Zynga Inc. (NASDAQ:ZNGA) Q3 2020 Earnings Conference Call November 4, 2020 5:00 PM ET

Company Participants

Rebecca Lau – Vice President-Investor Relations and Corporate Finance

Frank Gibeau – Chief Executive Officer

Ger Griffin – Chief Financial Officer

Conference Call Participants

Alex Giaimo – Jefferies

Mario Lu – Barclays

Colin Sebastian – Baird

Matthew Thornton – Truist Securities

Eric Sheridan – UBS

David Karnovsky – JPMorgan

Mike Ng – Goldman Sachs

Eric Handler – MKM Partners

Brian Fitzgerald – Wells Fargo

Matthew Cost – Morgan Stanley


Ladies and gentlemen, thank you for standing by, and welcome to the Zynga Third Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference to your speaker today, Rebecca Lau, VP of Investor Relations and Corporate Finance. Please go ahead, ma’am.

Rebecca Lau

Thank you, Joelle, and welcome to Zynga’s third quarter 2020 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.

Before we cover the safe harbor, please note that in an effort to keep our team members healthy, each member on today’s call is dialed in remotely. We appreciate your understanding during the call and hope that everyone is staying safe during this time.

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 Gibeau

Thank you, Rebecca. Good afternoon, everyone, and thank you for joining us on our earnings call. We continue to live in unprecedented times as the human cost of the COVID-19 pandemic weighs on so many different aspects of our lives. Over the past several months, we have been humbled to see more people turn to our deeply social game experiences for entertainment and a sense of community.

We are also proud of our teams as they continue to work from home effectively and deliver exciting new content for our players, including the successful launch of Harry Potter: Puzzles & Spells. In Q3, we delivered strong results ahead of our guidance across all key financial measures, including our highest ever quarterly revenue and bookings with revenue of $503 million, up 46% year-over-year and bookings of $628 million, up 59% year-over-year. We also delivered our best Q3 operating cash flow of $113 million, up 65% year-over-year.

Today, we are raising our full year 2020 guidance, which Ger will tell you more about later on the call. Execution of our multi-year growth strategy has driven our tremendous results to-date and generated positive momentum across our business. The foundation of our multi-year growth strategy is our life services by delivering a steady cadence of innovative bold beats, we are able to drive recurring growth across our highly diversified portfolio of forever franchises, as well as our social slots and casual cards titles.

Specifically in Q3, our social slots portfolio marked its best revenue in bookings quarter in Zynga history, led by breakout performances by Hit It Rich! Slots and Game of Thrones Slots Casino. We also saw record Q3 performances from Words With Friends, CSR 2, our Casual Cards portfolio and Empires & Puzzles.

These outstanding results are a great example of the enduring nature of our forever franchises at Zynga. In July, we successfully integrated Peak and our teams are working extremely well together. Toon Blast and Toy Blast were strong contributors in their first full quarter at Zynga and were key drivers of our year-over-year top line growth.

We also have an exciting pipeline of new games that have the potential to become new forever franchises and will add to our growth in the coming years. At the end of Q3, we launched Harry Potter: Puzzles & Spells worldwide, which is off to a great start with positive player feedback as well as 4.8 average star ratings on both the Apple App Store and Google Play. Building upon its positive launch momentum, we expect to steadily scale Harry Potter: Puzzles & Spells over the coming quarters as a meaningful growth driver for Zynga in 2021 and beyond.

FarmVille 3 and Small Giant Games’ Puzzle Combat are also progressing well in soft launch. As both these titles rigorously test new feature sets designed to deliver long-term engagement and monetization. Over the coming years we plan to release additional titles, including a new CityVille, two games set in the Star Wars Universe, as well as new projects from our Gram Games and Peak Studios.

The global proliferation of high-end smart devices is shifting the entertainment landscape towards mobile games. Players across genders, geographies and generations are drawn by the ever-increasing opportunities to socialize with friends and make new connections anytime and anywhere.

As the industry continues to expand and evolve, we are investing in new markets, categories and technologies that will have the ability to increase Zynga’s total addressable market and further accelerate our growth over the long-term. Specifically, in Q3, we grew our international revenue and bookings by 44% and 49% year-over-year respectively.

In Asia, the addition of Toon Blast and our investments in Empires & Puzzles drove user pay revenue and bookings up 70% and 88% year-over-year respectively. For Harry Potter: Puzzles & Spells, we are partnering with LINE, a leading social network in Japan to promote the title and connect players in the game.

On October 1, we closed our acquisition of Istanbul-based Rollic, bringing an incredibly talented team and community of external developers to Zynga. Rollic’s popular portfolio of hyper-casual games and robust prototyping approach to new game development will be strong growth drivers as we continue to scale in one of the largest and fastest-growing game categories on mobile.

While its large and diversified audience base will be valuable to Zynga, as the mobile games industry and advertising landscape continues to evolve and grow. Over the next few years, we also see the potential to build out Zynga’s player network which will unlock more cross promotion opportunities as well as new advertising capabilities.

As we look ahead, we continue to see more opportunities to acquire talented teams and franchises to further accelerate our growth. To-date, our acquisitions have delivered strong contributions to our live services, added multiple new forever franchises to our portfolio, expanded our new game pipeline and provided entry into new categories on mobile. Our proven integration model enables teams to maintain their unique development cultures while leveraging Zynga’s highly scalable studio operations, publishing platform and advertising network, so we can grow faster together.

