U.S. Markets open in 5 hrs 46 mins

Edited Transcript of ZNGA earnings conference call or presentation 31-Jul-19 9:00pm GMT

Q2 2019 Zynga Inc Earnings Call

San Francisco Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Zynga Inc earnings conference call or presentation Wednesday, July 31, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Frank D. Gibeau

Zynga Inc. - CEO & Director

* James Gerard Griffin

Zynga Inc. - CFO

* Rebecca Lau

Zynga Inc. - VP of IR & Corporate Finance

================================================================================

Conference Call Participants

================================================================================

* Alexander Joseph Giaimo

Jefferies LLC, Research Division - Equity Analyst

* Andrew Edward Crum

Stifel, Nicolaus & Company, Incorporated, Research Division - VP

* Benjamin Ari Schachter

Macquarie Research - Head of TMET Research

* 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

* Jeffrey A. Cohen

Stephens Inc., Research Division - Analyst

* Matthew Andrew Cost

Morgan Stanley, Research Division - Research Associate

* Michael Ng

Goldman Sachs Group Inc., Research Division - Research Analyst

* Michael Joseph Hickey

The Benchmark Company, LLC, Research Division - Research Analyst

* Raymond Leonard Stochel

Consumer Edge Research, LLC - Analyst of Entertainment

* Ryan Gee

BofA Merrill Lynch, Research Division - VP of US Equity Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to Zynga's Second Quarter 2019 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 Finance. Ms. Lau, you may begin.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Joelle, and welcome to Zynga's Second Quarter 2019 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 for his opening remarks.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Rebecca. Good afternoon, everyone, and thank you for joining our Q2 earnings call. We delivered great Q2 results ahead of our guidance and finished the first half of 2019 with strong momentum in our live services.

In the quarter, revenue grew 41% year-over-year to $306 million, and bookings increased by 61% year-over-year to $376 million. Q2 was our best mobile revenue and bookings quarter in Zynga history, with mobile revenue up 49% year-over-year and mobile bookings up 69% year-over-year. Operating cash flow was $99 million, our best performance since Q4 2011 and up 140% year-over-year.

Given the strength of our live services, we are raising our full year 2019 guidance, which Ger will discuss in more detail later on the call. We are on track to deliver our best annual revenue since 2012 and the highest bookings in Zynga history.

Looking back over the first half of the year. I would like to highlight some of the key drivers of our strong performance. Starting with live services, our focus on driving recurring growth through steady release of innovative bold beats is working. Empires & Puzzles and Merge Dragons! both delivered record top line performances in the quarter as Empires & Puzzles repeatedly broke into the top 5 U.S. gross gaming charts on Android and iOS, while Merge Dragons! entered the top 10 on Android and the top 20 on iOS.

Words With Friends achieved its best Q2 mobile revenue and bookings in franchise history, contributing to our highest Q2 advertising results ever. Celebrating its third anniversary, CSR2 was a strong contributor in the quarter driven by a series of Fast & Furious events. Zynga Poker performed ahead of our expectations as a new boost feature resulted in mobile revenue being flat sequentially and mobile bookings returning to sequential growth. Finally, from our Social Slots portfolio, Hit It Rich! Slots had a great quarter, delivering its best mobile revenue and bookings in over 3 years.

Next, we have successfully integrated our recent acquisitions into Zynga, and they are now contributing meaningfully to our live services performance and new game pipeline. Both acquisitions are performing ahead of our initial expectations as Gram Games recently completed its first full year at Zynga and Small Giant Games finished its first 6 months. Our integration approach is designed to enable teams to do what they love most, create great games while growing faster together. This is working well as these talented development studios maintain their unique creative cultures while leveraging Zynga's live services platform to enhance their growth.

Another key driver is we are making significant progress on our exciting pipeline of new games. On May 30, we released Game of Thrones Slots Casino worldwide. Through its first 2 months, the title was off to a great start with strong player engagement and monetization metrics. We expect this game will steadily scale over the coming quarters as we continue to invest in its growth.

In July, we also introduced 2 new games into soft launch, FarmVille 3, an innovative mobile experience built from the ground up around this iconic brand; and Merge Magic, a new title from Gram Games that combines whimsical magical themes with Merge! and builder game elements. These titles joined Puzzle Combat in soft launch, a new title from Small Giant Games, that combines modern combat with role-playing systems and accessible puzzle mechanics.

We are also expanding our reach into new markets and platforms to accelerate future growth. Specifically in Q2, we soft published Empires & Puzzles in South Korea and Japan. We are encouraged by the game's early engagement results and expect to invest in additional marketing on this title in Asia over the coming quarters.

We are also experimenting with the distribution of our games on new platforms. In June, we launched Tiny Royale, a team-based battle royale experience and one of the first games on Snapchat's Snap Games platform. We're excited to partner with Snap to introduce our games to a new audience and platform.

