Zynga Inc.
Q1 2021 Earnings Call Transcript

Published: 5 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Zynga First Quarter 2021 Results Conference Call. . I would now like to hand the conference over to your speaker today, Rebecca Lau, Vice President, Investor Relations and Corporate Finance. Please go ahead.

[Rebecca Lau:]

Thank you, Josh, and welcome, everyone, to Zynga's First Quarter 2021 Earnings Call. On the call with me today are Frank Gibeau, our Chief Executive Officer; and Gerard Griffin, our Chief Financial Officer. Shortly, we will open up the call for live questions.

[Frank Gibeau:]

Thank you, Rebecca. Good afternoon, everyone, and thank you for joining our Q1 earnings call. We are off to an excellent start in 2021, delivering record Q1 results and generating strong momentum across all aspects of our growth strategy. Today, we are also announcing our acquisition of Chartboost, a leading advertising and monetization platform with a proven track record of innovation in the ad tech industry. We could not be more excited to bring this talented team to Zynga and will discuss the acquisition in more detail shortly. Execution across our multiyear growth strategy has driven our tremendous results to date, while providing strong momentum for additional growth ahead. In and beyond, we are focused on continuing to drive recurring growth from our live services foundation and launching new titles from our exciting new game pipeline. In addition, we are investing in incremental growth initiatives where we believe Zynga is uniquely positioned to capitalize on several megatrends in interactive entertainment. These new initiatives include hyper-casual games, cross-platform play, international expansion and advertising technologies, all of which have the ability to meaningfully increase Zynga's total addressable market and capabilities to further grow our business. In Q1, we made significant progress against each of our growth initiatives. First, strength across our live services drove record quarterly revenue of $680 million, up 68% year-over-year and bookings of $720 million, up 69% year-over-year. While the majority of Zynga Studios are continuing to operate in a work-home configuration, our teams are performing incredibly well and remain focused on delivering highly engaging experiences for our players. By delivering a steady cadence of bold beats, we are driving strong play engagement and monetization and are seeing these positive trends continue even as more countries begin to reopen.

[James Griffin:]

Thank you, Frank. We delivered record Q1 results ahead of our guidance and are off to a great start in 2021. Our strong performance reflects momentum across all aspects of our growth strategy. On the talent front, I would like to echo Frank and welcome the recently acquired Echtra Studio to Zynga. This talented team brings extensive cross-platform experience and we'll be developing a new yet-to-be announced cross-platform play action role-playing game. As Frank noted, today, we are also pleased to announce our acquisition of Chartboost. Later in this call, I will outline some further details on this transformational acquisition. Building on our strong execution to date and our road map for the balance of the year, we are raising our full year 2021 revenue and bookings guidance. But first, let's discuss Q1 results. Revenue was $680 million comprised of bookings of $720 million, offset by a net increase in deferred revenue of $39 million. Revenue was $45 million ahead of our guidance, driven by a $40 million bookings beat and a $6 million lower-than-expected net increase in deferred revenue. Live services drove our record top line results, with stronger-than-anticipated performance from Rollic's hyper-casual portfolio, Toon Blast, Harry Potter

[Operator:]

. Our first question comes from Mike Ng with Goldman Sachs.

[Michael Ng:]

I was just wondering if you could talk a little bit about the acquisition of Chartboost. And perhaps compare it to some of the other ad network peers that it competes with. And also, will you be changing your user acquisition strategy to direct more dollars towards Chartboost? Is that where you're getting a lot of the synergies? I just would love a little bit more detail there.

[Frank Gibeau:]