In conclusion, we are executing well on our multi-year growth strategy as we continue to scale our business and progress towards our long-term margin goals. We are uniquely positioned as a mobile-first free-to-play live services game company on the largest and fastest-growing gaming platform. Building upon our strong performance to-date, we expect our highly diversified live services portfolio and exciting new game pipeline to be meaningful growth drivers in the years ahead.

To further accelerate our growth, we are also investing in initiatives that have the ability to expand Zynga’s total addressable market and continue to see more opportunities for M&A. All of these factors combined have us positioned to be an interactive entertainment growth leader in 2021 and beyond and gives us confidence in our ability to generate more shareholder value.

Now I would like to turn the call over to Ger to discuss our Q3 results in further detail as well as our outlook for 2020 and beyond.

Ger Griffin

Thank you, Frank. We delivered strong Q3 results driven by our live services and ahead of our guidance across all key financial measures. We achieved our highest quarterly revenue and bookings as well as our best Q3 operating cash flow. We were also very happy to welcome the Rollic team who joined on October one, marking our entry into hyper-casual games in a meaningful way. Given the full quarter contribution from Rollic, and continued strength in our live services, we are raising our full year 2020 outlook. But first, let’s discuss our Q3 results.

Revenue was $503 million comprised of bookings of $628 million offset by a net increase in deferred revenue of $125 million. Revenue was $58 million ahead of our guidance, driven by an $8 million bookings beat and a $50 million lower-than-expected net increase in deferred revenue. Broad-based spend – excuse me, broad-based strength across our live services drove our top line beat, in particular, stronger-than-expected performances from Words with Friends, our Social Slots portfolio and CSR2. Revenue was up $158 million or 46% year-over-year, driven by bookings growth of $233 million or 59% year-over-year, offset by a $75 million higher net increase in deferred revenue.

Our year-over-year top line growth was primarily driven by full quarter contributions from Toon Blast and Toy Blast, alongside growth in Empires & Puzzles, Merge Magic!, and our Social Slots portfolio. User pay was the primary driver of our top line growth with advertising also up year-over-year. The net increase in deferred revenue of $125 million was primarily due to the deferral of initial bookings on Toon Blast and Toy Blast in their first quarter at Zynga. The lower-than-expected increase in deferred revenue was primarily due to a conservative estimate in our guidance related to the revenue recognition on Toon Blast and Toy Blast, in addition to variances in actual bookings mix across the Zynga portfolio.

Turning to Q3 operating expenses, GAAP operating expenses were $389 million, up $104 million or 36% year-over-year, primarily driven by the first full quarter of peak and to a lesser extent higher stock-based compensation, contingent consideration and acquisition-related expenses year-over-year. We incurred $67 million of contingent consideration expense in the quarter, which was up $6 million year-over-year and $42 million higher than our guidance driven by our acquisitions, continuing to perform ahead of our expectations and the true up of the final year Gram earn-out.

As part of our broader strategic review for Gram, including updated long-term incentive plans, we agreed with the prior Gram shareholders to set the final year earn-out at approximately $75 million, allowing us to remove the earn-out operating covenants and fully integrate the operations of the studio in Q4 2020. The actual payment of the final year earn-out will remain in July 2021.

Non-GAAP operating expenses were $275 million, up $76 million or 37% year-over-year, primarily driven by a first full quarter of peak, and to a lesser extent, the increase in marketing investments across the rest of our life services. GAAP operating expenses decreased to $77 million – excuse me, to 77% of revenue from 83% in the prior year, primarily due to a stronger operating leverage from R&D, partially offset by higher marketing investments year-over-year.

Non-GAAP operating expenses represented 44% of bookings, down from 52% in the prior year, driven by improved operating leverage across all operating expense lines. We reported a net loss of $122 million, $38 million better than our guidance and compares to net income of $230 million a year ago, which included a $314 million gain on the sale of our San Francisco building.

The variance to guidance was primarily driven by lower-than-expected net increase in deferred revenue and stronger operating performance, partially offset by higher contingent consideration expense. The variance to prior year, excluding the one-time gain on the sale of the San Francisco building, was primarily due to a higher net increase in deferred revenue, amortization of acquired intangibles and stock-based compensation, partially offset by our improved operating performance.

Our adjusted EBITDA was $38 million, $83 million better than our guidance, primarily due to the lower net increase in deferred revenue and the improved operating performance. On a year-over-year basis, adjusted EBITDA increased $10 million on stronger operating performance, partially offset by the higher net increase in deferred revenue.

We generated our best Q3 operating cash flow at $113 million, up 65% year-over-year. As of September 30, before we closed our acquisition of Rollic, we had approximately $758 million of cash and investments. While we expect to end 2020 with a strong cash position supported by positive operating cash flow, we are assessing debt financing options to further expand our cash reserves, including for use in future acquisitions.