Finally, we executed on our objective to increase our cash reserves. First, given favorable market conditions, we issued convertible notes that were well received by investors. We also completed a successful sale-leaseback of our San Francisco headquarters in a strong real estate market. Given these transactions and our positive operating cash flow, we are entering the second half of the year with approximately $1.4 billion of cash and investments, which we plan to use primarily for future acquisitions to further accelerate our growth.

With that, I will now turn the call over to Ger to discuss our Q2 results in further detail as well as our raised outlook for the year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Frank. We closed out a great first half performance with Q2 finishing ahead of our expectations on strong mobile live service momentum and better-than-expected operating leverage. Given the strength of our mobile live services, we are raising our full year outlook for revenue and bookings.

But first, let's discuss Q2. Revenue was $306 million, comprised of bookings of $376 million offset by a net increase in deferred revenue of $70 million. Revenue was $26 million ahead of our guidance driven by a $16 million bookings beat and a lower increase in deferred revenue of $10 million. Our top line beat was driven by strong mobile live service performance, in particular, outstanding performances from Merge Dragons! and Empires & Puzzles as well as initial contributions from Game of Thrones Slots Casino, which released on May 30.

Revenue was up $89 million or 41% year-over-year driven by bookings growth of $142 million or 61% year-over-year, partially offset by the significant growth in deferred revenue, up $53 million. The strength of our portfolio drove our best mobile revenue and bookings performance in Zynga history. Mobile revenue was $287 million, up 49% year-over-year. And mobile bookings were up $358 million, up 69% year-over-year.

Our year-over-year bookings growth was driven by our mobile live services, including full quarter contributions from Merge Dragons! and Empires & Puzzles. The growth collectively in our mobile -- or excuse me, the growth collectively in our forever franchises more than offset the continued declines in our legacy mobile and web games. The increase in deferred revenue was driven by Empires & Puzzles, continued bookings growth from Merge Dragons! in addition to initial bookings from Game of Thrones Slots Casino. In assessing year-over-year variances, please note that the increase in deferred revenue represents a $53 million negative component for the year-over-year variance in revenue, net income and adjusted EBITDA.

Turning to Q2 operating expenses. GAAP operating expenses were $241 million, up $95 million or 65% year-over-year. This was primarily due to a full quarter contribution from Gram Games and Small Giant Games as well as higher contingent consideration expense versus the prior year. The contingent consideration expense was driven by our recent acquisitions, which continue to perform ahead of our initial expectations. This resulted in an expense of $24 million, up $22 million year-over-year and $9 million ahead of our guidance.

Year-over-year, GAAP operating expenses increased from 67% to 79% of revenue. This was driven by the significant increases in deferred revenue and contingent consideration expense, partially offset by improved operating leverage in SBC and other R&D and G&A expense lines.

Non-GAAP operating expenses were $197 million, up $71 million or 57% year-over-year. This is primarily due to the quarter contributions from Gram Games and Small Giant Games. Year-over-year, non-GAAP operating expenses decreased from 54% to 52% of bookings. This was due to improved operating leverage in R&D and G&A expense line items, which more than offset the higher sales and marketing as a percentage of bookings.

We reported a net loss of $56 million, $14 million better than our guidance and an increase of $55 million versus the net loss of $1 million a year ago. The variance to guidance was primarily driven by better-than-expected operational performance, with the lower build in deferred revenue more than offsetting the higher contingent consideration expense. The variance to prior year was heavily influenced by the significant increase in deferred revenue and contingent consideration expense versus prior year.

Our adjusted EBITDA was $3 million, $21 million better than our guidance and a decrease of $24 million year-over-year. The variance to guidance was driven by better-than-expected operational performance as well as the lower build in deferred revenue. The variance to prior year was heavily influenced by the significant increase in deferred revenue, which more than offset the strong year-over-year improvement in operating performance.

In Q2, we generated operating cash flow of $99 million, our best performance since Q4 2011 and up $57 million or 140% year-over-year. In addition, given the favorable market conditions, we executed on our objective of increasing our cash reserves through 2 transactions: the convertible debt offering and the sale-leaseback of our San Francisco headquarters.

In mid-June, we issued $690 million, 5-year convertible senior notes with a coupon of 0.25%. The initial conversion price on the notes is approximately $8.31 per share. In conjunction with the offering, we entered into capped call transactions designed to effectively eliminate the potential dilution impact on conversion until our stock reaches a stock price of $12.54 per share. Net proceeds from the offering were approximately $600 million after the cost of the capped call transactions and associated issuance fees.

This quarter, we also paid down the $100 million outstanding on our revolving credit facility and ended the quarter with $831 million in cash and investments. In addition, given the strong San Francisco real estate market, on July 1, we completed the sale-leaseback of our San Francisco building, which provided net proceeds of approximately $580 million after taxes and fees. As of July 1, we have approximately $1.4 billion of cash and investments, which we anticipate we will use primarily to fund the future acquisitions to further accelerate our growth.

