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Zynga Inc  (NASDAQ: ZNGA) Q4 2019 Earnings Call Transcript

Final Transcript

Zynga Inc  (NASDAQ: ZNGA) Q4 2019 Earnings Conference Call
February 05, 2020

Corporate Participants:

Rebecca Lau — Vice President, Investor Relations and Corporate Finance

Frank D. Gibeau — Chief Executive Officer

Gerard Griffin — Chief Financial Officer

Analysts:

Eric Sheridan — UBS Financial Services Inc. — Analyst

Alexander Giaimo — Jefferies LLC — Analyst

Mike Olson — Piper Sandler & Co. — Analyst

Michael Ng — Goldman Sachs & Co. — Analyst

Colin Alan Sebastian — Robert W. Baird & Co. — Analyst

Mario Lu — Barclays Bank PLC — Analyst

Brian Thomas Nowak — Morgan Stanley — Analyst

Douglas Lippl Creutz — Cowen and Company, LLC — Analyst

David Karnovsky — JPMorgan Chase & Co. — Analyst

Matthew Corey Thornton — SunTrust Robinson Humphrey, Inc. — Analyst

Ryan Gee — Bank of America Merrill Lynch — Analyst

Raymond Leonard Stochel — Consumer Edge Research, LLC — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Zynga’s Fourth Quarter 2019 Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

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

Rebecca Lau — Vice President, Investor Relations and Corporate Finance

Thank you, Liz. And welcome everyone to Zynga’s fourth quarter and full year 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.

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 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-K will include reconciliations of our GAAP and non-GAAP financial measures. Please be sure to look at these reconciliations as the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results.

This conference call is being webcasted and will be available for audio replay on our Investor Relations website in a few hours.

Now, I’ll turn the call over to Frank for his opening remarks.

Frank D. Gibeau — Chief Executive Officer

Thanks, Rebecca. Good afternoon, everyone, and thank you for joining our Q4 earnings call. Our strong Q4 performance capped-off an outstanding year as we delivered the highest annual revenue in bookings in Zynga history. We are executing well against all aspects of our multiyear growth strategy and expect to build on this momentum as we continue growing our business in 2020.

In Q4, we achieved revenue of $404 million, up 63% year-over-year, and bookings of $433 million, up 62% year-over-year. Our results were well ahead of guidance across all key financial measures and were driven by strength in live services, combined with remarkably strong seasonal advertising. Words With Friends achieved record revenue and bookings, and Empires & Puzzles also had its best quarter ever with a series of well executed holiday bold beats. Merge Magic! continue to build momentum and is on track to become our newest forever franchise.

Looking at the full year, in 2019, we delivered a record top line performance with revenue of $1.32 billion, up 46% year-over-year; and bookings of $1.56 billion, up 61% year-over-year. Live services were the primary driver of our results and are the foundation of our multiyear growth strategy. By delivering innovative bold beats, we are driving strong consistent growth from our portfolio. On top of our live services foundation, we launched two new games in 2019; Game of Thrones Slots Casino; and Merge Magic!, both are off to great starts and will be meaningful contributors in the years to come.

We also grew our international revenue and bookings to their highest level since 2012, as they were up 58% and 85% year-over-year. In Asia, we are seeing positive results from our decision to self-publish Empires & Puzzles in South Korea, Japan and Taiwan. Our strong 2019 results demonstrate our ability to scale Zynga and positions us for more growth in 2020 as we continue to execute on our multiyear growth strategy.

The first pillar of our strategy is to continue to grow our live services. As we enter 2020, we have strengthened momentum in our highly diversified live services portfolio. We expect to increase from five to six forever franchises, CSR Racing, Empires & Puzzles, Merge Dragons!, Words With Friends, Zynga Poker, and our newest one, Merge Magic!. We define our forever franchise as a game service that can entertain players for more than five years and generate at least $100 million of annual bookings. Adding another new Friends Forever! franchise provides us with more scale to drive our overall growth and operating leverage.

The second pillar of our strategy is to create new forever franchises to layer on top of our live services foundation. We have a robust new product pipeline with several new games in various stages of development. Currently, Puzzle Combat and FarmVille 3 are progressing well in test markets. And our Harry Potter title is on track to enter soft launch later in Q1. We maintain a methodical approach to engineering hits, which includes rigorous testing and soft launch and frequent iteration and tuning with the goal of delivering long-term player engagement.