Turning to guidance, we have developed our Q4 and full year 2020 guidance based on the information available to us today, November 4, 2020, and using similar methodologies to prior years – excuse me, prior quarters. Given the higher level of volatility and uncertainty in the industry, in particular around the COVID-19 crisis, there is the potential for a wider range of outcomes, both positive and negative as it relates to our ultimate business results. For example, in Q3, while we have seen audience levels return from shelter-in-place highs in Q2, we continue to see strong pair engagement of monetization from existing and new cohorts. Looking ahead, while we expect to see some level of continued normalization, this may be influenced by many factors related to the ongoing pandemic. That said, let’s now discuss our Q4 and 2020 guidance.

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Guidance for Q4 is as follows; revenue of $570 million, up $166 million or 41% year-over-year; and that decrease in deferred revenue of $100 million versus $29 million in the prior year; bookings of $670 million, up $237 million or 55% year-over-year; and net loss of $92 million versus $4 million in the prior year; adjusted EBITDA of $35 million versus $75 million in the prior year.

Some factors to consider in assessing our Q4 guidance include; live services will drive the vast majority of our top line growth, including full quarter contributions from Toon Blast, Toy Blast, as well as a full quarter contribution from Rollic’s hyper-casual games portfolio. We also will have initial contributions from our recently launched Harry Potter: Puzzles & Spells, which we expect to scale steadily in Q4 and into 2021. This momentum will be partially offset by declines in older mobile and web titles.

Our top line guidance does not assume the launch of any additional titles in Q4. We expect gross margins to be slightly down year-over-year due to the higher net increase in deferred revenue, amortization of acquired intangibles and user pay mix. We expect GAAP operating expenses as a percentage of revenue to increase year-over-year, primarily driven by the significantly higher net increase in deferred revenue and an increase in stock-based compensation, partially offset by lower contingent consideration expense.

Outside of these factors, we expect year-over-year operating leverage improvements in R&D and G&A to be more than offset by higher marketing across our live service portfolio, including full quarter investments in Toon Blast, Toy Blast and Rollic’s hyper-casual games portfolio. Additionally, building on Harry Potter: Puzzles & Spells successful launch momentum, we plan to invest meaningful marketing dollars to steadily scale this title in Q4 and into 2021. We expect the key drivers of the year-over-year change in our net loss will be the significantly higher net increase in deferred revenue as well as increases in amortization of acquired intangibles and stock-based compensation, partially offset by our improved operating performance, lower contingent consideration expense, and a benefit from income taxes.

The year-over-year decrease in adjusted EBITDA is a function of the $71 million growth in net increase in deferred revenue, partially offset by our improved operating performance.

Turning to 2020, our raise guidance is as follows: revenue of $1.93 billion, up $607 million or 46% year-over-year and up $129 million versus our prior guidance; a net increase in deferred revenue of $312 million, up $70 million or 29% year-over-year and down $88 million versus our prior guidance; bookings of $2.24 billion, up $677 million or 43% year-over-year and up $41 million versus our prior guidance; a net loss of $468 million versus net income of $42 million in 2019 and $82 million improvement on our prior guidance of $550 million of net loss; adjusted EBITDA of $211 million, up $124 million or 142% year-over-year and up $126 million versus our prior guidance.

The primary drivers of our increased outlook are the full quarter contribution from Rollic as well as continued strength in our live services portfolio. For 2020, we expect our best annual revenue in bookings in Zynga history. We were also on track to deliver strong year-over-year operating leverage, demonstrating meaningful progress towards our long-term margin goals. Our strong execution in 2020 should position Zynga for continued growth in 2021, where we continue to expect double digit top line growth as well as the potential for further margin expansion and positive operating cash flow.

In summary, while we are operating in unprecedented times, we remain focused on entertaining and connecting our players to our games. Our business fundamentals are strong as we continue to execute our multi-year growth strategy.

With that, we’ll now open the call for your questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Alex Giaimo with Jefferies. Your line is now open.

Alex Giaimo

Great. Thanks for taking the question. Maybe two, one for Frank and one for Ger. Frank obviously another strong top line beat and raise, but it does seem the magnitude of the beat was a bit lighter than what we saw in the first half of the year. So just curious if you’re starting to see trends normalized back towards those pre-level – pre-COVID levels that you touched on in your opening remarks? Or just anything you can say, broadly about engagement? And then Ger, heard in your opening remarks that you said no new games are in the 4Q guidance. Should we interpret that as, a new game won’t launch? Or is it just safer to not include in the guide and then see what happens? Thank you, guys.

Frank Gibeau

Alex, I’ll start with the discussion on the beat. Look, we had a strong quarter. We were up $55% – 59% year-over-year in bookings. And it was a choppy quarter just in terms of how it was going to unfold. With COVID causing a big audience increase in the late spring, early summer, how that was going to pattern out, it has been kind of a big topic at the company. What we are seeing in the data is that we are seeing engagement and monetization and retention trends, as well as conversion, really stay elevated, while we’ve seen a return of kind of the top line DAU growth to kind of more normal growth. Those other factors remain elevated, which I think points to the fact of why the beat on bottom was so much larger.

We saw a lot of leverage in the business because people were playing longer, they were monetizing at higher rates converting. And as we scale the business, looking at the overall ad market, we saw real opportunities to continue to drive the business organically without having to spend UA and that’s why you see kind of our second consecutive quarter of EBITDA percentages on a non-GAAP basis being 25%, 26%. So while the beat on the top, I think we beat our guidance. And as we look forward into Q4, the $670 million is going to be up to 55% year-over-year. And it’s really predicated on a couple of key things. We’ve got continued strength in live services that we’re forecasting forward. We’ve got the momentum from Harry Potter that has started very strong at the end of Q3. It didn’t contribute anything really in the quarter, but going into Q4, you’re going to really start to see that play a role.

