder value over the long term.

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

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

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Thank you, Frank. Q3 was another strong quarter for Zynga. We posted record mobile revenue and bookings and achieved our near-term margin goal. We delivered results ahead of our guidance, driven by strength in our mobile live services and continued improvement in our operating leverage. Our top line delivery was marked by strong player engagement and monetization across our live services as well as a particularly strong advertising performance. We are pleased with our integration of Gram Games, with Q3 marking their first full quarter post acquisition.

Our revenue and bookings both exceeded our guidance. Revenue, which is comprised of the net change in deferred revenue and bookings, was $233.2 million, $15.2 million ahead of our guidance and up $8.6 million or 4% year-over-year. We had a net increase in deferred revenue of $15.6 million versus our guidance of a net increase of $30 million and a net release of $11.1 million in the prior year quarter. The lower-than-expected deferred revenue build in Q3 was primarily due to the bookings mix, both in terms of games and monetization models. Bookings were $248.9 million, $0.9 million ahead of our guidance and up $35.4 million or 17% year-over-year. Our top line beat in the quarter was driven primarily by better-than-expected advertising, which offset some softness in user pay.

Taking a minute to double click on mobile, which now represents 91% of our total revenues and 92% of our total bookings. Mobile revenue was $212.5 million, up 9% year-over-year. Mobile bookings were $229.9 million, up 23% year-over-year. This represents our best top line performance on mobile in Zynga's history. Mobile user pay revenue was $149.1 million, down $1.1 million or 1% year-over-year. And mobile user pay bookings were $166.5 million, up $23 million or 16% year-over-year.

This mobile performance was anchored by a full quarter contribution from Gram Games and our forever franchises, in particular, strength in Words With Friends and CSR2, while Zynga Poker performed well despite some challenges in the quarter. We delivered our best mobile advertising quarter in Zynga history, with mobile advertising revenue up 45% year-over-year and mobile advertising bookings up 47% year-over-year. This performance was primarily driven by increased player engagement in Words With Friends and advertising network optimizations, including some one-time true-ups.

Q3 was a dynamic quarter for our mobile audience. Year-over-year, mobile DAUs and MAUs increased by 10% and 7%, respectively. Sequentially, average mobile DAUs and MAUs decreased by 2% and 1%, respectively. We continue to be pleased with player engagement and monetization across our mobile portfolio and have confidence in our ability to continue this trend in the coming quarters as we bring new games to market.

Turning to Q3 operating expenses. GAAP operating expenses were $149.9 million, up 8% year-over-year, representing 64% of revenue, up from 62% of the revenue in the prior year. Stock-based compensation was $18.8 million, up 20% year-over-year, representing 8% of revenue versus 7% of revenue in the prior year. Non-GAAP operating expenses were $128.9 million, up 6% year-over-year, representing 52% of bookings, down from 57% of bookings in the prior year. The year-over-year increase in operating expenses is primarily a function of the full year run rates for recent acquisitions, as well as some ramp in new game development costs.

We delivered net income of $10.2 million, $31.2 million better than our guidance and a decline of $7.9 million in net income year-over-year. Our adjusted EBITDA was $38 million. This was above our guidance by $22 million and a decrease of $6.6 million year-over-year. In assessing year-over-year variances, please note that the year-over-year variance and change in deferred revenue represents a $26.7 million negative component of the year-over-year variance in revenue, net income and adjusted EBITDA.

We generated operating cash flow of $41 million in the quarter, up 17% year-over-year. We ended the quarter with cash and short-term investments of $420 million. The sequential increase in cash and short-term investments is primarily driven by the operating cash flow we generated in the quarter. All in all, we had a very strong third quarter, driven by our mobile live services and continued improvement in our operating leverage.

And now to Q4 guidance, which is as follows: revenue of $235 million; a net increase in deferred revenue of $15 million; bookings of $250 million; a net loss of $2 million; and adjusted EBITDA of $32 million. In assessing year-over-year variances, please note that the year-over-year variance and change in deferred revenue represents a $24.5 million negative component of the year-over-year variance of revenue, net income and adjusted EBITDA.

Some additional factors to consider in assessing our Q4 guidance include: We anticipate our Q4 bookings performance to be similar to Q3, driven primarily by our live services. Within our forever franchises, we expect continued strength in Words With Friends and CSR2 to be offset by some softness in Zynga Poker as it continues to recover from platform challenges. We anticipate the bookings contribution from Gram Games to be broadly in line with Q3, and we continue to expect declines in our web and older mobile games.

