Zynga Inc.
Q1 2019 Earnings Call Transcript

Published: 1 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Zynga First Quarter 2019 Results Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Rebecca Lau, Vice President Investor Relations and Corporate Finance. Ma'am you may begin.

[Rebecca Lau:]

Thank you, and welcome to Zynga's First Quarter 2019 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:]

Thanks Rebecca. Good afternoon and thank you for joining our Q1 earnings call. We begin 2019 with tremendous momentum. Our live services portfolio anchored by our five forever franchises produced outstanding Q1 results. Today we are raising our full-year 2019 guidance which Gerard will discuss in more detail shortly. In Q1 we generated revenue of $265 million, up 27% year-over-year and bookings of $359 million, up 64% year-over-year. We delivered our highest mobile revenue and bookings quarter ever with mobile revenue up 35% year-over-year and mobile bookings up 77% year-over-year. Mobile now accounts for 93% of total revenue and 95% of total bookings. Our Q1 performance is driven by our live services portfolio in particular by strong revenue and record bookings from Empires & Puzzles, Merge Dragons! and CSR2. Words With Friends also delivered its best Q1 revenue and bookings performance in franchise history. While Zynga Poker and our Social Slots portfolio contributed meaningfully. It's an incredibly exciting time for Zynga. Our multiyear growth strategy is working as we grow our live services, create and acquire new forever franchises and invest in emerging markets, technologies and platforms. First, we have a highly diversified live services portfolio anchored by our five forever franchises

[Gerard Griffin:]

Thank you, Frank. With the phenomenal start to 2019 with Q1 finishing well ahead of our expectations on strong live services momentum and better than expected operating leverage. Given this live services momentum, we are raising our full-year outlook for revenue and bookings. But first let's discuss Q1. Revenue was $265 million comprised of bookings of $359 million offset by a net increase in deferred revenue of $94 million. Revenue was $25 million ahead of our guidance on a bookings speed of $34 million partially offset by a higher increase in deferred revenue of $9 million. Our better-than-expected top line performance was driven by outstanding performances from Merge Dragons! and the recently acquired Empires & Puzzles as well as strong contributions from CSR2, Words With Friends and Hit It Rich! Slots. Revenue was up $57 million or 27% year-over-year driven by strong bookings growth of $140 million or 64% year-over-year partially offset by a significant growth in deferred revenue, which was up $83 million or 737% year-over-year.

[Frank Gibeau:]

Thanks Gerard. Before we open the call for live Q&A, I want to take a moment to highlight how Zynga is uniquely positioned within the videogame industry. First mobile is the most ubiquitous gaming platform in the world. It has the ability to reach anyone anytime and anywhere. As a result, it is no surprise that mobile is the largest and fastest-growing game platform expected to reach 2.8 billion active mobile gamers and generate $95 billion of revenue by 2022. A key point to understand about mobile is that the platform evolves continuously. There are new devices, technologies and markets appearing regularly. This rapidly evolving environment creates tremendous opportunities for nimble mobile-first companies like Zynga. We are well positioned to capitalize on these growth opportunities given our live services foundation is predictable, recurring and growing. The sustainable profitability generated by our live services gives us the flexibility to invest in new game development and emerging opportunities. Another way to think about this is any success we generate from new games, emerging platforms or additional M&A layers on top of our existing live services foundation. In summary Zynga is a leading mobile-first free-to-play live services company on the largest fastest growing gaming platform. In 2019 we will be one of the fastest-growing public game companies with live services driving the vast majority of our growth. Over the long term we are well positioned to capitalize on the rapidly evolving gaming landscape at a time when demand for interactive entertainment is reaching new highs. With that we'll open up the call for your questions.

[Operator:]

Our first question comes from Tim O'Shea with Jefferies. Your line is open.

[Tim O'Shea:]

So thank you for taking my question. Given you're raising the bookings guidance by $100 million. I'm curious how that impacts your thinking around full-year EBITDA margin for 2019? And I know you guys aren't providing explicit EBITDA outlook, but generally speaking if a game like Empires & Puzzles is outperforming, would you allow that outperformance to flow down to the EBITDA line? Or might you find a way to invest that outperformance and I know Ger mentioned some increasing investment in certain areas like R&D. Thank you.