And then as we integrated Peak and Rollic, we’re going to start to see some interesting dynamics as we head into fall. I’ll start a little bit on kind of the philosophy around the second question on new game stuff, and then hand off to Ger for the guidance. One of the things that we have at Zynga is the strong foundation of live services, which gives us a lot of flexibility on how we develop and bring new games to market. It’s a real luxury, frankly, to be able to take your time and test the games to their maximum quality and to really deliver on long-term engagement.

Mobile is a very competitive category. There’s a lot of competition there, but as I think you see with the Harry Potter launch, with the strong start that we’re seeing there, the time that we spent in test market going through engagement, retention, monetization, as well as quality was time well spent, and we continue to hold that philosophy as we look at FarmVille 3, Puzzle Combat, the future pipeline of Star Wars, CityVille more games from Gram and Peak. When we launch a game, we want it to really – we want it to be a hit and we want to be able to add it to the portfolio and prove it to be a contributor for multiple years going forward. So that’s the management philosophy behind how we’re introducing new games. But now I’ll hand off to Ger to give you more detail.

Ger Griffin

Thanks, Frank. I think you nailed it. When you look at the guide for Q4, we’re seeing some really strong momentum with the launch of Harry Potter and we’re definitely doubling down the marketing we had implied in our guide when we set our guidance back in Q2 against this title. So if you think back – if you sort of looked at the implied guidance that we set back on the Q2 call, we’re talking somewhere in the zip code of bookings of $662 million and 20% flow through, which obviously implies some deleverage because we’re going to launch, games are a game. What our guidance assumes now is that the focus is on Harry Potter. And we’re definitely investing against that title, which is why you see deleverage from 26% in Q3 down to just over 20% in Q4.

As you guys know, as you launch a game, the engagement metrics will obviously trend ahead of the monetization and the pinch points. And obviously we’ll be investing marketing into that where we see momentum, which is the case of Harry Potter. And so we’re doubling down there. In addition to – we have some – obviously, we’re coming into the holiday season, so there is a little bit more against the live services as well. But the primary driver, when you look at the guidance from an EBITDA perspective is Harry. And that’s the basic assumption around the guidance as we fine tune that coming into the end of the year.

Alex Giaimo

Great. Thank you both.


Thank you. The next question comes from Mario Lu with Barclays. Your line is now open.

Mario Lu

Great. I have a couple of questions, one on Harry Potter and one on IDFA. So the first one on Harry Potter, I’m just wondering if you could provide some background on how that title – the partnership in Japan came about. I know you have a couple of titles within Snapchat, but do you think similar opportunities exist with your favorite franchises within similar social media apps here in the West?

Frank Gibeau

Yes. I’ll take the Harry Potter question, and we can jump to your IDFA. When we looked at our go-to-market strategy for Asia, as you know, last year we launched Empires & Puzzles into Asia directly without partners. And so for each title, we look at what opportunities there are to maximize success. And the Harry Potter brand is particularly strong in Japan. And when we approached line about a potential partnership, there was a lot of great collaboration and ideas for how we can integrate some of the assets of Harry Potter into their social network that could drive, promote additional info of DAU and connect players within the game.

What you find when you play Harry Potter, it’s quite a social match three game. There’s a lot of guilds and competitions. So tapping into the social network, that line has really enabled us to launch with a lot of momentum in Japan. As we look at other game launches in the future, like Farmville, the Star Wars title, we’ll take a country-by-country, look at what types of partnerships are available to us, or whether going direct makes the most sense. And then just if you compare and contrast Empires & Puzzles, one was completely direct without a partner. And then with Harry Potter, the brand affinity, and the collaboration possibility on social was something we jumped on. We have launched games on Snapchat as kind of an experiment to see if we could launch bespoke games that are fully operational inside of the social network. That’s something that we remain interested in and believe is a potential opportunity for the company longer term.

Mario Lu

Great. Thanks. And then on one on the IDFA, so I’m just hoping you can help bring sense the potential impact from the change next year. Now advertising revenue is still going pretty strong with 13% growth this quarter, but anything you can share in terms of the percentage of advertising revenue coming from iOS versus Android? And then maybe on the user acquisition side for in-game bookings within the given period, is there like a average percentage coming from existing users versus new users that may be impacted by IDFA? Thanks.

Frank Gibeau

Yes. It’s going to be a ship in the mobile ecosystem that a lot of the companies are really starting to understand and build new systems and approaches to customer acquisition and how they potentially might run their ad networks. And as we’ve looked at it, we have some particularly unique assets that Zynga that I think we’ll enable us to really manage through the IDFA introduction and be in really good shape long-term. The first is, with regards to the franchises that we have is they’re very long lived, right? Words With Friends is 12 years old. CSR is coming up on eight years. You’ve got games like Zynga Poker and others where the organic strength of the brands and also the awareness and interest they have with brands like Harry Potter and FarmVille and Star Wars. There’s a lot of latent demand out there. There’s a lot of organic demand out there that you can really go after in a non-IDFA way. In addition to that, we have a unique asset in Rollic.