The third pillar of our strategy is to invest in new platforms, markets, and technology. In 2020, we’ll continue experimenting with titles on chat platforms, investing additional marketing in Empires & Puzzles in Asia. We are also exploring new game markets including mass casual ad driven experiences by developing and testing a series of new titles such as Puzzlescapes. While our investments in these initiatives are still in the early stages, we believe they have the potential to increase our growth over the long-term.

Lastly, we see opportunities to acquire talented teams and franchises around the world to further accelerate our growth. Mobile’s talent base is global and there are new franchises and categories emerging all the time. We are pleased with how the Casual Cards, Studio From Peak, Gram Games and Small Giant Games have been performing as part of Zynga. Our proven model of enabling talented teams to maintain their unique creative cultures, while leveraging our scalable studio operations and publishing platform, enabling us to both grow faster together.

With that, I would now like to turn the call over to Gerard to discuss our results in more detail, as well as our outlook for the coming year.

Gerard Griffin — Chief Financial Officer

Thank you, Frank. Q4 capped-off a great year as we delivered our highest annual revenue and bookings in Zynga history and margins ahead of our near term goals in Q4 and for the full year. Our Q4 results were well ahead of our guidance across all key financial measures, driven by strength in our live services coupled with remarkably strong advertising results.

Revenue was $404 million, comprised bookings of $433 million, offset by net increase in deferred revenue of $29 million. Revenue was $39 million ahead of our guidance and up $156 million or 63% year-over-year. The net increase in deferred revenue was $29 million versus our guidance of $50 million and a net increase of $19 million in the prior year quarter. Bookings were $18 million ahead of our guidance and up $166 million or 62% year-over-year. Our better than expected top line results were driven primarily by Words With Friends, a tremendous holiday season for Empires & Puzzles, and a meaningful contribution from Merge Magic! in its first full quarter post launch.

We generated user pay revenues of $325 million, up 84% year-over-year and user pay bookings of $354 million, up 80% year-over-year. We delivered record advertising revenue and bookings of $80 million, up 11% and 12% year-over-year respectively. Our out-sized advertising performance was driven by exceptionally strong seasonality that kicked in earlier in Q4 and resulted in higher than expected advertising yields. This was further amplified by strong payer engagement throughout the holiday season, as well as one-time benefits from advertising network deals. The primary drivers of the net increase in deferred revenue were bookings on Empires & Puzzles and Merge Magic!. While the release of this [Indecipherable] will have a positive impact on revenue and profitability in future periods, it represents a $29 million reduction in revenue, net income, adjusted EBITDA in Q4. We ended the year with the deferred revenue balance of $434 million versus $193 million a year ago.

Turning to Q4 operating expenses. Please note, Q4 2019 includes a full [Phonetic] quarter of Small Giant Games. GAAP operating expenses were $258 million, up $93 million or 56% year-over-year, while non-GAAP operating expenses were $207 million, up $66 million or 47% year-over-year. Increased marketing investment in our live services and new game launches was the primary driver of the increase in GAAP and non-GAAP operating expenses, in addition to an increase in R&D investments in our new game pipeline and rent expense for our San Francisco HQ, which we now lease. The increase in marketing was primarily due to Empires & Puzzles as well as the ramp of investment of Merge Dragons! and our recently released titles. Contingent consideration expense was also a material driver of the increase in GAAP operating expenses. The increase in contingent consideration expense was driven by our recent acquisitions continuing to collectively perform ahead of our expectations. This resulted in an expense of $31 million, up $29 million year-over-year and $11 million ahead our guidance. Year-over-year, GAAP operating expenses decreased from 66% to 64% of revenue and non-GAAP operating expenses decreased from 53% to 48% of bookings. Our strong top line performance resulted in improved R&D and G&A operating leverage.

We posted a net loss of $4 million, $41 million better than our guidance, driven by our strong operating performance and lower than expected deferred revenue, partially offset by the higher than expected contingent consideration expense. Adjusted EBITDA was $75 million, $50 million better than our guidance, also driven by our strong operating performance and lower than expected deferred revenue. Exceptional advertising top-line performance and lower marketing spend were the primary drivers of our better than expected operating performance.