As we noted previously, we had a record advertising performance in Q3, driven in part by further improvements in our network optimizations, which included some one-time true-ups in the quarter. We anticipate this will dampen the typical advertising seasonality lift we would expect between Q3 and Q4.

This week, we are launching Wonka's World of Candy after taking an additional month in soft launch to tune the game. Given the timing of the launch and the gradual nature of how Match-3 games build engagement and monetization, we expect the game to contribute minimal bookings in Q4 and weigh on our operating margins due to the investment in launch marketing. We expect our gross margins to be comparable with Q3 and our operating expenses to increase sequentially, primarily due to the higher marketing costs associated with the launch of Wonka's World of Candy and a slight ramp in our investments in new game development.

Our results today reflect the successful execution of our turn-around strategy to sharpen our operating model while enhancing our live services and investing in areas of -- for future growth. Our focus on growing our existing live services through innovative bold beats has improved our player experiences and created a more sustainable foundation for us to layer in new franchises. We have significantly improved the fundamentals of our business and are confident in our ability to grow profitably over the long term.

I would now like to take a moment to reflect a little bit more on new games and how they will layer into our growth over the coming years. Priority #1 is to launch new games successfully and then to scale them. As we look to '19 -- excuse me, as we look to 2019, we are excited to start layering in our new game pipeline on to our strong live services foundation. We expect 2019 to benefit from a partial year bookings contribution from these new games, with 2020 realizing the full-year benefit. We anticipate that our operating expenses will rise in 2019, primarily due to marketing spend on new game launches in addition to a slight ramp in new game development spend. These investments will modestly weigh on our overall operating margins in 2019, but we expect to see an uplift in 2020 as these games deliver full-year bookings and margin contributions.

To close, we are excited about how we're executing against our 4-pillar growth strategy as we prioritize delivering value to our players, employees and investors. With that, we are 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 Mike Olson with Piper Jaffray.

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Michael Joseph Olson, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [2]

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I had a couple of pipeline questions. So there's a lot of interesting stuff in the pipeline for next year and then in to 2020. And it makes sense that there's some associated costs of launching those. When you say these investments will modestly weigh on overall margin in 2019, are you implying a down year-over-year op margin for 2019 compared to '18? Or just wondering maybe if you can further define what modestly weigh on margin means. And then I have one follow-up, please.

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James Gerard Griffin, Zynga Inc. - CFO [3]

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Yes. This is Ger. As we look at the overall margin on a percentage basis from '18 to '19, we would expect it to be down year-on-year, based on the timing of these launches and obviously, the marketing investment against these launches. As you can see from my guidance in Q4, as you launch a new game, there is, obviously, a disproportionate investment against or versus the initial bookings. And when you apply that into next year, based on the cadence of our new launches, we expect that we would see a modest reduction on an EBITDA percentage year-over-year. But again, as I say, once you get into a full year contribution from those games, you'll see that come back. And that's a normal cycle you would expect to see in new game launches, in particular in mobile.

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Michael Joseph Olson, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [4]

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And then your commentary regarding new titles in the pipeline includes, I think I counted them up right, the potential for up to 9 total titles between now and sometime in 2020 or whenever Star Wars is going to launch. And it looks like 5 of those potential titles would be licensed IP. So just wondering how you think about kind of margin impact from IP licensing. Or how do you weigh the balance between licensing cost versus brand awareness that you get with the licensed IP?

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James Gerard Griffin, Zynga Inc. - CFO [5]

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Yes. I think we've talked about this a little bit in the past. When you think about the kind of licenses we're dealing with here, you're talking about Star Wars, Harry Potter, Game of Thrones and even Willy Wonka and some of the other IP we have in the portfolio, those are mass-market brands. So from that perspective, you get a step-up in terms of brand awareness and accessibility to very large audiences. Obviously, the next step in the process is to make sure we produce an entertaining game that we can address against those audiences. And if you think about it in terms of working with our platform partners in Apple, Google, et cetera, those brands resonate very well. So we expect we're going to get a lot of good placement and exposure from that perspective. We'll still spend marketing dollars, but given the scale that these brands can attract in terms of audience, we believe that the return on investment is still very good.