[Frank Gibeau:]

Yeah, the way we're thinking Tim - the way we're thinking about it right now is obviously we completed a very strong Q1 and we're looking at a very nice Q2 driven by our live business. As we get into the second half of the year, you will see us obviously spend money against our new game launches. And right now I'm holding to the basic thesis that there will be some dilution based on royalties against intellectual properties and investing against that growth. But obviously given the strong performance in our live business there is a potential that - that could be offset. But right now we're too early in the year to be calling ultimately how the profitability will flow for the rest of the year, but there is the potential.

[Operator:]

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

[Mike Ng:]

Ger, I was just hoping if you could unpack the $1.45 billion of bookings guidance for the year. How much of that is live versus new, versus the contribution from SEG now? I believe the previous expectation was two 50? And anything else? Thank you very much.

[Gerard Griffin:]

In terms of the guide predominantly most of the $1.45 billion is being driven by our live services and the beat that you're seeing is a reflection of the momentum we're seeing in the live business. Obviously both Merge Dragons! and Empires & Puzzles are driving a significant amount of that given that the build-up in contingent consideration and just the momentum we're seeing in those games. We're also seeing obviously strong contributions from Words With Friends, CSR. In terms of new - the way I would characterize this new outlook versus the outlook we had last time around is there's less attach to new. That's not to say that there won't be a contribution for new games, but as we're thinking about the momentum we're seeing in live and how this year could unfold. We felt it was relevant to upgrade based on our live performance, but we didn't really delve too deep into new right now. It truly will depend on as the games come out how they kick in from a monetization point of view. So what I would say is the majority what you're looking at is similar to the 13 50 is of live.

[Mike Ng:]

And just as a follow-up, are you able to just let us know or minus what new games you're expecting for the back half of the year? I think Puzzle Combat was one that was not expected by me.

[Frank Gibeau:]

Yes, we're not going to go into detail. We have a variety of games in development as we've said before, you know, we've got two games, we've got a CityVille and a Farmville game, we've got a number of games in development. Under our licensed type P Harry Potter. We mentioned Game of Thrones that's in soft launch. The Puzzle Combat game was one that was in concept when we acquired Small Giant and that they've obviously brought that one out on a technical soft launch, whether it turns up this year or next year TBD as we said in our letter. So for now I would say we expect to launch a number of games in the second quarter, but we're not going to specifically say which ones. As Frank has said in the past when they're ready we'll let them out.

[Operator:]

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

[Eric Sheridan:]

Maybe two if I can. Of the acquired IP that you sort of put in the market and now supportive of, but let's get a little bit of additional color on what's driving the strength there? Is it marketing dollars? Is it the approach to the marketplace? Is it things you're learning from the live services platform as you transform the business over the last couple of years? Any additional color there would be really helpful on what you brought to the table in terms of pushing that IP along. And as we look to the back part of the year, could we expect a different approach on licensed IP in terms of go to market given the fact that a lot of that IP is fairly well known by consumers that could have a different approach even between acquisition or how you think about marketing channels in terms of position again in the marketplace? Thanks guys?

[Frank Gibeau:]