Mike, this is Frank. The first question about Chart boost is a really good one about our competitive positioning as we start to embrace and enter into the ad tech business in a much more aggressive way. Chartboost is a full stack end-to-end complete platform. It has demand-side capabilities, mediation as well as supply side. So on a capability standpoint, it checks all the boxes from that perspective. In terms of the scale, 700 million monthly users, 90 billion auctions managed. That puts it in the middle of the pack. It's got some growth. There's some networks that are larger. But when you start to think about bringing Zynga into combination with Chartboost the second part of your question is exactly right. As we move more of our advertising business into Chartboost platform, that will change the overall metrics and relative positioning competitively. In addition, one of the things that is really exciting for us is not only just moving the dollars into their networks and starting to save on the fees that we pay other networks to actually run those businesses. That's where a lot of the synergies will come from. But a lot of the strategic benefit is going to come from the fact that our first-party data, when combined with their capabilities, will create a much more effective and leveraged platform. We'll be able to hopefully increase yields, drive better monetization and then fill rates, and frankly, make the technology much more predict about what will happen because we can see the full set of data with now with what happens when people enter into the Zynga services. So it's a very exciting acquisition. We expect to take rest of '21, working with who's the CEO of Chartboost and integrating their platform, the SDK, the DSPs, all the different components into our business, starting to flow more business their way. And then also look to ways to continue to grow the third-party business that Chartboost has. I think that we can increase the value of what they provide to partners and advertisers because of all the additional data and resources that we're providing to their team. So it is a transformation of the company in many ways in terms of moving from a traditional developer and publisher of games only to a developer and publisher of mobile games, but now with a platform and an ad platform that puts us into a market that is growing very rapidly and is an extremely important part of the monetization and engagement that we run inside of Zynga's game. So very exciting time for us.

[Operator:]

Our next question comes from Matthew Thornton with Truist Securities.

[Matthew Thornton:]

Maybe two quick ones, if I could. I guess just first, obviously, with things starting to open up, vaccines rolling out. Just curious kind of what you're seeing in the data and the trends kind of through April into May, if there's anything you can kind of compare and contrast markets that are maybe more open versus some that are still going to shelter. Just kind of any learnings you might have on that front. And then just secondly, maybe, Frank, just around Rollic, I'm curious now with 2 full quarters under the belt, I'm curious kind of what you're seeing around again, upsell in the funnel to higher LTV kind of core Zynga games? And maybe if you can speak to just whether what you're seeing is contributing to the strong 1Q and kind of raised outlook for the year. Just curious if that's already contributing or not. Any color there would be great as well.

[Frank Gibeau:]

Sure. I think what's interesting about what's going on in this transition period between pandemic and post-pandemic for a lot of different countries and states is we're continuing to see engagement rise for our games. When we look at our core products, each quarter, in the last several quarters, we've seen a rise in core player engagement, which is what drives our business. And that's for markets that are opening up, where people are going back to school, going back to work, returning to their normal life, it appears they're taking mobile games with them. That experience that they had with them during shelter in place really opened up a lot of new markets, a lot of new players and a lot of players that have been with us for a while. They just the value of the social connections, the entertainment, the flexibility of free-to-play mobile being able to, frankly, take it with you, play anytime you want, in economically times. It's a very very efficient way to play games because you spend when you want to spend or you engage with advertising. So I think the resiliency of what we build and offer as services is in a position where as things are kind of going back to normal large, where we're not seeing like step function drops in engagement. We're actually seeing increases in engagement. Now that might not be true forever, but certainly, up through Q1, that has been the case. Now your second part of your question about Rollic. What's really great about Rollic is they have an approach to the business that is very fast, very nimble. They look at what's happening in pop culture. They've innovated some really new interesting techniques about how to partner with TikTok and bring to life their games there and build audiences both organically and also through paid acquisition. And so we're starting to see contributions from Rollic to our other games. It's a little too early to kind of set kind of rules of thumb here yet. But we are building good cohorts in Harry Potter from the Rollic hyper-casual games. We've seen a lot of new players coming into our network that have never played a Zynga game before. And what's interesting is we're seeing that people play both hypercasual and the more traditional mainline mobile They'll play both and they're playing more games. And that's an exciting part of what we're seeing inside of our audience, in terms of MAUs is up a 139% year-over-year, there's a lot of Rollic contribution there. Advertising was up 108% year-over-year. There's a lot of contribution there as well. So I think just two quarters in, we're seeing very positive contributions from the team, and they are continuing to really embrace, building out their development community to the point where we're starting to acquire some of these developers and bring them in from a third-party relationship into internal studios, and that should continue to maintain growth for us. So On both fronts, I feel like Q1 was a good quarter for the company on an engagement level for sure.

[Operator:]

Our next question comes from David Karnovsky with JPMorgan.