We generated operating cash flow of $94 million, up 5% year-over-year in the quarter. We ended the year with cash and investments of $1.54 billion, which we anticipate we’ll use primarily to fund future acquisitions to further accelerate our growth.

Turning to 2020 guidance, which is as follows. Revenue of $1.6 billion, up $278 million or 21% year-over-year; a net increase in deferred revenue of $150 million, down $92 million or 38% year-over-year; bookings of $1.75 billion, up $186 million or 12% year-over-year; and net loss of $130 million versus a net income of $42 million in 2019. Please note that our net income in 2019 included a one-time gain on the sale of our San Francisco building of $314 million. Adjusted EBITDA of $200 million, up $113 million or 129% year-over-year. Our guidance assumes our live services will drive the vast majority of our top-line performance. We expect our forever franchises to collectively scale throughout 2020 and anticipate initial contributions from new games that are targeted to launch in the second half of the year. In 2020, operating leverage will ultimately be a function of our live service performance, user pay versus advertising mix, the timing of our new game launches, and the level of marketing investments applied to scale new titles, and our live services.

For the full year, we anticipate slight pressure on gross margins due to the higher mix of user pay versus advertising. We expect to see modest improvement in operating leverage in R&D and G&A, which should be more than offset by increased marketing investments in both, our live services and new game launches. Our guidance assumes that we will see higher operating margins in the second half of the year as greater top-line scale provides stronger leverage in R&D and G&A, partially offset by launch marketing for new games. In summary, our full-year guidance implies another year of double-digit top line growth, with margins in line with our near term goals.

Now, for Q1 guidance, which is as follows. Revenue of $385 million, up $120 million or 45% year-over-year; a net increase in deferred revenue of $15 million, down from $79 million or 84% year-over-year; bookings of $400 million, up $41 million or 11% year-over-year; and net loss of $26 million versus a net loss of $129 million in the prior year quarter; adjusted EBITDA of $57 million versus a negative $19 million in the prior year quarter.

Our top-line performance will be driven by our live services, including the addition of Merge Magic! and Game of Thrones Slots Casino, as well as growth in Empires & Puzzles and Merge Dragons!. These games will be partially offset by declines in older mobile and web titles, as well as year-over-year pressure on advertising as we lap advertising network optimizations.

We expect a increase in deferred revenue of $15 million versus $94 million in Q1 of last year. The year-over-year change in this GAAP deferral represents a $79 million year-over-year increase in revenue, gross profit, net income and adjusted EBITDA. We expect gross margins to be up year-over-year, primarily due to lower net increase in deferred revenue in Q1 2020 versus the prior year quarter, partially offset by the dilutive impact of a stronger user pay mix in Q1 2020 versus the prior year quarter. We expect our GAAP operating expenses as a percentage of revenue to decrease significantly year-over-year, primarily due to the lower net increase in deferred revenue and lower contingent consideration expense in Q1 2020 versus the prior year quarter.

Outside of these factors, we also expect modest improvement in our year-over-year operating leverage in R&D and G&A, which should be more than offset by higher marketing investments against our live services to maintain momentum in the coming quarters. In particular, we increased market expenses, primarily for the year-over-year additions of Merge Magic! and Game of Thrones Slots Casino, as well as continued investment against high growth titles such as Empires & Puzzles and Merge Dragons! Finally, we are not anticipating the worldwide release of any new games in Q1 2020. We expect to spend modest test marketing on these titles in soft launch.

In conclusion, we are pleased with the progress we’re making in all aspects of our multiyear growth strategy. In 2020, we look forward to delivering another year of double-digit top-line growth and strong sustainable profitability.

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

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Frank D. Gibeau — Chief Executive Officer

Thanks, Gerard. Before we open the call for questions, I wanted to take a moment to discuss Zynga’s strong position in the rapidly growing gaming landscape today. In 2020, mobile will be the largest and fastest growing games platform and is expected to reach more than 2.5 billion people across more than 155 countries. It is also the most ubiquitous and highly accessible platform that enables people to play games anytime and anywhere. Mobile is constantly evolving with new markets, devices and technologies that will serve us tailwinds for interactive games. In particular, the arrival of 5G and streaming will enable higher performance games, more streamline player experiences and innovative new forms of distribution. As a leading mobile first free to play live services company, Zynga is uniquely positioned to capitalize on this opportunity. Our strong 2019 performance demonstrates our ability to scale Zynga through our multiyear growth strategy. In 2020, our live services foundation grows from five to six forever franchises. We have a more robust new product pipeline with Puzzle Combat, FarmVille 3 and Harry Potter. We are also continuing to invest in new platforms and markets and see more opportunities to further enhance our growth through acquisitions.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Eric Sheridan with UBS. Your line is now open.