Rollic is a very high MAU network of game that we acquire players, not using IDFA, at very low rates of acquisition costs that can be then moved into our network and potentially shown other games from the thing of portfolio. And if we’re able to convert, any of those players into a player of another game, it’s extremely leveraged for us. So we also though think about with regards the amount of information that we gather about our players inside game events, when they come in Words With Friends, who are they talking to, who are they playing. So we can serve them better, that information that allows us to have better targeted ads. We can do a lot of inference and probabilistic targeting that allows us to continue to talk to advertisers about the demographics they’re interested in reaching and how that translates into our network.

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So there’s probably a dozen things that we can do in our go-to-market platforms and in our acquisition platforms that will allow us to continue to maintain effectiveness without really degrading our capabilities by the loss of that attribution. In terms of the iOS, Android split and advertising, it’s mainly iOS about 60% iOS, 40% Android is one way to think about it. And in terms of working with Apple on what they’re standing up in terms of their new attribution model in ad market that’s something that we’re learning a lot about and believe that we can also use to acquire players. So I think for some companies, it’s going to be painful. I think for our company, we’ve got a really good strategy in place to be able to kind of move through it. And from our perspective, privacy is really important for our players. And when new regulations or requirements come out, like IDFA, I’m sorry, like GDPR or the California Rules. We adapt our services and are able to still deliver great gameplay, great services and still acquire players in a way that makes the continued growth of Zynga.

Mario Lu

Great. That’s very helpful. Thank you.


Thank you. Our next question comes from Colin Sebastian with Baird. Your line is open.

Colin Sebastian

Great. Thanks for taking the question. In the letter, you talk again about the potential for more acquisition, so just wanted to clarify that for now, is it safe to assume, you’re still taking a breather, which means deals as you integrate Peak and enroll and I guess still the ground? And then player engagement of a sequential increase from Q2 to Q3, is that all related to the integration of the acquired users or is there also some engagement improvements among the existing portfolio? Thanks.

Frank Gibeau

Thanks, Colin. The integration for peak was completed in Q3 and with the closure of the deal on Rollic on October 1, integration is well underway with Rollic. As we look out into the future, our M&A performance over the last few years has worked out and we liked the studios that have joined us. The talent is fantastic. The franchises I’ve been really added to the portfolio. But we are very selective about the deals that we pursue and the company that interest us. And from our perspective right now, we’re focused on delivering a great launch of Harry Potter and scaling into Christmas, looking at the live services portfolio, like growing that and continuing the integration of Peak, Rollic and also looking at the graham stuff that Ger talked about.

So you never say never, but as we think about the fall, we’re in pretty good shape. But as we look to 2021 and beyond, we want to be in position for being able to partner with companies globally that could add to the growth. And I think that’s a really important strategy for us long-term. And we will continue to pursue that. In terms of the elevated engagement, that’s not just from the acquired studio, that’s actually from the existing franchises. If you look at, two games in particular, CSR2 and Words With Friends, they had record Q3. The social Slots Casino, those games are five, six, seven years old. They’re doing terrific. And that’s because we’re seeing people as they went in to shelter in place as they come out, they’re playing mobile game longer. They’re playing more mobile games and they’re retaining in a very positive way. And they’re seeing the value of playing and socializing. So they’re monetizing. So it’s not just an addition from Peak. It’s actually a portfolio wide.

Colin Sebastian

Great. Thanks, Frank.


Thank you. Our next question comes from Matthew Thornton from Truist Securities. Your line is now open.

Matthew Thornton

Hey, good afternoon, Frank, and good afternoon Gerard. A couple if I could. A follow-up on idea, I’m just curious, over the past three months, obviously the industry has kind of had a little more time to get its arms around the changes. I’m curious if you’ve seen a change and maybe, the M&A opportunity, as you think out over the next couple of years, because of IDFA or said differently, do you feel like there’s more perhaps every subscale players that want to come to the table and have conversations just curious many change there. So that’s question number one.

And then just secondly, maybe for Gerard, you talked a little bit about, the visibility in 4Q versus the last quarter, I don’t say it’s really hard, but when you think about how much COVID sheltered home lift is still kind of in the industry, do you feel like exiting 3Q there’s we’re kind of back to a normalized run rate, or are you still not willing to kind of make that call yet, any color it’d be helpful as well? Thanks again, guys.

Frank Gibeau

Yes. So, starting with the IDFA question and the impact on the overall industry, scale is going to really matter in terms of a post-IDFA world, really having a large audience, having a lot of MAU, having a lot of relationships and information, inside your network is going to be critical. And if you’re a subscale player, it’s going to be very difficult to make some of these UA decisions, and the lack of efficiency for subscale companies is going to be more painful.

And so from my perspective, we think that, from a trend line standpoint, those types of opportunities are going to be more plentiful as you move into 2021 and beyond. At the same time, we’re very excited about, services and games that have high audience counts and bringing them into the Zynga network. So, I think on both sides of it, there’s going to be new opportunities versus, where we were as an industry over the last couple of years. Gerard?