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Operator [6]

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Our next question comes from Eric Sheridan with UBS.

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Eric James Sheridan, UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst [7]

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I wanted to unpack a little bit of the revenue contribution from some of the key titles ex Gram. What some of the drivers were in Q3, just make sure we understood some of the moving pieces from a dollar standpoint Q3 over Q2. And what's implied in what you're saying around Q4 versus Q3 ex Gram, maybe tying it back to some of the big forever franchises. That would be number one. And then number two, can you just give us a little bit better sense of what some of the true-ups were in the advertising business that occurred in Q3 and why they would create such a headwind in Q4 versus Q3? Just so we have a little more granularity there.

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James Gerard Griffin, Zynga Inc. - CFO [8]

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I'll start, and then Frank may chime in. When you think about the forever franchises, we've seen some good progression in Words With Friends and CSR2. As we said, as you look at Poker, Poker had a strong quarter. It was in line with its best-ever quarter, but it did -- it was the title in our portfolio that was more meaningfully impacted by the issues we experienced with Facebook in Q2. So we saw Poker being a little bit softer than our expectations as we go through Q3 and into Q4. So when we think about the live service portfolio overall, and I've said this in the past, the profile of our live business is fairly similar going from Q2 to Q3 to Q4 right now. And the growth that we're seeing there obviously is being mitigated with some of the older web and mobile that drags on that business, but the overall shape of live service is very healthy. Sorry, could you just hit me with the second question again?

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Eric James Sheridan, UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst [9]

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Just a little bit more granularity on the true-up in the advertising business versus what won't repeat in Q4, just so we understood some of the mechanics around that.

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James Gerard Griffin, Zynga Inc. - CFO [10]

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Yes. There's a few things going on in there. We -- as we've said in the past, we're continually negotiating and trying to look to optimize our deals with some of our networks. And one of those networks in particular, I'm not going to mention which one, we were able to obviously uplift the overall economics. Some of that was sort of just an initial step-change as opposed to what I would call a natural run rate. We got some benefits in the quarter from just the renegotiation. We also had a noncash event, where we had monies owed from one of our network advertising partners that, instead of receiving that money in cash, we actually locked in the ability to use some of the technology that they had available that we can use to communicate with our players. It's essentially tools that we can use in lieu of purchasing them elsewhere. That helped us drive value out of the situation that, potentially, wouldn't have been a cash event for a number of years.

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

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The only thing I would add to that is that we've seen very good improvements in engagement, so the number of moves per DAU in Words With Friends is up significantly. We're seeing increased engagement from WPT inside Poker. We've also expanded the amount of inventory that we dedicate to Watch to Earn, which as you know if you experienced inside game, is a great way to keep players engaged. They're able to watch the ad, earn some in-game currency and then continue on forward in terms of their play. So there's also some core fundamental shifts in terms of player engagement inside our games that are proving to be very beneficial.

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Operator [12]

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And our next question comes from Brian Nowak with Morgan Stanley.

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Brian Thomas Nowak, Morgan Stanley, Research Division - Research Analyst [13]

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I have 2. Just going back to the comments on 2019 margins, I was wondering, could you talk to us a little bit about how you think about your ability to continue to drive monetization of the current forever franchises into 2019? Are you expecting a material deceleration? Stable growth? How do you think about the pipeline of your bold beats of the core 4 franchises? Then the second one, just to go back to the Poker Facebook issues, any way you can sort of quantify that headwind in the quarter? And how long should we think about this headwind lasting on Poker from Facebook?

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

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I'll start. First, point is, on this call, we're not giving guidance for 2019. So I can give you more context how we think about our live services. And as we've said in the past, and both Frank and I have said this, think about our live services as relationships. We're continually introducing new content and features to our player bases. So we maintain that relationship and we can obviously sustain and grow it over time. Some of those features can be fairly meaningful in terms of like a major event. Some of them are more of just maintaining a level of vibrancy in the game that doesn't necessarily mean it's going to pop to a higher level of trended bookings. But as we look into Q4, and we talked a little bit about some of the bold beats coming in CSR2, with the arrival of Legends, I'll just use that as an example, you'll start to get access to some of the iconic cars that are going to be part of that feature in Q4. But throughout the course of '19, you're going to have access to additional cars and different features. So as we look at that bold beat, that's one of the features that we see that will sustain and entertain and engage CSR2 players well beyond Q4 but into '19. Similarly with Poker, the World Poker Tour, we've kicked it off. It's on, what I would call, a gradual ramp. The more meaningful aspects of that in terms of events, obviously, from a time perspective, you'll see in 2019 versus in the end of Q3 into Q4. So from our perspective, when we look at our mobile business in particular, our forever franchises and some of the recent acquisitions like the Gram acquisitions with Merge Dragons!, we have a slate of updates against all of those games. And ultimately, the proof will be in the pudding in terms of the engagement of players with them, but it's our expectation that we're going to sustain or grow that portfolio over time.