Turning to guidance. Guidance for Q3 is as follows: revenue of $325 million; a net increase in deferred revenue of $55 million; bookings of $380 million; net income of $250 million, which includes a $305 million onetime gain on the sale of our San Francisco building; and adjusted EBITDA of $7 million.

Some factors to consider in assessing our Q2 -- excuse me, our Q3 guidance are as follows: Our Q3 top line performance will be driven by our live services. In particular, we expect moderate sequential growth collectively across our 5 forever franchises. We also anticipate that the incremental top line contribution from Game of Thrones Slots Casino will be more than offset by declines in web and older mobile games. We expect our gross margins to be pressured sequentially by a higher mix of user pay versus advertising and an increase in royalties and licensed IPs, with this negative impact more than offset the revenue increase in the quarter.

We also expect an increase in our operating expenses sequentially, primarily due to higher marketing investments in the quarter, a slight ramp in R&D on our new game pipeline and rent expense of approximately $3.75 million on our San Francisco headquarters. These increases should be partially offset on a GAAP basis by lower contingent consideration expense. The sequential increase in marketing cost is expected to be driven primarily by the ramp of investment spend on the recently launched Game of Thrones Slots Casino as well as Merge Dragons! and Empires & Puzzles.

We have also factored into our guidance the potential for initial marketing investment on some of our titles in soft launch. While these investments will pressure operating margins in Q3, we expect them to support growth in future quarters.

In simple terms, we expect the pressure factors noted on gross margins, the ramp of investment in marketing and new game development as well as the introduction of rent expense on our San Francisco headquarters to have broadly similar impacts on our Q3 operating margins.

Finally, on July 1, we completed the sale-leaseback of our San Francisco building, resulting in a onetime gain of approximately $305 million. While we did incur San Francisco transfer taxes on the sale, we expect minimal federal and state taxes on this gain due to the utilization of net operating losses carryforwards.

Turning to expectations for 2019 and beyond. Our top line performance for the year will be driven by our mobile live services, anchored by growth collectively in our forever franchises. We also continue to make progress on our exciting pipeline of new games under development. In Q2, we launched Game of Thrones Slots Casino and are currently testing 3 new games in soft launch. We remain on track to deliver our strongest annual revenue since 2012 and the highest bookings in Zynga history.

Given the strong momentum in our live services, we are raising our full year 2019 guidance to $1.24 billion in revenue, up 37% year-over-year and an increase of $40 million versus our prior guidance. We are also raising our bookings guidance to $1.5 billion, up $55 million year-over-year, an increase of $50 million versus our prior guidance. We expect a net increase in deferred revenue of $260 million, up 317% year-over-year and an increase of $10 million versus our prior guidance. While the release of this GAAP deferral will have a positive impact on revenue and profitability in future years, it represents a $260 million reduction in revenue, net income and adjusted EBITDA in 2019.

In terms of profitability in 2019, we continue to expect pressure on our gross margins due to the higher mix of user pay versus advertising and an increase in royalties and licensed IPs. In addition, we expect to increase our marketing spend year-over-year as we invest in high-growth live service titles such as Empires & Puzzles and Merge Dragons! as well as the launch of new titles. We also anticipate a slight ramp in development spend on our new game pipeline and incremental rent expense related to the sale-leaseback of our San Francisco headquarters. These factors will modestly impact our overall operating margins in 2019, which should deliver returns in future years.

Looking forward to 2020. We continue to expect low double-digit revenue and bookings growth with greater operating leverage as our live service growth is enhanced by full year contributions from our 2019 new game launches as well as initial contributions from games launched in 2020. Over the next few years, we expect to make meaningful progress towards achieving margins more in line with our peers on a like-for-like basis. In conclusion, we are pleased with our performance through the first half of 2019 and the progress we are making on our multiyear growth strategy.

With that, I will turn the call back over to Frank.

--------------------------------------------------------------------------------

Frank D. Gibeau, Zynga Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Ger. Before we open the call up for live Q&A, I want to take a moment to highlight how Zynga is uniquely positioned within the interactive entertainment industry. Zynga is a leading mobile-first, free-to-play live services company with a mission of connecting the world through games. Mobile is the largest and fastest-growing gaming platform in the world with mobile games expected to reach 2.4 billion people in 2019. This platform is constantly evolving with new devices, technologies and distribution innovations that will expand the overall accessibility of games and therefore, Zynga's total addressable market.

As a nimble, mobile-first company, we are well positioned to capitalize on this rapidly evolving game landscape at a time when demand for interactive entertainment is reaching new highs. Our great results through the first half of 2019 put us well on track to be one of the fastest-growing public game companies this year. We are focused on executing our multiyear growth strategy to further scale our business and generate more value for players and shareholders.

With that, we'll open up the call for your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Colin Sebastian with Baird.

--------------------------------------------------------------------------------

Colin Alan Sebastian, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

A great quarter. I have a couple. First, could you talk about the levers driving continued strong growth in Empires & Puzzles, including the mix of paid user acquisition versus specific monetizing events or other activities?