Thanks Eric. So starting with your first question, if you look at how Merge Dragons! has evolved since the middle of last year, it really has been a steady cadence of new bold beat features coupled with marketing support and expansion of support from the platform partners. So the game is really added a lot of new features with regards to puzzles and how you unlock more characters, how you socialize in the game and at the same time we've expanded the footprint of Merge Dragons! into new markets. Our partners at Google and Apple have really helped get behind the title. So it really has been bringing Gram's franchise into the Zynga publishing platform using the data science, the advertising, the product management, the go-to market teams, it's really amplified and multiply the overall impact, but it really does start with a really high-quality game team building creating bold beats on the player engagement and high-quality products. It's very much the same story for Empires & Puzzles. That is a an extremely high-quality team in Helsinki that really has blended a very accessible gameplay mechanic in Match-3 with really proven PDP and RPG systems that has proven to be very retentive, very engaging and from a standpoint of player engagement we're seeing incredible results. We've also expanded our support for the title. It is actively being marketed against in multiple territories worldwide. We're seeing very good returns on those investments and our partners at Google especially have gotten behind the title. It is now broken into the Top 5. It was the #1 game on the Android just not too long ago. So we're seeing it compound in terms of its strength and its momentum, but it's really the combination of exceptionally strong game teams with great cultures building high-quality products plugging into the Zynga publishing platform. In terms of the second question that you raised with regards to the strategic licenses of Harry Potter, Star Wars and Game of Thrones, one of the reasons that we sought to partner with those companies and those brands was because they will give us advantages in terms of how we go to market and acquiring audience. Obviously Game of Thrones is at a very high-pitched right now in terms of its fandom and the ability to launch a product into that halo is a fantastic opportunity for us and will create marketing platforms, new channels and new ways to market the games that you don't traditionally find with some other go-to market strategies on the games that are wholly owned IP. So as we look at Star Wars, Game of Thrones and Harry Potter, our goal is to maximize the fandom and the audiences for those and also launch very efficient global campaigns that build new forever franchises.

[Operator:]

Our next question comes from Mike Olson with Piper Jaffray. Your line is open.

[Mike Olson:]

I just have one question. You mentioned 5G and I was just curious does that change anything in any material way for kind of how you'll have to look at game development and even potentially which genres you want to focus on going forward. I guess in other words, does 5G kind of better optimize certain types of titles or raise the bar for what kind of development can be done in mobile that have been - may be result in some changes like various players to the space that really position themselves for that?

[Frank Gibeau:]

I'll take the question. The capabilities and potential of 5G we think can be profound for growth inside the mobile because we believe that it will enable higher performance games. Games that will have much larger worlds will be possible, more massively multiplayer experience is always connected, always on, will be something that will be really exciting. It will also enable new distribution opportunities. For example you'll be able to seamlessly go from an advertisement straight into a game when it's coupled with streaming. So I see 5G and streaming being a combination of two technologies that work hand in hand that we believe will really drive greater efficiency in the player acquisition funnel, will enable higher performance games and it will also be very customer friendly in terms of how they manage the memory on their devices, they won't have to store large client games on their devices, they'll be able to stream in the content much more efficiently and effectively in this environment that's coming. There's still a lot of ground to cover before 5G and streaming get here and impact the entire mobile ecosystem, but it's one of the things that we try to highlight in our remarks in our letters is that there's numerous platform innovations coming to mobile over the next few years that will act as tailwinds for growth in companies like ourselves.

[Operator:]

Our next question comes from Justin Post with Merrill Lynch. Your line is open.

[Justin Post:]

I just like to ask about Empires & Puzzles, obviously doing quite well in the charts. Can you tell us anything about how that revenue compares to Merge Dragons!, which appreciate the disclosure there and how that revenue is trending and what do you see the opportunity relative to so your other large games? Thanks.

[Gerard Griffin:]

Just in terms of - in absolute terms obviously Empires & Puzzles is a bigger game. But both games have our - are showing even pre-acquisition post-acquisition, Empires & Puzzles is on a very nice growth trajectory as is Merge Dragons!. So from a growth perspective we see both of them as titles that we are investing significantly again. As I mentioned on our last call, the overall shape of our P&L has changed given the profile of our forever franchises. We have growth in CSR and Words With Friends, but the growth we're seeing in Empires & Puzzles and Merge Dragons! is being driven. As Frank said by the quality of the game and the sort of long-term engagement and monetization but it's also being fueled by significantly higher marketing than the company average. I will say that both those games are generating margins that are significantly above the near term margin goals of the company. So it's all good. The shape of P&L is that way mainly because it's a smaller development investment against those games. So net the trajectory and growth in both games is comparable, but from a size perspective Empires & Puzzles is obviously larger.

[Justin Post:]

Maybe one follow-up, if it is larger maybe you can help us understand why it's not in the online bookings disclosure when you disclosed your Top 10 games I didn't see it in there. I'm just wondering about that?