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Frank D. Gibeau, Zynga Inc. - CEO & Director [15]

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I think your second question was a little bit more detail on the Poker Facebook situation. So earlier in the year, there were some changes made to the platform that impacted Facebook Connect experiences for Poker players, and it caused us to lose some of that audience. And what we've done is essentially contain or mitigate the impact of Facebook Connect inside of Poker. And at the same time, we've gone out and started to reacquire those players. Unfortunately, that's just a process that takes time. So when I say recovery, what I'm talking about is there was a group of players that we lost because of the platform shifts and issues related to Facebook Connect. And then we've been reacquiring them organically and from a paid standpoint in the interim -- in the intervening time period. I'd like to think that we're further through the recovery than just beginning. So we like what we're seeing. And I think that WPT, releasing it just a few weeks ago, has been a major driver to bring folks back into the service. But it's one of those things when you're managing a portfolio of live services, you'll have issues that you run into that you have to deal with in one that might not affect the other. The reason that the Connect issues hurt Poker more was it was a highly PvP, in-app, purchase-based economy, whereas the Words of Friends was more of an ad model and CSR didn't have the same level of Facebook Connect percentages. So that's a little bit of -- gives you a little bit more texture on it. But I'd say that we're through most of it on Poker, and as WPT starts to scale, our goal is to return Poker to growth as we exit 2018 and into 2019. And again, I think that's one of the things that, as the team here at Zynga, we're really proud of, is that we have a diverse portfolio of franchises. So when Poker hits an air pocket and goes flat for a bit, we have an up 52% delivery on Words With Friends in that same quarter and CSR continues to go along. And I think it's tied to the bold beat process that we put in, where we're looking at every franchise we have and assigning great teams to develop great features, and that's how we keep this going. And our intention is to continue to grow our portfolio of live franchises, and the beauty of this is as we layer in new games in '19, Game of Thrones, Harry Potter, one of the Villes, Willy Wonka, that starts to push the bookings and also the profit generation overall for our operating model. And that's what we're excited about transitioning to as we enter into '19.

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Operator [16]

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Our next question comes from Colin Sebastian with Baird.

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Colin Alan Sebastian, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [17]

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I have 2. With the Match-3 games, you mentioned being able to leverage the existing user base to grow the genre. So I'm wondering if you expect these to be largely incremental to the existing portfolio or perhaps absorbing users from some other games, or is this an opportunity to reactivate less active gamers from other titles? And I have a follow-up.

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Frank D. Gibeau, Zynga Inc. - CEO & Director [18]

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Sure. If you talk to our players in Social Casino and Words With Friends as well as Ville players, their favorite categories include Match-3 right at the top. In general, these are women 25 and up globally. And when we do the research, we find that they're ready and willing to and want to play Match-3 experiences. So we think that they are adjacent opportunities. We think that they're incremental. I think they'll bring in new players as well as getting existing players to potentially play one more Zynga game. And I also think that we can market and communicate these games to reactivate maybe lapsed players in these different genres. So it operates on a couple of different dimensions there. And we find that it can be a very complementary part and a new part of our network and our future growth plans.

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Colin Alan Sebastian, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [19]

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Okay. And the follow-up I have is on the licensing questions. And I guess I'm wondering if Chris and the corp dev team are focusing more time on partnerships like these? Or are there still attractive acquisition opportunities that you're seeing in the market? Is that still a priority?