And then secondly, raising the full year bookings guidance by more than the Q2 beat, if you could just maybe talk a little bit more specifically about what parts of the business you think are showing more sustainable, faster growth.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Colin, this is Frank. I'll start with the Empires & Puzzles question. It's going to be a combination of things. We have a fairly aggressive bold beat calendar in front of us for these next couple of quarters, where we will be expanding the number of systems that players can engage with.

One example is we'll continue to expand the base features that we introduced this quarter, including stronghold max levels, new characters and new ways to compete. Also, we are investing more in our operations in Asia against this title. It's out in South Korea and Japan, as we mentioned, and we're seeing some very promising early indicators. So expect that we'll also ramp geographic expansion over the coming quarters that should also help drive the growth of that franchise.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

This is Ger. In terms of the full year guidance, as we stated, the primary rationale for the increase was how we see our live services progressing over the second half of the year. Obviously, we expect the Game of Thrones Social Slots to ramp. It's obviously progressing through this quarter and then through the end of the year. But also, as we look across the rest of the portfolio, we still believe there's room for growth as we assess the various bold beats that we are going to prosecute, both in Q3 and Q4.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

And our next question comes from Michael Ng with Goldman Sachs.

--------------------------------------------------------------------------------

Michael Ng, Goldman Sachs Group Inc., Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

I have one for Ger and one for whoever would like to take it. Ger, could you just talk a little bit about how much incremental marketing spending you're putting against the 3 soft launches this year? I'm just trying to better understand the impact to margins on the third quarter and full year, what I would consider growth investments that likely won't pay off until 2020.

And my second question, and I apologize if I'm being a little bit pedantic, but it seems like your language around using capital allocation to fund acquisitions seems a little bit more intentional than in previous quarter. Has your intention increased since your last earnings report? And could you just update us on your progress there?

--------------------------------------------------------------------------------

James Gerard Griffin, Zynga Inc. - CFO [7]

--------------------------------------------------------------------------------

Yes. We don't break out specifically the exact number against what we may apply against the soft launches. It's just as we now have 3 games in soft launch, they're at -- obviously, in different levels of maturity. I did consider that as I was setting guidance. But I will say if you think about the last quarter, from Q2 to Q3, we essentially indicated there's about 3 points of pressure. And I gave a little bit of an outline in my prepared remarks to say that a point is fundamentally coming from the gross margin side of the equation, a point is coming from the rent on the real estate, and then the other point is broadly related to marketing.

So a little element of that relates to what I'm talking about in terms of soft launch. The majority of it relates to the ramp-up of Game of Thrones Social Slots game and obviously continued investment against Empires & Puzzles as it ramps in Asia and Merge Dragons!.

On your second point, from our perspective, I don't think we amplified our intention on acquisitions other than prosecuting our objectives to refill our cash reserves. Obviously, it's indicative that we now have the capital in-house should additional opportunities arise. But it has always been our intention to be prepared if other opportunities similar to Casual Cards or Gram Games or Merge Dragons! are on the offing. And so from our perspective, there's no rush to do another acquisition, but we feel the sale of the building and the convert gives us the opportunity to execute from a financial perspective if an opportunity arises.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And our next question comes from Alex Giaimo with Jefferies.

--------------------------------------------------------------------------------

Alexander Joseph Giaimo, Jefferies LLC, Research Division - Equity Analyst [9]

--------------------------------------------------------------------------------

I guess from a high level, it seems as if mobile is quickly becoming the most competitive subsector within gaming. Can you just talk a bit about how your team is adapting to that competitive environment and if you do feel acquisitions are necessary to maintain growth rates? Or are you confident that your existing portfolio can drive the low double-digit future growth rate that you referred to?

--------------------------------------------------------------------------------

Frank D. Gibeau, Zynga Inc. - CEO & Director [10]

--------------------------------------------------------------------------------

Yes. Alex, I think that if you look at mobile overall, it's as competitive as it's always been. I wouldn't subscribe to the point of view that mobile is getting more and more competitive. I think that it is a very dynamic marketplace. It has innovation happening in the hardware handsets, in the distribution channel and the business model. And it's also expanding into new markets in the emerging world at a very aggressive rate.

So from our perspective, we look at it as, yes, sure, it's competitive. You need to have -- you need to know what you're doing in this category. It needs to be something that isn't a hobby. It needs to be something that your primary focus in many ways is to really break out. And so we -- that's where we keep our management attention very much focused on our live ops. We have a very rigorous process to continually look at our franchises in terms of are we bringing new people into the franchises; are people that are playing the games playing more; our lapsed players, do we have to plans to bring them back. And keeping that drum beat and that discipline is integral to our overall strategy of producing growth inside this overall marketplace.