[David Karnovsky:]

Frank, I was hoping you could maybe just discuss how Apple's changes to its privacy framework informed your decision to acquire Chartboost And then maybe can you discuss how many you'll gain from ownership of an ad network might play towards your M&A or your game strategy?

[Frank Gibeau:]

Yes. It was a factor in the process of going out and thinking about how we build our platform. It wasn't a determinant variable, but it was certainly a factor. I think one of the things that we thought about was the value of having first-party data extend higher in the funnel through a lot of the things that ad tech companies do. We have this great first-party data around what our and services do. Again, some of these games have been around for 12, 15 years. So we have really great, rich behavior what people like, what they don't like. But it was a little opaque to us as we were doing third-party handoffs into our first party. And post IDFA, a lot of that data handoff goes away. But when you start to step into an opportunity like Zynga plus Chartboost, that data continues to flow all the way through because it's a first-party solution from demand all the way through in game. And so from my perspective, it was a very clear opportunity for us to vertically integrate into ad tech. It would allow us to have a lot more information, so that we can make better product decisions, better service decision, better investment decisions. It will also tell us at the top of the funnel, what's hot and what's not out there in terms of trends in the marketplace long before it would start to appear in the charts. And so from our perspective, we look at the point of view of how do we maximize this combination of these 2 teams and what possibilities does it open it up for additional game development, better investment decision-making. And I think IDFA is a component of that. And as we've moved through the last 1.5 years or so, the unfolding of GDPR and the California rules for privacy, we've embraced those -- our players care about privacy. And from our standpoint, that's the value of our company that we also as it changes the rules and how you operate, we're making those adjustments, so that we can do both. And that's really -- it was a key part of the acquisition, but it wasn't the reason we did it. We had aspirations to increase the leverage and growth of our core advertising business, which was before this deal, largely an optimization ad stack for engagement combined with inventory in our games. And so now by vertically integrating into this, we get a full view on it. And I think just as importantly, we got a great engineering team from Chartboost of ad tech engineers and ad tech leaders, that will add a lot of new DNA to Zynga and give us a lot of new points of view about how to grow in the mobile ecosystem over time, and that's exciting for us as well.

[Operator:]

Our next question comes from Eric Handler with MKM Partners.

[Eric Handler:]

Frank, you talked -- I believe I heard you say you're looking at other games that have cross-platform capabilities. And as you think about your business over the next couple of years, how many of your games that you launch or maybe or currently have -- will add cross-platform play or include cross-platform play at launch. And as second part to that, how much incremental development costs go into that if you add cross platform play?

[Frank Gibeau:]

Yes. I think the way to think about it is probably a handful. As we said, we're going to start by anchoring this on the Star Wars brand. And we've looked at our NaturalMotion studio, in combination with Echtra as kind of the collection of developers that want to go after this. They're very experienced in the category and in the design. What works really in our favor from a cost and effectiveness standpoint is there's a lot of tools now that allow us to develop these where the marginal cost to complete other platforms is quite low because Unreal and Unity do a lot of the heavy lifting for you. And when that's combined with something like AWS or Azure and the emerging 5G networks, you can get the very high performance gains that will be able to be completed and playable across simultaneously in a very efficient way. Now we have started to investment spend in R&D against this idea. And I think that we're not going to go for a huge platform shift of every game from Zynga is cross play. It's really focused on the games that make the most sense, the brands make the most sense, and that's where we're starting. And as this unfolds over '21, '22, '23, '24. If this is really working, then it's possible to do more. But we feel very good about increasing our total addressable market by going after this. And I think that in addition to the tools and technologies which make this a reality for a company like ourselves, we have a real advantage in free-to-play and running live services, which if you look at the largest -- the multibillion-dollar franchises out there that are cross-play, they're free to play. They run live services. They're really good at live ops. And I think that, that part of the equation for us is really important, and we're very excited to kind of go in there with production values that are quality and then start to bring together these audiences across all of these different platforms. I think there's a lot of really beneficial things that we can do there.

[Operator:]

Our next question comes from Doug Creutz with Cowen.

[Douglas Creutz:]

With the ad revenue being so strong in Q1, I mean, noticing it was up sequentially from Q4, which is pretty rare. Can you give a sense of how much of that was driven by Rollic's success with some of their launches in Q1 versus just overall market conditions and anything else you may have been doing to help your ad pricing?