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Frank D. Gibeau, Zynga Inc. - CEO & Director [20]

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When you look at our growth plans as it relates to forever franchises, our goal is to build them but also to potentially buy them. And the corp dev team, we keep them very busy. And they've been very productive over these last couple of quarters in helping bring in some really big licenses. Early on, when we started this turnaround of Zynga, we talked about the room in the portfolio for a few strategic licenses. And I think that Star Wars, Game of Thrones and Harry Potter kind of checks that box. I don't necessarily see a dramatic need for more licensed IP right now. I think we have a really nice blend of Words With Friends, Zynga Poker, the Villes, the Merge Dragons!. We have a really nice blend of owned IPs that have growth potential, as well as being able to introduce licensed IPs that while the economics on a gross margin basis might have some impact, you will pick up efficiencies in that these games bring audiences that allow us to be more efficient from a marketing standpoint. It generates greater organic audience generation than a nonlicensed product that potentially somebody has never heard of. In addition to that, on the production side, these universes come with very rich characters, storylines, effects, spells, spaceships, castles that a game team has the rulebook for what to build. And they can focus more on the gameplay and the experiences as opposed to also building the world. So there's production R&D effectiveness there as well. So all those ideas go into when we think about acquiring a license or not. In terms of looking out in the marketplace, we believe that there are still opportunities for acquisition of new forever franchises and highly talented teams.

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Operator [21]

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Our next question comes from Justin Post with Merrill Lynch.

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Justin Post, BofA Merrill Lynch, Research Division - MD [22]

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Just wondering if you can help us at all with what the contribution from acquisitions was to bookings in the quarter. And second, any framework of how much the new games could contribute to revenues next year on a percentage basis? Or any help there. And then, Frank, clearly, you're looking to license some titles and that comes with some licensing costs. But how do you think that makes the new games kind of stand out next year when you have that license? And how do you think about that trade-off?

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Frank D. Gibeau, Zynga Inc. - CEO & Director [23]

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I'll take the last question first. I think that the -- the licenses operate in a couple of ways. One, we start in a category where we have some sense of the player base. We have an ability to reach out and acquire them. The license expands that and adds to that. And then when we look at the licenses, these have to be high-quality, highly engaging experiences. And we fundamentally really look at that element of the [licenses.] Just looking at them as quick add-ons to an existing game is not at all the approach that we're taking. So we want to build each of these games into forever franchises. That's our intent when we greenlight them and proceed with development and enter into soft launch. And I think that the fact they are in categories that are very adjacent in the cases of our Match-3 bets and our Social Casino bets, that gives us a lot of market risk management that we can look at and adjust for. We also think that taking the NaturalMotion quality, technology, production values and marrying that with the world of Star Wars feels like a really nice fit and complementary to what we've done with CSR and Dawn of Titans. So long term, we think that these are obviously going to be accretive and help drive bookings and also audience size.

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James Gerard Griffin, Zynga Inc. - CFO [24]

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In terms of talking about the acquisitions, if you refer back to what I said when we acquired Gram, that will give you a broad indicator of the level of contribution from a 12-month run-rate basis. Back then, I said somewhere in the $100 million to $120 million on a natural run-rate basis. So that -- I would still stick to that. Gram is operating within our expectations that we set out when we bought them, so I would stick to that as the only guidance I will give you at this point.

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Operator [25]

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Our next question comes from Tim O'Shea with Jefferies.

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Timothy Larkin O'Shea, Jefferies LLC, Research Division - Equity Analyst [26]

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Just looking for an update on user acquisition trends, what you're seeing in today's mobile game market. And what's the strategy to acquire users? Do you guys launch new games? Is this something that can be done on a profitable basis? Or is this a large upfront expense that needs to be incurred to prime the engine? And maybe just how soon after launch should we expect you guys to start aggressively acquiring users? And does it matter if it's an owned IP or a licensed game?

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Frank D. Gibeau, Zynga Inc. - CEO & Director [27]