[Gerard Griffin:]

It's not greater than 10% of revenue as we mentioned. One of the vacancies are one of the technicalities of accounting is, when you bring in a game into your portfolio as a new games that already has meaningful bookings the majority of those bookings gets deferred. So when you look at this game from a revenue perspective it's one of our smaller games but from a bookings perspective it's obviously one of our larger games. Over time that will take care of itself. But similar to like Gram sorry Merge Dragons! even though Merge Dragons! has not been out well over a year it continues to grow and we continue to defer a portion of its bookings. With Empires & Puzzles for the next two quarters on average you amortize over nine months. So as you can imagine there's a book that needs to get filled before you truly see the bookings and the revenue come more in line. That's still a few quarters out.

[Operator:]

Our next question comes from Brian Nowak with Morgan Stanley.

[Brian Nowak:]

I only have one, so the question is Frank so you guys have done a heck of a job at turning around the platform, integrating the couple acquisitions and really driving outsize growth. As you sort of sit there now and sort of look at the portfolio could you just give us one or two areas where you still say these areas where we could improve this franchise, improve this target and this user base. So really improve this mechanism in a game or a genre to really drive even longer sustained growth across the current portfolio? Thanks.

[Frank Gibeau:]

Thanks Brian. You're talking kind of about it's kind of a day job at the company. We were running live services and they span lots of different categories from brain puzzle to PDP Match-3 to driving games. And we learned something in each category that the game teams pick up on. So we have a very flat organization. The game teams see a lot of each other's data cohort analysis and we share that learning across all of the games. So it's kind of a continuous improvement process where if we learn something and Words With Friends or learn something in Empires & Puzzles. We quickly ripple that learning through the rest of the organization and the game teams can learn from it. And that includes not only the live games but the games that are coming out and in development now. They will pick up on innovations or they will see key features that are generating big list and engagement for example or have stronger conversion rates. And we'll start to learn from those systems and apply that learning to the development process. I think the big areas that we're really excited about gaining more traction in is what we've done with Android over the last year. So, as one of the key objectives for us was to expand our international footprint away from being heavily weighted to North America and Western Europe. And we've started to do that. And Android is key to doing that in lot of the emerging markets and that's why we're pleased with the big lift that we've seen, but we think with their still more growth there. In addition Asia is a very large portion of the mobile market as you know. We're starting to look at how we go to market there with partners and other ways with the existing lineup, but also the games under development. So we'll continue to internalize and operationalize the learning from one franchise to the others. We'll look to continue to expand on Android and we're excited to start to begin the journey in Asia for Zynga as we look forward over the next couple of years.

[Operator:]

Our next question comes from Doug Creutz with Cowen. Your line is open

[Doug Creutz:]

Last-month Apple I guess two months ago now Apple announced Apple Arcade I'm just curious what your guys take was on it. Is it a threat, is it an opportunity, is it neither I'm just curious to hear your thoughts on that?

[Frank Gibeau:]

Look I think Apple is our largest platform partner. We have a really good relationship with them. We are a free-to-play oriented company and so if you look at how Apple Arcade is designed it's really a premium game subscription service. So with the part that we're participating in this, we don't build premium games. However, if they do involve it to include premium it would be something that we would absolutely talk to them about. I think one of the things that is topical right now is a lot of the streaming services that have subscriptions tied to them. I think one thing to clarify is that Zynga is very bullish on streaming, but linking it to a subscription isn't necessarily the only - what you have to do. So from my perspective subscriptions will be a very viable business model in a lot of the games that we make over the long-term. In a near term we see opportunities in several of our per franchises for that, but I think streaming is going to be a really key component to us in terms of how we look at distribution and how it unfolds in mobile on a global basis.

[Operator:]

Our next question comes from Drew Crum with Stifel. Your line is open.

[Drew Crum:]

Frank can you remind us what your exposure is the loot boxes and given what seems to be increased scrutiny on those? Is that in any way change how you design of the in-game spending mechanics for titles going forward? Thanks.