[James Griffin:]

Doug, this is Ger. Yes, the -- We obviously saw -- it was obviously a full quarter contribution from Rollic, but we also saw a significant uplift in their performance given the titles they launched in the quarter. So versus the market, I think, Rollic, was really strong. So when you think about Q1 advertising. And actually, as we look at the rest of the year, we believe that the momentum we have in our hypercasual business is going to be a very strong driver of our advertising growth.

[Operator:]

Our next question comes from Drew Crum with Stifel.

[Andrew Crum:]

Frank, you gave us a lot of detail on the various new growth initiatives you've embarked upon. As you think about hypercasual cross-platform, ad tech and international, can you rank order the importance of the '21? And how you see that evolving over the next couple of years? And then separately for Ger. You mentioned that the cash and the balance sheet earmarked for acquisitions, including outstanding and contingent consideration. Can you remind us what that number is and the timing of those payments?

[Frank Gibeau:]

Yes, Drew, the way to think about how the growth initiatives unfold is most of the growth this year is going to be delivered from live our new game pipeline. And in addition, hypercasual is obviously contributing and will continue to contribute as we move through the rest of the year. Cross-platform really starts to happen towards the end of this year and starts to ramp over '22 and '23. That's where you'll start to see more of the games released, more of the platforms to take hold in terms of more distribution there. International is kind of happening now. So that's a contributing factor right now. We're running about 60%, 40% international on the business right now, and we're seeing good growth in hypercasual already. With regards to the final piece on AdTech, we're going to take the next 6 months or so of the year to kind of start to integrate our businesses together with Chartboost. And I think the synergies case starts to really take on an interesting level in '22 and beyond. But in '21, we're going to start to test how we will operate together, to what degree can our resources leverage each other and start to look at the data plans and that sort of thing. So when that deal closes, we'll be in a much better chance to integrate. But think about the ad tech platform really starting to take hold more in '22 and beyond.

[James Griffin:]

This is Ger. In terms of the contingent consideration, that liability is obviously for 3 parts. It's Gram, Small Giant and Rollic. And it's just over $330 million as of the end of the quarter.

[Operator:]

Our next question comes from Matthew Cost with Morgan Stanley.

[Matthew Cost:]

So I guess on Chartboost, over the long term kind of when you get through this initial phase that you just mentioned about integrating the 2 businesses and shifting some of what you do externally or with what are currently third parties into Chartboost? Over the longer term, how do you see the opportunity to basically serve yourselves as a publisher versus serving third parties and maybe growing an ad tech software revenue line within Zynga, serving publisher developers and then publishers that you don't own? And then just separate from that, obviously, international has been a huge success story for you guys. You just mentioned 40% of revenue coming from that angle. It seems like China is something that is gaining steam now. I think we've talked a lot in the past about Korea and Japan and other markets in Asia that have done well. But has your view on the China opportunity, all following some of the success you're seeing with hypercasual games there?

[Frank Gibeau:]

Yes. I think on the first question, we are looking at how we integrate the first-party and the third-party opportunities in a way that -- because Chartboost has a very vibrant and great third-party business right now. And in fact, by bringing in our first-party data as well as other capabilities, it should improve their standing and competitiveness as a network for other parts inside the mobile ecosystem. So long term, our view is that Chartboost plus Zynga creates a great platform for advertising and monetization that serves not only Zynga's needs, but also the broader mobile ecosystem. And companies that are in gaming or outside of gaming brand advertisers, especially, will come to this network because we have a very unique set of audiences with predominantly women, busy adults, a very diverse product portfolio of games combined with these capabilities that will improve over time as we bring the data together. That, from our perspective, is really important. How it's actually recorded, that we'll figure it out for another day. But in terms of our goals, it is definitely about driving the advertising business and a component of that will be advertising from assisting third parties and growing their businesses. And I think as you look at the capabilities of what the platform has at Chartboost and what we can do with it going forward, that will only increase in value and importance. In terms of international success, China has always been an important market for us. It's just been one of those markets that we take a very patient approach to. We're not necessarily rushing into China. We're releasing games. Our hyper-casual games are doing very well there. And as we develop the market opportunity in Asia, the prioritization of Japan and Korea, a little bit higher than China, that could shift over time. It's just really making sure that we're not overinvesting too quickly and getting over our here. But it is exciting to see the audiences really start to build up, which is the first thing that we want to make sure is that our property really really appeals to that audience and that we have the right type of live services model, so that we can continue to sustain those. So there's going to be more about China as we grow our company. It's an important market for us long term. And I think as you start to see more of the PDP experiences that we're building that are cross platform, the PC market is very important in the Asian region. And so having PC plus mobile experiences that work together is going to be another advantage for us. as we start to build out that marketplace.