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Yes. I'll start with that. In general, UA, acquiring users comes in 2 forms. It's organic and paid. And it's getting -- the mobile ecosystem is getting more and more competitive on a global basis. So one of the reasons why we look at relationships like Harry Potter and Game of Thrones and Star Wars is those properties bring millions and millions of people day 1 into the acquisition funnel. They're aware of the franchise. They have an interest in the franchise. And if we can convince them with strong advertising copy, we start to close the conversion much more effectively. So it's kind of obvious, but when you think about how the strategic licenses fit into the UA equation, that's how we think about it. We do spend a lot of time innovating new channels for organic acquisition. We have very good relationships with Google and Apple in terms of merchandising and promotion. But in addition to that, we are constantly looking for ways to cross-promote, to virally get people to invite more folks into the game like with Words With Friends or Zynga Poker. So we do a spend fair bit of engineering hours and product management time and data analytics on generating new organic channels to bring players in. At the same time, we've been increasing our capabilities in the paid acquisition camp. We have very clear and obvious ROIs in terms of how we buy, when we buy, by genre, by game, by cohort. A lot of mobile game companies have that. So a combination of those 2 capabilities is how we start to look at it. In terms of how -- I'll talk about the investment piece last. But in terms of how a mobile game rolls out, I think one of the key learnings for me having come over from a console and mobile -- or PC business, when I first got into mobile, was it wasn't really a day 1, week 1 sales kind of sales curve. You go into soft launch. You understand what the KPIs are and the LTVs. You release the game, and then you slowly build the audience up because you see how it's responding in the global marketplace. You make your adjustments to the game to get to the right LTV, and then you have a positive ROI investment thesis. And so that -- you want to build them up a little bit slower than what you would typically see in other game categories, and so as we launch new games, we don't focus in on the first day of sales. We actually focus in on how, cohort by cohort, they're engaging, how they're retaining, what their lifetime values are, how -- what are they like? Are they happy with it? And then, we correspondingly marry that to an acquisition strategy. So that's why when we talk about Wonka coming out not being a huge contributor to the quarter, it's because it's coming out of a successful soft launch. We're putting it into the marketplace. We're doing the final checks. And then once we have a good read on LTV, then we scale it up. That gives us the best return and the most control over a given dollar of R&D or a given dollar of marketing. I think the way to think about the new product pipeline is you have to start with the live services foundation that we have. We've spent the last couple of years sharpening our operating model, investing in our new live -- in our live service games like Words With Friends, like Zynga Poker, like CSR2, adding Merge Dragons!, calibrating our Slots portfolio to be profit-oriented. And we've got -- I think this quarter indicates we've gotten to a configuration that gives you a sense of what the live model was like. Our intention, our commitment is to continue to grow our live services model by continuing to drive bold beats. And that represents the -- a lot of the profit generation in the company. At the same time, we then layer in new releases on top of that strong, profitable, growing base. And that's the model that our management team is pursuing so that when we do look at a Wonka or a Game of Thrones or a Harry Potter, we're taking into consideration the overall profitability of the enterprise. And at the same time, we never put at risk the live part of the company. That live part of the company continues forward contributing, and we, therefore, are able to modulate when we new games -- when we need new games and we don't and we can take more time with them in development, if that makes sense.

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Operator [28]

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Our next question comes from Doug Creutz with Cowen.

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Douglas Lippl Creutz, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [29]

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Kind of a follow-up to an earlier question. If I take your mobile user pay bookings of plus 16 and I adjust some for Gram and for Peak, it looks to me like your same-store, I guess, mobile user pay would have been down around mid-single digits in the quarter. So firstly, just verify that, that's a reasonable way to look at it. And then secondly, you said that CSR was up 7%, Poker was flat, Social Slots down 4%, and obviously, Words With Friends is growing. It seems to me that there must be some other lever in there that's weighing down on it. And I'm just curious, is that older games that you're sunsetting? Or is there something else going on there?

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James Gerard Griffin, Zynga Inc. - CFO [30]

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Doug, this is Ger. Yes. When you look at the profile just going through the quarters, you obviously have growth coming in, Words With Friends, CSR2. Poker got off to a good start. It's sort of broadly flat as you go through the quarters. Slots is slightly down quarter-on-quarter. We're talking single digits in terms of the percentages. The older mobile and web are the 2 drags that obviously we're still working against. And the good news about those is over time, they become less. But that's -- if you layer it up like that, that's how the business is progressing over these quarters.

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Operator [31]

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Our next question comes from Mike Hickey with Benchmark Company.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [32]

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This may be hard to answer. But curious when you look at your 5 games that are still coming out in 2019, can you give us any sense of ranking as you see sort of the opportunity size-wise for each of these games? What do you think the biggest opportunity is down the list? And then also, curious if you can update us sort of on -- when you look at each category, what are the average team size and time it's taking to make these mobile games today? That will be helpful.