Ger Griffin

Yes. In terms of COVID, Matt, you’re right in the sense that if you think about Europe right now, my mother country Ireland is going into complete lockdown. The Brits are following suit. So, there is a lot of volatility in terms of what’s going on in the world in terms of shelter-in-place and – but as it relates to the quarter, our base assumption was we’re going to see some level of normalization continue. But again, it’s too early to say, one of the reasons we characterized at the start of the guidance that there’s a lot of puts and takes. In a world, where we’re back in a full lockdown, it’s intuitive that there would be more engagement against games, but TBD. So, there is something there, but it’s not really something that we built into the forecast.


Thank you. Our next question comes from Eric Sheridan with UBS. Your line is now open.

Eric Sheridan

Maybe, coming back to the usual acquisition monetization question that’s been asked a couple of times, there are key investments that you guys are trying to make either in your data science teams, either internally or working with partners externally to sort of do a fuller look at like what the opportunity might be unusual acquisition to maximize for ROI and/or prepare for IDFA and the same question might away from usual acquisition, but also within, in-game monetization, how should we think about positioning the product and making the dustbins broadly and data science? Thanks.

Frank Gibeau

Hey, Eric. the answer is yes, we are making investments in data science, as well as product management to really diagnose and look at where the opportunities are in? What the new ecosystem is going to look like, where attribution is going to shift in terms of how it works and what types of information are available? One of the benefits of our company is the diversity of the studios that we have. Just speaking about Rollic, they’ve joined on October 1 and the amount of learning that we’re getting from their perspective on how hyper casual market works? How they acquire? How they monetize from an advertising standpoint? Same thing with peak, in terms of how they look at long-term engagement and frankly, the impact that they had on Harry Potter, as it finished.

That diversity in our studios and on our product management and our data sciences is really a big strength of ours. And we are investing in a lot of modeling and testing right now, and building out some new capabilities that not only improves the services and things that we have right now, but inventing new ones and starts to look more upstream in terms of how the ad markets are working, and understand that dynamic and be able to harness it more to our advantage.

So, it’s one of our core competitive advantages is information superiority, because of product management, data science, it’s one of the things we will continue to recruit great talent leverage or diverse studios again, and we are building out new capabilities techniques there.

Eric Sheridan

Maybe, if I could just guess one follow-up if possible, how do you think about addressing the situation inorganically? Do you ever think about looking out into the broader digital advertising ecosystem and thinking about acquiring data analytic capabilities, or thinking about inorganic deployment of capital against the opportunity broadly for in-game monetization? Thanks so much.

Frank Gibeau

Yes. The answer is, yes. We do look at, not only just game studios, but as we think about Zynga longer-term as a platform or a network, those types of opportunities are something that we have been considering and continue to consider. It’s something that is super-important in terms of maintaining our strength in data science and product management. And as we embark on new capabilities, we’re looking at build versus buy. We look at our talent base and try and figure out if there’s opportunities to find those out there in the marketplace. and we haven’t done any deals like that yet. But we don’t rule them out.

Eric Sheridan

Thanks so much.


Thank you. Our next question comes from David Karnovsky with JPMorgan. Your line is now open.

David Karnovsky

Hi, thanks for the question. Frank, can you explain a bit on the rapid prototyping approach you highlighted in the letter, what type of games would fall into this strategy? Should we think of them as having the potential of being forever franchise or would these maybe be smaller games, but higher quarter?

Frank Gibeau

Yes. David, there’s a couple of areas, where you see rapid prototyping from Zynga. The first is in Rollic, where they are releasing a dozen games a month almost in terms of the prototypes that they’re looking at. The games that they’re bringing into the shoot and testing, some they’ll proceed with, some that they won’t proceed with. they’ll make adjustments. So, very high product velocity from Rollic and the ideas that we see there, sometimes have applicability back into the main part of the business and that’s something we’re just starting to learn from is how hyper casual can help inform the larger games as well as continue to drive more and more ideas in these instant on ad driven games that have very large audiences? So that’s one area you see rapid prototyping.

In other areas for example, at Gram, we do put a lot of prototype games into soft launch that are testing a few things like a core loop and an engagement curve. And if we see heat, we start to build on it; and if we don’t see heat, we pull it back and call it a day with that type of development model has proven to be pretty successful for a lot of companies and we think that as we look across our portfolio, there’s going to be times and places for the big licenses, like the Harry Potters and the Star Wars, but we’re also going to be nimble in launching new ideas, testing them quickly. And if there’s, see we can double down on them or if not, we can pull back and we think that that evolution of our studios is a good thing.

David Karnovsky

Okay. And then the letter mentioned some testing of the new features for Merge Magic! and driving to enhance the long-term player experience. Maybe, we’re reading into it too much, but just wondering what’s driving the initiative and does that create any kind of near-term headwind to monetization or engagement?

Frank Gibeau

Well, I think one of the things that Merge Magic! and Merge Dragons! benefits from is that we have a lot of games that are older than they are, and have scaled to performance levels that demonstrate the need for deeper social systems, systems that are more collaborative and compete any elder game. So, those are some of the features that we’re learning from an Empires & Puzzles and Words With Friends, obviously you see some of that taking hold in Harry Potter.