It's also a marketplace that I would point out is very broad in its demographics. So a lot of the franchises that we have, whether it's Words With Friends, the upcoming Farmville 3, Merge Dragons!, they're reaching audiences that traditionally a lot of the game companies haven't reached. And that's exciting for us because we're just starting to tap into that and grow it, especially internationally. So from our perspective, we're going to keep our eye focused on the fundamentals of mobile, but we're also going to be aggressive.

Our new product pipeline is just starting to show up in terms of the marketplace with Game of Thrones Social Casino. And the 3 titles that we have in soft launch, they're all very big potential titles: Farmville 3, Puzzle Combat, Merge Magic. Those titles have real potential. And that doesn't even include the games that we're working on in the future with Star Wars, Harry Potter and the future pipelines that we have coming.

So the combination of those 2 elements, we think, can continue to deliver on our strategy of a strong foundation of growing live services with incrementally layering in new titles. And we believe that, that execution will continue to deliver the growth rates that we've committed to our shareholders and to the marketplace.

The M&A is actually a lever on top of that, and we take it in a very considerate and thoughtful manner. We don't -- we're not in a rush to do any deals. But if we see something that we can plug into our live services platform and we find a game team and a franchise that we really believe in, we'll go for it. And that would increase the growth rates from what we've already committed to. So we don't really have any assumptions in our projections against further M&A. It's all based on organic growth from existing live services and with a very small assumption against new title releases.

--------------------------------------------------------------------------------

James Gerard Griffin, Zynga Inc. - CFO [11]

--------------------------------------------------------------------------------

The only thing I would add to what Frank said is as you think about 2020, and we talked about this before, as these new games come out, they'll start contributing. Games that come out obviously in 2019 will give us a full year contribution similar to like Game of Thrones Social Slots.

As you get into 2020 then, depending on the timing of the additional games, when they turn up, that will ultimately define the level of operating leverage we can command. Obviously, if we get the games out earlier in the year, they'll be contributing more to the year than if they come out later in the year. But that's all TBD depending on the cadence of our new games.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew Andrew Cost, Morgan Stanley, Research Division - Research Associate [13]

--------------------------------------------------------------------------------

It's Matt on for Brian. So can you discuss the puts and takes that you saw in Words With Friends and Zynga Poker in the quarter? Obviously, you grew bookings sequentially in both of the games but cited them as a driver of the slight decrease in users sequentially. And then can you discuss kind of what you're seeing in the chat games and Solitaire as well on that point?

--------------------------------------------------------------------------------

Frank D. Gibeau, Zynga Inc. - CEO & Director [14]

--------------------------------------------------------------------------------

Yes. With regards to Poker and Words With Friends, there's a lot to celebrate in terms of the features that were released. In Poker, there was a new boost system that was introduced to the game that fans really, really like. We also made some changes to the infrastructure and the production cycle so we can actually get bold beats out faster. And that was very encouraging to see the return to growth on a sequential basis. As we've discussed on prior calls, we felt that, that was going to be a second half event. So the fact that it's a little early is very positive to us. And we anticipate that the velocity of bold beat releases on Poker will increase as we enter into the second half.

In terms of the audience level, there's some puts and takes on Poker in terms of some different markets that we've been active in on UA, some places we pulled back a little bit, some places we've leaned in. And we wanted to see how the boosts were really working before we look at that on a more long-term basis.

In terms of Words With Friends, again, best quarter it's ever had on mobile, big driver of the results on advertising. The new achievements will be -- was very well regarded. We also had a promotion with Garth Brooks. And so we had a really good May and June on that title. We just released the celebration of the 10th year anniversary with a Friendiversary event, which is off to a good start. We've got in-game giveaways and exclusive titles coming. So what we're seeing is the existing base of users is playing the game more. We're seeing more moves per player. And as we get Friendiversary out, we're going to look at ways to expand the audience through UA and further investments.

In terms of the legacy titles, there have been some changes in terms of how Facebook has been approaching Messenger and movement of that app from where it was into the new blue app that they have and where it's been surfaced and how discovery works. We've decided to focus our efforts there on Draw Something and Words With Friends. And we've sunsetted the rest of the chat games there. So that was a negative impact on audience as we sunsetted those games and focused more in on the 2 titles that had substance in [off] audience.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

And our next question comes from Drew Crum with Stifel.

--------------------------------------------------------------------------------

Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [16]

--------------------------------------------------------------------------------

Talk about the CSR2. It sounds like you have a deeper lineup of content and bold beats coming in 3Q versus 2Q plus an easier comp. How are you thinking about that franchise in the second half?

And then separately, and I apologize if I missed it, can you comment on your plans for marketing support of new initiatives beyond 3Q? Aside from the seasonality you see in 4Q, should we expect another step-up going from 3Q to 4Q around marketing?

--------------------------------------------------------------------------------

Frank D. Gibeau, Zynga Inc. - CEO & Director [17]

--------------------------------------------------------------------------------

Yes. Drew, on CSR2, we do have an ambitious bold beat road map for us starting in Q3. Today, you saw the announcement of the Pagani Huayra Roadster that was released exclusively for the first time ever in a game. Very well received. And we have a new beta testing feature, a PvP feature called Showdown, which really is focused on expanding the player-versus-player mode inside CSR2 that we're very excited about and that should have a long-term impact on the franchise.