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James Gerard Griffin, Zynga Inc. - CFO [33]

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Mike, just in terms of just size, we're not giving guidance on FY '19 on this call. But I think if you sort of look at the type of brands we're bringing to market and then the genres they're playing into, obviously, when you think about a Match-3 game with a Harry Potter brand against it, that's obviously going to be addressing a larger audience than a very strong brand in Game of Thrones into Social Slots genre, where it's a more -- it's a smaller part of the overall mobile game ecosystem. But both of those are obviously -- we believe are going to be very compelling games. And then you think about some -- our Ville games have, in the past, been mass market, and there's still -- if you look at the kind of competitive set out there in the marketplace, they're -- it's a large genre. So I would give you -- that's the context I would give you right now. That's how we're thinking about it. And obviously, we have expectations what we believe these games can do in a -- within a launch window and ultimately over a 12-month, 24-month period.

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

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In terms of the dev model, yes, you can get a mobile game out anywhere between 1 and 2 years, depending on how much technology are we using and what you're starting with. Many of the games that we talked about on this call today have been under development for some time and have been resident in the R&D OpEx part of line. So these are funded and is part of the current operating model. With regards to soft launch, again, we typically think it's a 6-month to 1 year, depending on the category and depending on the complexity. So a brand-new built from the ground up mobile game like a CityVille or a FarmVille might have a longer soft launch, for example, than a game that's a sequel or an adjacency that we've been under development with for a little while already with more knowns. So I think from the standpoint of thinking about next year, we tried to give you closest to the pin, best estimates right now with Game of Thrones and Harry Potter in the second half of '19, with FarmVille and CityVille in soft launch in the first half of '19, with one coming out in the second half. Merge! team at Gram has a game in soft launch right now. So we're learning from that one. And then Wonka is releasing this week, so you'll start to see that scale into '19. We did talk about Star Wars not being in '19. Those are core experiences, and they have higher levels of production values like what you see with CSR and also Dawn of Titans. So I would expect that it's going to take us a little bit longer. We are under development with it, but not in '19.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [35]

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And real quick, what's your -- is your headcount going to go up in '19?

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Frank D. Gibeau, Zynga Inc. - CEO & Director [36]

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We haven't guided that. We're currently around 1,730 right now with a larger percentage in international markets.

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Operator [37]

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Our next question comes from Ryan Gee with Barclays.

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Ryan Gee, Barclays Bank PLC, Research Division - Research Analyst [38]

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So I think this is actually before either of you might have joined Zynga. But is it reasonable to look at the last FarmVille, CityVille games on mobile as maybe an indication for how you're thinking about the potential contribution when either one or both comes out next year? Or if you could just briefly talk about how that category has changed since those years? I mean, what you're doing differently to capitalize on that genre.

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Frank D. Gibeau, Zynga Inc. - CEO & Director [39]

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Yes. Thanks for the question. So yes, those Tropic Escape and Country Escape were the games that you're referencing, and they did occur before this management team came in. But we've been operating them now for some time, so we've learned a lot about the category. When you look at how they came out and then how they scaled, we have higher ambitions for the new CityVille and for the new FarmVille. We think that we had to rebuild those games from the ground up and start to look at some of the more modern and the changes that have been happening, frankly, inside mobile. So they're addressing those opportunities. The good news is that the teams that are on those games are very experienced. Our team in Helsinki is building FarmVille, and our team here in San Francisco is on CityVille. And the talent on the teams are very experienced in mobile and have worked in this category before. So we're excited about the innovations that they're bringing to bear. The overall category has seen some great games in it, with -- whether it's Hay Day or the -- more recently, some of the titles from Playrix. It's a category that, I think, is ripe for innovation, and this is also a category where we are still operating web versions of FarmVille alongside these 2 mobile versions of Country Escape and Tropic Escape. So we do think about FarmVille in particular as a game franchise that has a very large audience from the past as well as still active. And so as we look at how the next FarmVille will roll out, we're taking all of those advantages into account.

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Ryan Gee, Barclays Bank PLC, Research Division - Research Analyst [40]

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Okay, great. And then a follow-up, if I may. So in addition to the new games next year, bold beats are going to be the driver for the existing or legacy titles. I'm wondering if there's any way for you guys to help us frame like the value of a bold beat to your business. In other words, can you say or help us think about each bold beat in a casino or a racing genre delivers a certain uplift or a percentage growth in bookings over a certain amount of time? Does it make sense to look at that? Or can you help us think about that in any way?