So, as we work with Gram on their roadmaps for the next four quarters for each of those games, we inject new ideas from different parts of our businesses. And right now, what we’d like to see is Merge Dragons! and Merge Magic! invest more in systems and game play features that really drive that long-term elder game, where the players really are the content, playing together, cooperating, competing and we think that the universe is in the games really lend themselves.

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There’s lots of near-term events like Dragons and prizes, we’ve got the holiday season, we have a really cool set of features that we’re launching and the season passes that we have introduced for those games. We have some strengthens. So, this is just part of ongoing development for live services games, as you grow them year-after-year, you’re constantly adding features and looking for areas inside the service, where you think you can do better and in this particular case, long-term player engagement is where we’re focused on those new titles.

David Karnovsky

Okay. Thank you.


Thank you. Our next question comes from Mike Ng with Goldman Sachs. Your line is now open.

Mike Ng

Great. Thank you very much for the question. First, I just want to ask about just the broader mobile game advertisement. I think advertising came in a little bit better this quarter certainly than I expected. What are you seeing there? And is there all still pacing towards that $100 million annualized that you had originally talked about, or is it better or worse given heightened engagement with games more broadly? Thanks.

Ger Griffin

Yes. This is Gerard. I’ll take that one. We definitely saw improvement in demands in Q3 with an advertising broadly. And that obviously, shown through in terms of our performance for advertising in the quarter. It was obviously up year-on-year and we grew sequentially. In terms of Rollic, Rollic is still on pace, the implied estimate for guidance is still in that $100 million range in terms of their bookings.

And so from that perspective, Q4 generally speaking as we see sort of growth in terms of advertising from the seasonal point of view, we do expect implied in our guidance is moderate growth from Q3 into Q4. Obviously, excluding Rollic, Rollic itself is a full quarter contribution. And they’re off to a great start as part of our Zynga, they’re engaged what are our advertising teams, data science teams. So, I think from our perspective, the integration of Rollic into Zynga is going very well.

Mike Ng

Great. Thank you. And just a separate question on Harry Potter and new game profitability. Could you just remind us, how long it typically takes for a new game to go from a loss generating to profitability; at which point, do you see Harry Potter bookings and say we have some sufficient number of users and we’re in a good place in terms of marketing spend to start letting that profitability flow through to the bottom line.

Frank Gibeau

Yes. generally speaking, the first quarter games are out, depending on when – it doesn’t really matter, whenever they turn up in the quarter journey, you see the actual gross margin flow-through is less than the marketing. In particular, if you see a game that’s got heat and it’s showing the right metrics from an engagement point of view and adoption. So, our expectation is that Harry Potter will start becoming a flow through to the bottom line in the second quarter, going into its third quarter. The key here is when you have a game like Harry Potter or any of our games, which have that long-term engagement hook, what we’re investing in right now is not just what’s going to happen next quarter to what’s going to happen over the lifetime and we’re building those layers of players into the game. And what we’re seeing right now is really engaged in the game. We’re seeing a lot of positive feedback on the game. So when you see that you invest against that horse and it’s definitely going to be a dilutive impact to us in Q4 for obvious reasons, because engagement is ahead of monetization and obviously marketing is ahead of both.

So from our perspective, Q4 will be dilutive. It was implied that way, whether it’s one game coming out in Q4, two games, the original implied guidance for Q4, we were going to see pressure on margins in more like 20%. So, still above are our 20% hurdle, but you should see contributions from a margin perspective absolutely from Harry in the full fiscal 2021, but starting in Q1 and Q2 of next year.

Mike Ng

Excellent. Thank you.


Thank you. Our next question comes from Eric Handler with MKM Partners. Your line is now open.

Eric Handler

Yes. Good evening and thanks for the question. Apologize if this has already been touched on. With regards to M&A and as you think about, possible, a debt raise, I’m curious, how are you thinking about leverage over the next couple of years and to what extent, you’re willing to add debt and as you look at the deals that are out there right now, are you seeing any big changes in acquisition multiples?

Ger Griffin

Eric, this is Gerard. Yes. As it relates to debt leverage, broadly speaking, I’m thinking somewhere in the two to three times, from your performing EBITDA. So that’s how we think about a big picture. In terms of the multiples on acquisitions, again, if you look at our track record today, we generate are targeting in on companies, where there’s an obvious win-win for the studio to join Zynga and leverage our capabilities, and vice versa that we know we can apply the opportunity to grow that asset beyond whatever multiple they come in at. So while, while there’s always, in particular, when there’s banks involved, there’s always a potential for they ask for higher multiples. We haven’t ever been driven to multiples that would make us feel worried ability to deliver shareholder value for Zynga shareholders.

So, from that perspective, I think we’re feeling uncomfortable. We’re still a destination for independent studios, and it was asked earlier on this call about the challenges of IDFA, et cetera, when you look at what Zynga is, in terms of our portfolio forever franchises, social slots portfolio, the casual cards, that’s an aggregation of very talented studios that are – have creative independence and the ability to leverage the data science and publishing capabilities in Zynga. And that’s our sales pitch.

We’re not here to change you the minute you join, we’re here to amplify the strengths that you bring to the table, leveraging our strengths. And there’s no shortage of opportunities out there for acquisitions that the mobile landscape is vast. And we’re looking talented teams that can bring IP, our capabilities to Zynga to help us continue to accelerate our growth next few years.