[Operator:]

Our next question comes from David Beckel with Berenberg Capital Markets.

[David Beckel:]

Just touching back on Chartboost. I was hoping we could dig in a little bit to the expected revenue synergy. I believe it was in 2022 of $20 million to $30 million. Can you describe for us the mechanics of that? Is that primarily serving ads through Chartboost instead of a third-party system and thereby eliminating the 15% to 30% sort of fee that you've talked about in the past? And what percentage of your inventory filled through that channel, does that assume? And just as a second question, it's about ROIC. You talk a lot about the third-party partners. Can you explain a little bit how the third-party relationship works from a revenue monetization perspective and what third-party acquisition means from a financial perspective in terms of outlay? Are these expensive acquisitions?

[James Griffin:]

This is Ger. In terms of the benefits we outlined as it relates to post-integration and more importantly, what you're referring to '22, the largest element of that is actually related to where the user acquisition side of the equation, the demand side, where we will look to flow a larger percentage of our user acquisition spend through our own first-party platform, and obviously, eliminate the fees we paid to our other partners. We don't intend to eliminate our other partners. They will continue to be trusted partners as we look to acquire users, but we do anticipate putting, obviously, more of our own spend through the -- our own DSP and generate profitability there. There is an element of ad monetization in the mix as well because obviously, we'll get the benefit from the third-party monetization. But initially, we're focused more on the user acquisition side and ultimately we'll look for synergies through both sides. We haven't indicated what the exact percentage is, but you can assume it's going to be in the sort of initially in the sort of the low double-digit range. And sorry, could you -- in terms of the acquisitions, can you repeat that part of the question, you're referring to Rollic?

[David Beckel:]

Yes. Sorry, just referring to Rollic. You mentioned a couple of studios that were recently acquired. What is the relationship with these third-party partners? Are you currently monetizing them? Or do you have to acquire them to gain the benefit of those relationships?

[James Griffin:]

No. The studios and the games that have actually gone from third party to the first part, they were already partnerships we already had. So in terms of economics, the normal economics in a third-party relationship is there's a profit share, i.e., we, as in Rollic, our platform, we published the game, we drive the monetization through advertising. We execute the marketing against these games. So the net of bookings and marketing ultimately then get shared with the actual developer of the actual game. Those percentages can vary. But in a situation where we bring the studio in-house or the game in-house, sort of quick as you buy the game or you acquired the studio and you eliminate that profit share. And so there's a stronger flow-through for Rollic and for Zynga, obviously, developing and publishing its own games. That's the core economics. The other obvious benefit is you're enhancing the talent base of our own hypercasual studios as we think about new games going forward.

[Operator:]

Our next question comes from Mario Lu Barclays.

[Mario Lu:]

I have a couple of questions. The first one, I wanted to expand on a question earlier. You guys mentioned most of the outperformance this quarter was from recent acquisitions and Harry Potter. I was wondering if you could share what the organic growth was for core Zynga titles? Or just generally how those are trending?

[James Griffin:]

I think overall, our business grew. It was up modestly in terms of if you were to take out the Harry Potter, which we obviously believe is an organic title in our live service portfolio. But collectively, the portfolio grew, but the major drivers in the quarter were the year-over-year acquisitions. But Empires & Puzzles, Words With Friends, CSR2, Casual Cards, they all had record Q1 revenue and bookings. So it was a -- there is strength across the portfolio, but it's -- I know I'm the obvious. It's an Irish thing, the full quarter contributions from Peak and Rollic, plus the very strong performance from Harry Potter helped improve the overall performance of live services.