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Frank D. Gibeau, Zynga Inc. - CEO & Director [41]

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I think I will start with the following. Not all bold beats are created equally. Some are purely event content. Some are more gameplay-oriented. I'll give you 2 examples of that. The content upgrade bold beat that worked extremely well was Fast & Furious in CSR2. In fact, it helped inform why we went after the World Poker Tour and partnered with that company on Poker. So we -- given our data science and product management, we measure every bold beat and we have a sense of how they contribute. But they're not all created equally. But gameplay-oriented bold beats tend to do very well if they work. And a good example of that is the first growth spurt of Poker when we added tournaments. You saw that, that carried the game for many, many quarters and added new levels of engagement and reactivation. Fast & Furious was a content upgrade that lasted a long time as well. But sometimes, you'll have a bold beat that will last simply 1 quarter and then it's consumed and you move on. So what I can tell you is that we're committed to continuously increasing the learning and applying it to the bold beats. So as you see with CSR2 this upcoming Christmas, we've timed a very big bold beat to that game. We basically took CSR Classics, it's almost a full game in terms of its scope and impact, and we've turned it into an expansion at Christmas. We have a series of new bold beats planned for Words With Friends. We think that will really tie into what's happening there in player behavior, on engagement as well as with the new economy that we've launched. So I think what you can think about is going back and looking at quarter-over-quarter growth rates as it relates to the types of bold beats that we're doing, knowing that we definitely think about them quarter-by-quarter. But we do understand that sometimes, one will be greater than another.

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Operator [42]

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Our final question comes from Raymond Stochel with Consumer Edge Research.

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Raymond Leonard Stochel, Consumer Edge Research, LLC - Analyst of Interactive Entertainment [43]

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So one, piggy-backing off some prior questions would be if you can give directional headcount amongst the titles that you plan to launch in 2019. And then in addition to that, how are you contemplating potential for delays or cancellations in that operating expense growth rate projection that you're putting out there?

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James Gerard Griffin, Zynga Inc. - CFO [44]

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We haven't given guidance on headcount for 2019, but as Frank mentioned earlier, we have teams in the current headcount that are building against these games. Some of those teams are smaller, and they will scale. But some of those teams have been around for a while, obviously, through this fiscal -- obviously, working on these games. I would tell you that in something like the Star Wars game, which is more recent, even though it does have a team working on it, most of these projects have been ongoing. And then in terms of your second question, could you repeat it, please?

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Raymond Leonard Stochel, Consumer Edge Research, LLC - Analyst of Interactive Entertainment [45]

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In terms of what you're contemplating around the potential for delays or cancellations that you're going to soft launch and what that could mean for your OpEx growth rate into 2019? And how we should think about that, as far as if we do hear that you have a game that gets canceled or pushed, would that actually be accretive to your margins during the year?

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James Gerard Griffin, Zynga Inc. - CFO [46]

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I think the way to think about it -- and this is the same for any mobile gaming company, sort of less so, I guess, for the larger players given the level of investment they put in console games. When we think about our games, the smallest element of the investment actually is the studio team. The larger element, in particular as you get to a launch cycle and then scale, is your marketing. So when you think about what I said earlier about my margins, in a hypothetical scenario, which would never happen, but in a hypothetical scenario where we don't launch any new games, we don't build any new games, obviously, I'd be a more accretive company. But I'd be taking off the table my potential to grow the company. But as we're going through the year, if we feel we need to give a game more time or in a real downside scenario, we feel we need to take a game out, the one thing that obviously you will have is a reduction in our expectations in terms of marketing dollars. But you'll also have a lesser -- obviously a reduction in bookings because the relative relationship between bookings and launch depending on timing, you actually could have an accretive event there as it relates to our expectations. But again, we review both our bold beats in our live business and the status of our new games on a regular basis. So that's something that -- I think I have mentioned this in the past. We've come from sharpening the operating model to managing it. So we're continually looking at the metrics against our games. And ultimately, once they get into soft launch, we'll have a lot more data to work with. But if we did have to delay, the first thing you drop in terms of acceleration is obviously marketing dollars, and then you define how you want to progress with the -- obviously, with the development.

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Operator [47]

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Thank you. I'm not showing any further questions at this time. I would now like to return the call back over to Rebecca Lau for any closing remarks.

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Rebecca Lau, Zynga Inc. - Director of IR & Corporate Finance [48]

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All right. We just wanted to say thank you to everyone for joining our earnings call today. We look forward to connecting with you more over the coming weeks.

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Operator [49]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.