We'll also have some new Fast & Furious events coming. So we do have a lot of ambition for the game in the second half. The investment in the PvP feature is substantial. And in terms of the release calendar, you've seen a lighter cadence in this last Q2 and coming off Q1. So we'll start to ramp CSR2 as we go into the second half.

I'll let Ger talk about the sequencing of marketing from Q3 to Q4.

--------------------------------------------------------------------------------

James Gerard Griffin, Zynga Inc. - CFO [18]

--------------------------------------------------------------------------------

Yes. Our guidance for Q3, and if you think about my overall color I've given on margins for the full year, it would indicate a similar sort of pressure on margins for Q4 as we do invest against our current live titles and the potential of investment against new titles. So from a quarter-on-quarter perspective, without putting any major dollars against new games, you should sort of assume that Q3 and Q4 broadly look the same from a top and a margin profile as of now.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

And our next question comes from Ryan Gee with Bank of America.

--------------------------------------------------------------------------------

Ryan Gee, BofA Merrill Lynch, Research Division - VP of US Equity Research [20]

--------------------------------------------------------------------------------

So the first one's on Puzzle Combat. We're watching it in soft launch, and in our view, it kind of looks like a modern combat versus fantasy re-skin of Empires & Puzzles. So we've seen this at your competitor that did a bunch of different themed Match-3 games in the past, and sequels weren't really that incremental. So I'm curious how you guys are internally forecasting the contribution of that sequel. Is it just about moving users from one game to the other and then focusing on retention? Or do you plan to see incremental users and revenue once Puzzle Combat does launch?

And then a follow-up along those lines. You now have 3 titles in soft launch. So have you guys committed to a specific number of titles for 2019? I think going into the year, you were looking at 4, possibly 5 if CityVille makes it. So just curious if that's still the case and if that was a factor in the $50 million bookings guidance raise.

--------------------------------------------------------------------------------

Frank D. Gibeau, Zynga Inc. - CEO & Director [21]

--------------------------------------------------------------------------------

Ryan, I'll start with the Puzzle Combat question. It's very early in soft launch. We are looking at all different types of player behaviors, how cohorts come in, what features they like. I think you haven't seen the full feature set rolled out against the game in soft launch. So I'm not sure I would characterize it as re-skin of Empires & Puzzles. It certainly is embracing a different theme in modern combat, which we've seen in testing really does open up incrementally new audiences. So our goal is not to create a cannibalistic, "sells less than the last game" type strategy here. So I think it's a little too early to read too much into what the game eventually is going to look like in soft launch.

From a modeling standpoint, we're not doing a lot of deep modeling in terms of the revenue contributions on Puzzle Combat right now. We're looking at, frankly, what's the player behavior in the franchise. All the projections that you've seen from us on the future really are more related to how live ops and the title that we discussed roll up.

In terms of the 3 titles in soft launch. We committed to having games in soft launch and releasing a few titles. I don't think we ever committed to 5 games releasing this year. But really, the beauty of how we constructed the company is that we can deliver recurring predictable growth off of live services that are strong. I mean this quarter's up 61% on a bookings level without major contributions from new titles. We did not want to design a company that was beholden to the risk of new product introductions. And so from that standpoint, it takes a little bit of pressure off of new product involvement process if we're not trying to land it in a quarter and we're able to just more focus in on the product quality, the engagement metrics and the lifetime value that we can generate inside the title.

So that's why we're not as vocal about we have to get these games out in this quarter. It's really more about let's get into soft launch. Let's see what we'll learn. If things look really good, it can go pretty fast. If things need more work and more polish and iteration, fortunately the way that the live services are performing, we have that flexibility and opportunity to do so.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

And our next question comes from Doug Creutz with Cowen.

--------------------------------------------------------------------------------

Douglas Lippl Creutz, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [23]

--------------------------------------------------------------------------------

Obviously, FarmVille is an important title for you guys. It kind of was the face of the company for a long time. You've now got FarmVille 3 in soft launch. Can you talk about what you're doing with that game that's going to kind of update it for what modern audiences are looking for in a top 5 mobile game and what you're doing you think you can make it successful?

--------------------------------------------------------------------------------

Frank D. Gibeau, Zynga Inc. - CEO & Director [24]

--------------------------------------------------------------------------------

Yes, Doug. The game is innovative on a lot of levels, and we're encouraged by what we're seeing in terms of research and test in terms of the appeal. It starts by building it from the ground up for modern mobile user experiences, modern mobile technology. It has a lot of new things in it related to event harnesses so that we can frequently update it in live operations. But it really does start with a new look and feel to the game. It's actually 3D, not 2D. It has a really accessible UI, and it's focusing in on some key elements on the farm that I think people are really going to gravitate to, which is the animals, the ability to interact with farm animals, horses, dogs, cats. And we've added a layer of story and RPG related to farmhands with the different characters who operate on the farm.