[Frank Gibeau:]

Sure, the majority of our revenue comes from things other than loot boxes. So I'll start there. We do see it as a very viable part of freemium design. Again our games are free-to-play. You don't start with the premium purchase and then get to loot boxes so the way that we designed the loot boxes is very much part of that player journey. There is a lot of fun in the light that people get from them. It's like buying baseball cards back in the day who did you get in the pack? We're try and be as proconsumers as possible in disclosing the odds on the individual loot boxes. So if you go into our games and you click on the little icon you actually go in and see the percentages for what different items are in the loot boxes. So players can make the best decisions possible if they want to engage in the loot boxes. We definitely are not a pay-to-win type of company. We like to have very level playing field for how people compete. So we really try and use loot boxes as - a really special award for behavior inside the game that fans really love to engage in, but it's not a gate to being able to play the game at a high-level.

[Operator:]

Our next question comes from Ben Schachter with Macquarie. Your line is open.

[Ben Schachter:]

A few if I could. Frank you discussed a bit about Android. So what are you actually seeing there that's giving - what's different there and do you see any different economics there on Android versus iOS? And separately could you just give us a high-level view of what you're seeing in Social Casino broadly how you think about the genre going forward? And then I have one quick follow-up.

[Frank Gibeau:]

So I'll start with the Android and the economics are roughly the same as Apple. So there's no real differences there. There are markets in the world that are more heavily weighted to Android than they are to iOS. So we've looked at some of those markets in terms of how we've optimized our go-to-market plans. In addition to that there is more platform differences in Android than there are in iOS based on the open standard in a lot of different manufacturers. So we definitely work hard on getting to more performing games that work across more device configuration. And also that ties obviously back to the geo component. We also have been optimizing our games in terms of client size, user flows, some of the things that Android. There is a little differences that between Android and iOS that make a lot of difference in terms of how the player experience feels. So there's a lot of nuance and some other basic kind of geographical and technical performance metrics that we look at. In terms of the second question overall in Social Casino look it's a very vibrant category for us between the casual card's group with Poker in addition to what we've been building with our slots businesses. We see a very good return from our investments that we have highly engaged players. We see some growth on the horizon. It's probably more fighting over market share amongst competitors than it is just pure platform growth, because the demographic is a little bit more limited than some of the other categories. So for example, Social Casinos more weighted towards North America and Europe and the rest of the world. And in addition to that, we do you have games that were actively investing in our Hit It Rich! product is doing very well for us right now. It's going from strength to strength. The team is really invested heavily in elder game features and more social features and obviously, we have a Game of Thrones, Social Casino project in soft launch currently that we're excited to finish up test marketing and take out into the global marketplace.

[Ben Schachter:]

And then just quickly if you could, organic bookings growth, what would that look like if you strip out of the acquisitions? Thanks.

[Frank Gibeau:]

Looking at that overall, a lot of the organic bookings that we're seeing is tied to the existing live services franchise that we have like Words With Friends, CSR, Poker. So there's a lot of puts and takes. My overall view is that we're seeing no really - there's no - it's on the way up in single-digits but it's not really something you can look at from a - we pull the acquisitions out because we're making decisions against that that comingle with the titles. So it's not a totally fair analysis of the segment that way but if you segmented it, it's up, it's doing okay this puts and takes.

[Gerard Griffin:]

Overall the - if you take out the Merge Dragons! and Empires & Puzzles, if you look at Q1 even Q2, you would see that our core mobile and I'm talking about if you take Poker, CSR2, Words With Friends and our Social Casino that collective is growing and that's offsetting some of the older web and legacy mobile. So the core portfolio is still healthy and growing. But as I said in our - as we said in our remarks, obviously the layers on top was very strong growth in the quarter.

[Operator:]

Our next question comes from Ryan Gee with Barclays. Your line is open.

[Ryan Gee:]

So Frank I believe earlier you mentioned the 75 I mean the $95 billion mobile market TAM. I believe roughly 50% or more than half of that is Asia and a good chunk of that is China. So can you guys just remind us of your business exposure in Asia, specifically in China for your forever franchises? And then Merge! and Empires & Puzzles are those already launched in China? How much is expansion for those two titles in that specific geo an opportunity for you guys in 2019 or 2020? Thanks

[Frank Gibeau:]

Yes I think we're just getting started in Asia. So there's no at scale business right now for us in China or Korea or Japan. We're starting getting started especially with Empires & Puzzles and Merge Dragons! that's just recently gone into the Geos. So were looking at that as a long-term opportunity for us. We do like territories like Japan and Korea, South East Asia. We tend to prioritize those slightly higher in China right now but we do look at China as a key opportunity for us certainly to grow audience and to expand our footprint. So our exposure to Asia is actually we think of it more as an opportunity because we've been so weighted traditionally to Western Europe and North America.