[Mario Lu:]

Got it. That makes sense. And then just lastly, on the synergies from your recent acquisition. You mentioned Rollic. You're already able to kind of cross-promote those titles with your other ones. In terms of Peak game, what's now iOS 14.5 and IDSA out live, is there an updated time line on when and if we should expect advertising to be layered into both Toy and Toon Blast?

[James Griffin:]

We're not going to disclose timing on that. It's something that the studio teams and the advertising teams are obviously working at. In the end of the day, the aim there is we do see an opportunity to deliver advertising from these games, but we're obviously working very patiently with the studio and the advertising teams to make sure we do it in a very strong player first way?

[Operator:]

Our next question comes from Mike Hickey with The Benchmark Company.

[Michael Hickey:]

Congrats on the quarter guys. Appreciate it. I guess double-clicking on cross-platform game opportunities. You've had sort of a few more months on development sort of curious. If you're more or less encouraged that you can be successful or not in this effort? And maybe, I guess, the second part would be the challenges of lifting a new mobile game to cross play versus an existing mobile game with a player base that's already and monetized. And I guess the comp would be, you see a lot of successful mobile games of proven game IP. That sort of seems to be an established relationship. It just seems like an extra headwind with a new game versus the existing game trend go on the console PC.

[Frank Gibeau:]

Mike, thanks. Good question The early testing on Hunters is very strong, very positive in our testing with consumers in play testing and concept testing. So we're very encouraged by the reception. The game was built with very high-quality assets from the So in terms of resolution of the models and the textures and everything, the fact that it's using Unreal allows it to kind of move across these platforms at a very high level performance in terms of how it looks and feels, the frame rate, et cetera, et cetera. What I think is really interesting for us is because we're building it with on mobile simultaneously, a lot of the decisions around how live services is going to work and the free-to-play model is already built in, and we're not trying to basically downsize code to work from a high-end console to work on mobile. We're actually going the other direction, where we're taking great production values, them up, increasing the performance on other devices. So we actually think by building to that -- building in that manner, we're going to see some real benefits for how the games perform, how they get adopted and the fact that there's a lag between when something happens in one platform or another, we're going to get rid of that. So it's really exciting to see the early reaction. I'm encouraged by the momentum that the teams have. And where we spent a lot of time on this project and a lot of us have experience on consoles and PCs. I think that's why you see us reaching out and partnering with a company like Echtra and having them doing Zynga's. They just released games on multiplatform. They've done it in engine. They've done -- they've run the service. So they've kind of done it before, and that really helps raise the level of the entire effort inside of Zynga because of their experience is so real and has happened just recently. So from my perspective, that's the real positive. And I think for us, we're going to see how this goes. And we think that we have a lot of brands that will appeal across these platforms and that does open new opportunities for us in Asia by having PC versions of these games.

[Operator:]

And our last question comes from Brandon Ross with LightShed Partners. Just

[Brandon Ross:]

Just one. As you guys are entering the ad tech world, is Chartboost the beginning of a multipart built by? Or should we just expect acquisitions from here on out to be back to the tried and studio acquisitions that you've done in the past?

[Frank Gibeau:]

Yes. I think where we're at right now is we're very excited about Chartboost and integrating that team, letting the market unfold a bit here over the summer and see how things go with IDFA and the other aspects of returning from COVID in terms of the shelter in place. So we're not -- our business has a tremendous amount of organic growth opportunities and we've got excellent capabilities now at Chartboost to help optimize and grow the business. So we're not in any hurry or need to grow through additional M&A. Having said that, we're an acquisitive company. We are constantly looking at build versus buy options. And I think giving us a little bit of time to integrate Chartboost, work with their leadership team to understand what's possible in terms of what's next is certainly something that we don't rule out. But at this point, we have nothing that we're thinking about. As it relates to the overall M&A environment, It's a global talent base. There's great games out there and great teams. Obviously, there's a lot of attention on acquisitions and ad tech and gains right now. And that increased competition is certainly clear and present. But at the same time, we like our positioning. We like our track record. We like our appeal as a destination for developers and the proposition that companies can join us and grow faster together is proven through multiple examples now over these last few years. So dynamic time, exciting time. We're in a great position to make sure that we can grow the way we want to grow, without getting forced into an acquisition because we think we have to do that. I don't believe that we're in that position.

[Operator:]

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