Eric Sheridan — UBS Financial Services Inc. — Analyst

Thanks for taking the question. Maybe two bigger picture questions, coming out of what you just said there, right at the end, Frank. If you go back couple of years ago, you guys were very heavily skewed towards North America and iOS, and sort of had a plan of getting more geographic distribution as well and getting better at Android as a platform. Now, a couple years on, sort of, is there still a lot more work to do that could open up more addressable market for the company and the types of games you’re bringing to market? Maybe just to check in on that and how you’re thinking about some of the investments that are being made versus broadening-out distribution?

And the second part, a topic we’ve talked about in the last couple of earnings calls. You’re testing out a lot of newer distribution mechanisms, like Snapchat, Facebook, and others. Any update there on what some of the testing and learning that might have happened from some of those newer distribution platforms when you think outside the box, looking out over the next couple years? Thanks so much guys.

Frank D. Gibeau — Chief Executive Officer

Eric, I’ll take the question. And when you look at our weighting a few years ago, you’re absolutely right, we’re heavily biased to North America and iOS. And we undertook a very methodical approach to try and expand our appeal through new intellectual properties, opening a better performance on Android by developing the apps on Android first in some cases, and we’ve seen terrific progress there. I think that our total addressable market still has a lot of room to grow. We just got into Asia, as you know, in 2019 with Empires & Puzzles and we’re seeing some good early results. And then, we’re also starting to see a bigger wave of Android performance internationally in our mix. And I think that’s in some ways, if you look at Empires & Puzzles, they’re really the best example. We’re seeing tremendous growth in Empires & Puzzles internationally and on Android. It does very well on iOS. But, the highest growth rates for that franchise are international and Android platforms. And we’re also seeing the same dynamic with our games from Gram. I think, one of the things that you’ll see us experiment more with as we look at new geos and opening up new markets is we’ll start to do faster to market games, games that are potentially less expansive in terms of their total depth and feature rate, and start to get into faster iteration times of games. I think, a good example of that working is what we did with Merge Magic! last year. That game had a very fast development cycle. It did extremely well in test launch and so was able to come to market very quickly. I would expect you to see more shots like that from us, in addition to the tent-pole titles that we’ve already publicly communicated. We also talked in the letter a little bit about our interest in mass casual, which we also think is an addressable market that we’re not very deeply in right now. These are ad driven experiences, they appeal to the mass casual market globally. A lot of fans are called hyper casual. There’s a mix of titles in here that I think, the Zynga brand, and the Zynga studio can execute there that we’re excited about.

In terms of the second question about trying new distribution platforms. Yeah, we absolutely invested in looking for new channels, chat being the one that we occupied most of our time. We had some very good learning on Facebook Messenger. In fact, our Words With Friends product there does very well. And then, we last year lunched Tiny Royale on Snap. And we’re encouraged by looking at these channels long-term and we’re going to continue to iterate and develop games and learn. These are very early development titles. So any impact on the business is premature, but in terms of looking at traffic patterns, what types of designs, intellectual properties work, we’re very committed to continuing to innovate in mobile. And I think when 5G starts to come on line in terms of the infrastructure, I think there’ll be more innovation in terms of newer distribution techniques, you’ll see a much more efficient player funnel in terms of acquisition and then the higher performance games. I think that’ll open-up incrementally new distribution channels, so we’re going to try and stay in front of it.

Eric Sheridan — UBS Financial Services Inc. — Analyst

Thanks so much.

Operator

Our next question comes from Alex Giaimo with Jefferies. Your line is now open.

Alexander Giaimo — Jefferies LLC — Analyst

Hey guys, thanks for taking the questions. So, two from me. First, I wanted to ask broadly on the M&A environment within mobile. We’ve seen two or three deals take place here within the last few weeks. So, just curious, if the competitive environment is creating a situation in which bids for some of these assets out there are going up? And then, just taking a step back, does the team still feel that there are attractive assets out there?

And then, secondly, just an update, you can provide around the soft launch games and thoughts around launch timing would be helpful. I think, Gerard said second half of the year, but just wanted to clarify. Thanks guys.