So it embraces a lot of the tried-and-true builder mechanics from the original FarmVille and from what's popular in the category. But it adds a few new twists with collection, RPG, depth in terms of how the stories unfold. And we haven't unveiled them yet in soft launch, but there are also elder game features related to social co-op play and other things that we feel can drive the elder game retention that this type of franchise will enable. And so very early days. It's only been in soft launch a few weeks, and we expect that we'll be polishing and testing this game over the next couple of quarters.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

And our next question comes from Ben Schachter with Macquarie.

--------------------------------------------------------------------------------

Benjamin Ari Schachter, Macquarie Research - Head of TMET Research [26]

--------------------------------------------------------------------------------

I hopped on late, so I apologize if this was already asked. But one, can you update anything on the strategy for Asia, for China specifically? Anything new there, either near term or long term? And then secondly, I don't know if you've seen what's happened with Tinder recently, but it's the first time that I've seen anyone in app go around the payment systems from Android. And we think that we know how they did it, but the question is, can a game company do it as well? And if there's any update in terms of how you're thinking about the ability to go around the 30% [tax] rate or negotiate that lower.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. On the first question regarding Asia, our focus was very deliberate and one game at a time and do it in a way that we don't rush in and end up making mistakes in terms of how you enter Asia like a lot of companies have. So we focused in on Empires & Puzzles, which we saw was testing well. And we started with the markets that we felt we could self-publish in with Korea and Japan, where we could actually get direct feeds on the data. We would control more of our own destiny in terms of how we can invest and change the games and give us much more flexibility for how to bring the games to market and then grow them over time. I'm happy to report very encouraging early metrics from both markets, so much so that we will be increasing the marketing expenditures against that title in the coming quarters.

As it relates to China, given a lot of the dynamics related to how games are regulated, how you go into the market, we decided to focus more in on Korea and Japan on the titles, get to success and scale there. And while we do have games available in China, Merge Dragons!, for example, has a fairly good audience there, that's going to be a part of the next wave of efforts as we look at how to expand further into Asia.

As it relates to the app stores, and there's a lot of dialogue about the distribution channel, the rates, the fees, how to go around it, I can only say this: It's really a dynamic environment. The mobile ecosystem is subject to constant change, and there's a lot of attention and pressure on the current structure of how it's operating. Zynga is a great partner to Apple and Google. And our perspective is let's do what we do best, which is make games, run live services. And if there are shifts in the channel as it relates to some of these dynamics, those will probably benefit us, but it's not a forecastable event.

And as far as going around some of these systems and policies that they have, a dating app, where a lot of the activity happens off the application, is a little bit different than a game, where most of the activity happens inside the application. So I think there's some more fundamental structural issues there to look into that doesn't make it a perfect North Star for how to potentially go after that activity. So from our perspective, we love mobile because of the opportunity it presents for growth and change, but at the same time, the current system is benefiting us well.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

And our next question comes from Ray Stochel with Consumer Edge.

--------------------------------------------------------------------------------

Raymond Leonard Stochel, Consumer Edge Research, LLC - Analyst of Entertainment [29]

--------------------------------------------------------------------------------

So a couple on new platforms. What would be the long-term opportunity for you all with cross-platform play? Historically, you ran your own website and portal historically, but we know that there's pressure of web-based games. Is there a scenario where you have cross-platform play with third-party distribution as we see there continues to be growth of third-party distribution on PC?

And then secondarily would be on chat. Is there any way that you can quantify the audience impact either for Facebook Instant Games in 2Q and 3Q or Tiny Royale in 2Q and 3Q?

--------------------------------------------------------------------------------

Frank D. Gibeau, Zynga Inc. - CEO & Director [30]

--------------------------------------------------------------------------------

Yes. So the cross-platform opportunity for us, we think, is profound. And it is something that Zynga teams and Zynga intellectual properties, we think, they can appeal across platforms. The most adjacent clear opportunity is on the PC, not just the web, but also in a fully downloadable game-type environment. Free-to-play is a very proven model on PC. There's a lot of great distribution channels with Steam and Epic and others that you can go direct on that we think over the long term, as we look at how we grow our forever franchises, there will come a day where Zynga will be able to launch games, have cross-platform play and cross-platform audiences.

PC is also very appealing to us because of the presence that it has in Asia. And as we grow our global footprint, the ability for mobile players and PC players to co-mingle and play against each other is really exciting and something that we're looking at. The next step out from that, we have console and streaming systems. I think it's simple to say, we are a platform-agnostic company. We start with the games, the teams and where we can generate audiences profitably. And if we can figure out paths for franchises and IPs that makes sense, that would be something that we would evaluate. It's not anything that's eating up R&D right now, but it's certainly something that we think about as we contemplate 2020 and beyond.