Eric Handler

That’s helpful. And at this point in looking at portfolio, are there any particular holes that you’d like to fill?

Ger Griffin

We don’t focus in on a specific genre or type of game. As Frank mentioned earlier, we are looking at talented teams that can bring games that can either obviously continue to build on our investment in hyper-casual at Rollic, or they build long-term engagement franchises within the portfolio, or give us additional capabilities as it was referred to earlier. If we find opportunities to enhance our advertising capabilities or data science capabilities, true technology extensions or vertical integrations, we’re interested in that as well.

Beyond the mobile platform, we have said, we see the opportunity in the future to expand our games on to, from a free-to-play perspective on to other platforms, be it mobile. So that’s another area where we do focus in terms of looking for talented teams that can enhance our capabilities there.

Eric Handler

Thank you.


Thank you. Our next question comes from Brian Fitzgerald with Wells Fargo. Your line is open.

Brian Fitzgerald

Thanks guys. We’ve heard about brand ad budgets returning in some of the other calls this quarter to date. And Gerard it sounds like that is showing up in your ad business well. What are you seeing with respect to pricing there? Is it getting more a competitive and that goes for both your customer acquisition channel, but also the pricing you’re seeing inside your ad business as well.

Ger Griffin

In terms of the – brand advertising in general is better yields. So from that perspective it’s better than – you get from the pure performance-based advertising. As it relates to performance-based advertising across the industry, there is a lot. But we are seeing improvement in the yields, or we did see improvement in the yields in Q3, which is more market than anything we were doing from an optimization point of view, which has been a trend in the past where we obviously feel we’ve got a pretty strong capabilities in that area.

As it relates to – what I would say, if you think – flip it over to the user acquisition side, we’ve got obviously a very large and diversified portfolio, some pressure in some channels, but we’re seeing opportunities and other, so I know it seems like a very Irish answer, but it is. We’re continually looking to optimize the user acquisition investment into channels that we feel will deliver the right level of long-term return. As you saw in Q3, we were very happy with the overall engagement within our portfolio, and that helped us obviously optimize our user acquisition spend and deliver a stronger quarter from a profitability point of view. As you see with Q4, we see the opportunity to invest both in our life services and Harry Potter. So you’re going to see the – a little bit of a pressure on our margins in Q4, but for the right ambition to drive stronger growth as we come out of Q4 into 2021.

Brian Fitzgerald

Got it. Thanks, Gerard.


Thank you. And we have time for one last question and that question comes from Matthew Cost with Morgan Stanley. Your line is now open.

Matthew Cost

Hey guys, thanks for taking the question. I have two. So on the expectations for 2021, obviously you guys reiterated kind of the double-digit top line gross number that you gave last quarter. I was wondering if you could dive a little bit deeper into the drivers of growth that you’re expecting in that number, kind of between the existing portfolio and then the new games with Peak and with Rollic.

And then secondly, just not on the Slots portfolio, I think you guys mentioned that it was the record quarter, it’s actually bigger than last quarter for the Social Slots portfolio. So I’m just wondering what has been driving that, and when do you expect to see normalization in sort of data that specific subsegment of the portfolio? Thanks.

Ger Griffin

Yes . I’ll take Slots first. I think Slots – the Slots portfolio is obviously still benefiting if you could use that word from the dynamic a shelter in place, just purely because the Slots players are very passionate about their games and they’re obviously highly engaged players. And once you have strong cohorts in these games, they stick with these games for a long time. They’re very much attached to brands in terms of their ethos. And what we’ve seen is whether it’s Hit It Rich! some of the existing games and our recently launched well a year ago, we launched a Game of Thrones Slots, it’s performing really well.

And so the portfolio is from – when Frank joined or I joined six months afterwards compared to where we are now, this is a highly performance portfolio of Slots games there, both top line and bottom line. And it’s very much driven off engagement bold beats adding new content into those games. And the addition of Game of Thrones Slots obviously was a big deal for that portfolio because it added a new title that’s leading that growth between it and Hit It Rich!, they’re probably the two games that have the strongest impact.

In terms of the – your question on 2021 expectations, obviously we expect as we did back in Q2 earnings to see double-digit growth. And the obvious thing to say is full year – a full year contribution from Rollic and from Peak is to be a major driver of that. But we do expect to grow our live services, including Harry Potter is part of that overall live service portfolio, and so that – we expect that to grow as well. The overall live services, if you think about it from a same-store sales of us use the old deal for us, or like-for-like, there will be some challenges as you get into the second half of the year, in terms of just your – what I would call the amplified impact of COVID on bookings year-over-year. But we still believe collectively that we’re still going to see growth, obviously given the size of the portfolio coming out of Q4 2020.

And the other thing I would say also is we still have games in development in terms of our pipeline. So the expectation is we will see additional games come out. And just to clarify, one thing as it relates to COVID, the biggest bang from COVID was obviously Q2. We’ve seen normalization through the rest of the year. So TBD what that will mean, but as we sit here today, if you look at the fundamental live services, the recently launched Harry Potter, the acquisition of Rollic, the full year contribution from Peak plus the pipeline of new games that we still haven’t developed, including the ones in cell phones, we feel comfortable that we can grow the business year-on-year.

Matthew Cost

Great. Thank you.


Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, you may now disconnect.

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