Frank D. Gibeau — Chief Executive Officer

Yeah. In terms of the overall M&A environment, this is a — it’s a global marketplace in mobile for development teams. There’s a lot of talent out there, the new franchises and categories popping up all the time. So, I would definitely say that the M&A environment is active. There’s a good supply of opportunities there for companies to look at. As you know, over the last few years, we’ve been very active there and we continue to be very active there. We positioned ourselves by selling the building and entering the convert market to generate $1.5 billion to be able to go out and look at opportunities to grow the Company through mergers and acquisitions. We’re still committed to that. We haven’t seen bids going up. Competition has shifted a little bit from how it’s been in the past in terms of who you’re seeing in the processes. But, in terms of the overall — there hasn’t been a huge inflation in the prices of the assets. There’s just been a lot of really good deals out there, because the talent base is so big and the market is so large. So we anticipate that when we look at the environment for M&A, the consolidating effect that you’re seeing right now in the overall marketplace will continue. But we also think there’s an ample supply of opportunities, if you’re looking globally and if you’re looking across a lot of different categories and platforms. I think, there’s deals to be had.

So from our perspective, when we look at how we’re going to grow the Company, we see the majority of our focus on building our our live services and the new product pipeline. We’re very excited about where Puzzle Combat and FarmVille 3 are in soft launch. As you know, our goal is to deliver long-term engagement. We want games to be able to last for five years or more at scale, $100 million or more a year in revenues. And so, we just really take our time with putting the games through rigorous testing and making sure that they’re fully featured and that we have a good sense of how they’re going to perform. And so, we feel good about both of those titles. And Harry Potter has done very well in its development cycle and is entering soft launch here in Q1. We did weight the year towards the second half in terms of communicating where we think the titles will land. But really, it comes down to how is — what are the KPIs coming in, what do they look like, and do we have a green light to go forward launch. But, when we look at the overall revenue mix in the year, the vast majority of the 2020 guide comes from our live services. And that helps us derisk the Company from the standpoint of being too reliant on new releases. And it gives our development teams the time and space to really get the games in position to be successful releases. And sometimes they can go really fast like Merge Magic! Sometimes they can go really on time like Game of Thrones Slots did. Sometimes it will take a little bit more time with a game in order to get it into the right position.

Operator

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

Mike Olson — Piper Sandler & Co. — Analyst

Hey, good afternoon. So, maybe just following up on that pipeline for 2020? Is it reasonable for us to expect any other titles other than Puzzle Combat, FarmVille 3 and Harry Potter? Are those the titles that we should expect or could potentially the other ones in the year? And then, from a margin profile, I think the goal has been to drive a multiyear upward margin trajectory obviously, but that may stall a bit this year with new title launches. I know you’re looking at 2020 right now and not 2021, so probably not wanting to give guidance. But, would it be reasonable to expect an upward trajectory in 2021, unless there’s some unknown pipeline of titles coming in that year? Thanks.

Gerard Griffin — Chief Financial Officer

Yeah. This is Gerard. In terms of new games, I think, the three that are mentioned in our prepared materials are I would say the main games that are obviously in soft launch or coming to soft launch. What I will say is, you will see additional games coming out from Zynga into prototyping and into soft launch in the sort of mass casual, our best genre. You’ve seen some games come out from Gram Games in that title. And you’ve also seen some other games come out from the company overall. As it relates to the margin profile, we’re effectively guiding to — if you look at EBITDA excluding the impact of deferred revenue, looking at a 20% EBITDA for 2020. As you think about ’21, ultimately, the EBITDA flow through in 2020, 2021 will be a function of how we grow our live services and how we scale the new games. So right now, it’s our ambition to grow into 2021. But as we progress through this year, we’ll have a better sense of what that means. As we see the trajectory of our core live services, and the new games coming out. As it relates to ’21 and beyond, we won’t be done with new games. Ultimately, we have a slate of games beyond the ones we’ve mentioned, we’ve talked about them in the past. So, don’t be surprised if you see new games again in ’21. So we’ll give more color on that as we get closer into the middle of this year.

Mike Olson — Piper Sandler & Co. — Analyst

Thank you.