As it relates to chat, we recently announced -- or we recently released Tiny Royale on Snap. And we've been very pleased with the partnership with Snap. They're a very, very good company. And their approach to gaming, we really like. And it's exciting to see the reception that Tiny Royale has received. So the idea that you can build games on chat platforms in the West, I think, is still in very early days. Snap just got in. Facebook is recalibrating in terms of how it wants to approach that.

So I think when you look at audience numbers, they're going to jump around a lot. There's going to be a lot of noise in them. We don't really break them out. So I can't give you a quantitative assessment of how big they are. But from a standpoint of over the long term, there's audiences there in chat that find Zynga intellectual properties like Words With Friends and Draw Something and Tiny Royale very appealing. And so it's a place that we'll continue to look to innovate.

It's also going to be an ad-driven business, which also works well for us. So there's still a lot of structural things that we like there, but again, the cautionary note that I would say is it's early days, so reading too much into the audience or how it unfolds is -- do at your own risk.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Frank, Ger, Rebecca, congrats on the quarter, guys. I guess the first one, just looking at your '20 bookings guidance, 10% to 15%. Obviously, your live service games are cranking here. Just curious how you sort of balance growth from the existing live services versus new games. They obviously are inherently more risky into that 10% to 15% guided range. And then I have a follow-up.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The way we think about planning both current year and future years is we do have -- obviously, we've got a perspective on our new games [slate] and potential launch windows. As we thought about giving our guidance for 2020, we said low double digits. So in that guidance, we implied we would get growth from our core live portfolio, but we do expect that we'd get some contribution from new games, whether it's a full year contribution of a game launched in this year or some additional games that we'll launch in 2020.

So in setting that guidance, there is a component that relates to new. And from our perspective, as we look at the portfolio, both our live portfolio and the potential games that could soft launch over the next year or so, we felt low double digits was a reasonable expectation. As you think about it from a mix point of view, the majority is still going to be coming from what we would call live games. And live by definition is any game that is in the market prior to the end of 2019.

--------------------------------------------------------------------------------

Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

Okay. The last question from me on Small Giant Games. It looks like Empires & Puzzles is north of $80 million in bookings for the quarter. I think it was probably the top-performing game by quite a bit. When you acquired that asset, I think the run rate -- forgive me if my math is wrong, but it was around $200 million. So now it looks like you're sort of looking to be well over $300 million. So one, is that math right? And two, can you sort of help us bridge that sales growth from that game that you generated?

--------------------------------------------------------------------------------

James Gerard Griffin, Zynga Inc. - CFO [35]

--------------------------------------------------------------------------------

Yes. I think the math is broadly correct. The game had -- as we said when we brought Small Giant into the family, we're really excited with the performance of the game that was starting, obviously, its journey in terms of ramping. It had a very good Q4, had an excellent Q1, and it's continued to grow. So in terms of how much of that was baked into our initial expectations, we obviously took a more conservative view. Hence, you see the contingent consideration build. But when we -- if we sort of step back in a time machine and look at it versus our case that was [pitched] to our Board, it's obviously performing ahead of our expectations.

And to a similar extent, we have a similar situation going on with Gram. Those titles, the core -- as Frank said in his opening remarks, the core team and their creativity, we haven't messed with that there. They're part of the Zynga family. But what we've been layering into them is our publishing experience, our studio ops and our ability to help them scale better. And the combination of the 2 has worked really, really well.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

And our last question comes from Jeff Cohen with Stephens.

--------------------------------------------------------------------------------

Jeffrey A. Cohen, Stephens Inc., Research Division - Analyst [37]

--------------------------------------------------------------------------------

So one of your competitors made an acquisition today in the hyper-casual space. Could you maybe just talk about that genre and any ambitions you might have to get bigger there?

--------------------------------------------------------------------------------

Frank D. Gibeau, Zynga Inc. - CEO & Director [38]

--------------------------------------------------------------------------------

Yes. It's a category that is very interesting to us. It's very high DAU, very casual, very easy to get into. It tends to skew a little younger than a lot of the main native apps. It's an ad-driven business right now. It could start to evolve more towards IAP or in-app purchase. So when we look at the overall download charts on the platforms, you do see the charts dominated by these very quick, easy-to-play, easy-to-get-into games.

The challenge is just how do you get to scale, how do you maintain that sustainable -- make the DAUs sustainable. You have to have really good systems for cross-promotion. You have to have really good advertising systems. We like the category. It remains to be seen how long it'll stay at this rapid growth rate, if it's going to start to slow down in the second half or not. But from our perspective, we think that hyper-casual is a strong sector of growth inside the mobile ecosystem.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Rebecca Lau, Zynga Inc. - VP of IR & Corporate Finance [40]

--------------------------------------------------------------------------------

Thank you, Joelle. We want to thank everyone for joining our earnings call today. We look forward to connecting with you more over the coming weeks.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

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 wonderful day.