[Operator:]

Our next question comes from Ray Stochel with Consumer Edge Research. Your line is open.

[Ray Stochel:]

Could you talk about the incremental marketing investments that you're making? Can you give us a sense of maybe 1Q, 2019 versus 1Q, 2018 in terms of acquired versus not acquired from a UA perspective? And could you give us a sense of whether or not you've increased marketing spend for Empires & Puzzles in 1Q, 2019 versus 4Q, 2018?

[Gerard Griffin:]

Yes I'll deal with it probably a little higher level but if you think about marketing overall, the sales and marketing within our business on a percentage basis has historically been in the low 20s. It's now in the high 20s and that's fundamentally a function of when you look at Empires & Puzzles and Merge Dragons! those titles are investing in UA closer to 40% of their bookings as opposed to the company average and so when you look at it, that's fairly significant but you also have to think about it in terms of where those games are in their life cycle. And when we look at return on investment, we're still seeing a very strong operating contribution in the quarter and obviously we see a strong operating contribution on those cohorts over lifetime. So when you think about in terms of Q4 to Q1 and even into Q2 of this year yes, we did increase the marketing but we also saw significant growth in the bookings, so on a percentage basis it wasn't an increase but we are definitely fueling the tank as we see growth in those titles. And it's a question we've been asked in the past where we set are we being overly conservative in terms of our investment? Frank and I said in the past, when we see opportunities to invest against growth we will. What we're very conscious of we're not just going to pump money and just to try and force it. And as it relates to those cycles I would say that CSR and Words or others, we're not investing at those kinds of levels but as you think about this quarter and if you think about my guide for Q2, we are upping the investment a little on those two growth cycles in Q2, which means that the actual margin contribution is still north of our near-term goals but it's lower than we would have seen in Q1. As we go through the quarter, we make we may manage that in terms of once we see what the returns are but that's what as we said in the past, marketing in our business is a very fluid event. Every day the teams look at their returns, they look at their lifetime values and their roll-offs and if they can find channels that are giving good returns they will invest and if they can't find channels that are not giving good returns they will pull back. We saw a little bit of that in Q1 actually. So when I guided for the quarter I did not expect to deliver another quarter north of our near-term margin goals but part of that is because of the strong return we saw on our marketing investment where we're able to pull back a little bit and hold that powder for Q2.

[Ray Stochel:]

And then a follow-up would be if you could again on acquisitions. If you can break down the advertising bookings between organic or versus inorganic. And that would be it for me. Thanks.

[Gerard Griffin:]

The majority is organic. If you look at those business, I think all the business are roughly sort of 80-20 mix broadly speaking.

[Operator:]

Our next question comes from Evan Wingren with KeyBanc Capital Markets. Your line is open.

[Evan Wingren:]

Just wondering on the success of the integrations that you've had how that's impacting conversations that you're having in the marketplace with other potential acquisitions or relationships and just to the extent that that is playing out? How you think about that?

[Frank Gibeau:]

This is Frank. As we look at how we're going to grow the company, it all starts with growing live services. It then moves into building a pipeline in new games, looking at new platforms, new markets as we said on the call. And M&A for us is a way to do all three of those things. If there's opportunities to find a live service that we can bring in an scale or there is a new franchise, a game team out there that can join the company or if there's a new market or category that's interesting will user M&A to go after that. What underlies all that though ultimately is the connection between the companies. And is there a culture fit? Do the leadership teams have a similar worldview and are you able to create a business arrangement so that both teams win and have alignment of goals. And so we typically try and approach it very simply from that perspective and the good news is we've had a series of investments here starting back with Peak and Gram and now with Small Giant, where we've seen some very good success on the thesis of what Zynga is all about and how bringing additional developers into the company can possibly result in better outsized returns. So they that word-of-mouth and that reputational support is now there. So we like that. Now the good news about the growth strategy we have in place is we don't have to buy anything to grow. So we're going to be very selective in terms of who we're looking for and who we partner with. And it needs to be something that really makes sense for Zynga over the long term and ultimately starts with a fit between the leadership teams, the team cultures and then getting to an alignment in terms of how the two companies come together and then grow together. So it's a great place to be where you don't have to buy anything to grow. And that allows you to be a lot more selective.

[Operator:]

And our last question comes from Mike Hickey with The Benchmark Company. Your line is open.

[Mike Hickey:]

Just two questions. I was hopefully remind us I guess, more specifically your long-term operating margin goal and so do your playbook in terms of how you expect to sort of bridge the GAAP between where you are to next year and where you expect to be on that margin goal. And then I guess on Zynga Poker, it looks like that continues to struggle maybe last in the prior quarters. And I think you said you expected to be accelerate in the second half of 2019 and just sort of curious your plan to driving growth into the Poker second half. Thank you.

[Gerard Griffin:]

Obviously, our medium and long-term margin goals are to get more in line with our peers. If you look at our peers of margins, I'm going to do this excluding deferred revenue just looking at it more at a macro level from an operational point of view. You want to be somewhere in that sort of 25% to 30% range. And that's on how we will report our bookings. And so on the near term we said in the past let's see if we can we break 20? We did that in Q3, Q4. And we actually did that in Q1. So and one is to sustain 20 and as we indicated on a high-level if we continue in our current course and speed with our live services releasing some games this year and then getting the full contribution of those into 2020, we should be able to get there and then ultimately sustain for a full fiscal and growth from there. What gets you beyond that obviously as Frank had said, continue to focus what is core to business our live services. Those businesses at scale delivers significantly better than that. So if you can get that aggregate to continue to grow that helps plus layering in additional games in 2020 and 2021. If you get a breakout that helps a lot but that's a core organic strategy. Again if we find additional talented teams or IP that can layer into that at the right kind of top line or margin goals that also helps.

[Frank Gibeau:]

In terms of Zynga Poker you're right. The sequential performance of the game is much better than the year-over-year comps. So we feel like we the worst is behind us and now we're starting to get into position for growth in the second half. And I think it really requires us to be able to spend more of our engineering time on bold beats and player facing features than a lot of the things that we've been doing recently related to platforms and also addressing some performance issues inside the service. So we're excited to get Poker back. The beauty of our business is that Poker is contributing on a profitability and revenue standpoint very meaningfully on the growth of slowdown after very explosive growth in our first few years here. Our goal is to S curve it, use this period of time of flatness to kind of get it fit for purpose and return to growth. The good news is the rest of the portfolio is performing very nicely and that gives the diversification of our portfolio is really one of our strengths.

[Gerard Griffin:]

I would just like to follow up. If you think of our business, it is actually very exciting time as we look at the business not just today but as it's trending over the rest of this year into 2020 and 2021. Because when you look at our core forever franchises and our live business, as we said that's predominately top line guidance for giving you guys for 2019. That business in terms of the live services, the actual games in the market is performing really well and driving what is effectively predictable growth over the coming quarters and into 2020. It's allowing us to invest a significant amount of capital against a very exciting pipeline of new games and obviously invest against the games momentum when we see it and our core live services, whether we're entering new markets or just growing in the existing markets. I think that's a critical thing if you look at the company today versus two, three years ago. We have a preferment portfolio of live franchises, five forever franchise now versus three a few years ago and we have a very defined pipeline of new games that were going to layer into that equation over the coming quarters and years. And so from our perspective, because Frank said, every day we wake up we worry about the core live services, making sure the bold beats are on track that we're seeing the right level of player engagement and excitement in our games and in parallel we continue to make progress against our new game development in addition to investing in new areas that Frank outlined in his prepared remarks.

[Operator:]

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Rebecca Lau for any closing remarks.

[Rebecca Lau:]

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

[Operator:]

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