Operator

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

Michael Ng — Goldman Sachs & Co. — Analyst

Great. Thanks for the question. I just had a bit of a follow-up to the last one. I guess, for the 12% bookings guidance for 2020, can you talk about how much contribution you’re assuming from, I guess, those two new games and the soft launch? And Gerard, I was hoping if you could just elaborate a little bit more about some of those new games from Gram Games? We saw a couple like Pirate Evolution! and Raid Kingdom!. Could these be potential 2020 launches or are they just very much in testing phase? Thank you.

Gerard Griffin — Chief Financial Officer

Yeah. In terms of the full year guide, very similar to last year, the majority of our bookings, the vast majority of our bookings is coming from live. We’ve said this in the past. We are not going to put big numbers on new games. That guide could be flattered ultimately by the launch of new games, depending on when they turn up. But more importantly, it’ll also be dependent on the level of marketing we invest in launching those games and sustaining them through the end of the year and obviously into ’21. From a guidance perspective, you should proceed this guide to be fundamentally a live service guide.

In terms of the smaller games, yeah, we’re talking about the pirates game, the raiding game. You have got other games, word puzzle games that are coming out of our studios here in San Francisco. Those games follow a more of a prototyping approach. So, my caveat, if we see those games, and you probably see more games like that pop into the marketplace, the teams are testing those, taking them out, testing them again, they take a different approach to what I would say, more mainstream games, like the ones we’ve mentioned that are in soft launch. So from that perspective, we have not put a lot of — there is a lot of bookings against those games. But again, as you know, in our marketplace, a small game can become a big game very quickly if it’s adopted and players engage with it. And so we’re very much focused on delivering games that we feel will appeal to that that mass casual audience. And you’ll definitely see a portfolio of those games that turn up in 2020 whether they sustain and grow will be a function of the testing we do on the games.

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Michael Ng — Goldman Sachs & Co. — Analyst

Great. Thank you. And if I could just have one quick follow-up. To your point, the ex deferred EBITDA margin for 2020 is about 20%. So that’s a little bit better than the, call it 1 to 2 percentage points of margin contraction that I think a lot of people were thinking about. Is there something that you see that gives you more confidence about margins, whether that’s maybe the game is performing better, so you need less launch marketing or is there something else? Thank you.

Frank D. Gibeau — Chief Executive Officer

Well, I think, what we’re very happy with is the scale of our live services and how we see that ramping over the year. As we indicated in our prepared remarks, we do expect to see improvement in the margins in the second half due to that scale. And, as we think about last year, again, when I started last year, I guided to a few points of pressure, given the performance of our live services, and in particularly through the end of the year, the strength we saw in advertising, we obviously, we delivered 21% in ’19. So, that’s hell of a lot better than where we thought we’d end up at the start of the year. And as we talk about this year, given the live service profile, we feel that the 20% is a good base to operate from and then ultimately we’ll see how our live services progress through the year, we’ll see how the advertising versus user pay mix evolves and also, depending on when the new games arrive, they — as I say, I’m not worried about bookings from new games, it’s ultimately what is the shape of the P&L for those games through the end of 2020 and how are they going to help me grow the company in ’21.

Michael Ng — Goldman Sachs & Co. — Analyst

Great. Thank you very much.

Operator

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

Colin Alan Sebastian — Robert W. Baird & Co. — Analyst

Great. Thanks. Nice quarter. Can you talk about the adverting strength that you saw in Words With Friends in terms of what specifically worked well? How much of that revenue was one-time, and whether you can utilize that experience across other franchises?

And my follow-up is on trends in Poker and CSR, in terms of what you’re seeing there, what your plans are to generate growth from those franchises in 2020? Thanks.

Frank D. Gibeau — Chief Executive Officer

Yeah. As we said in our prepared remarks, we definitely saw the uptick in seasonality in the quarter. So, we had a lot more track to go after, driving strong yields in the advertising business. But, we do see that as a function of Q3 to Q4. Traditionally, we’ve seen a drop off from Q4 to Q1, and that’s what our guide implies. In terms of the one-time factors, there were number of what I would say uplift bonuses we got in the quarter, but there was also, we had to renegotiate the contracts [Technical Issues] that we got in the quarter. That was roughly in the mid-single-digit millions for Q4, with the balance of the upside, obviously coming through the seasonal lift and what I would call, more traditional yield uplift.

As you think about the Q1 guide, that’s why you’re seeing the obviously a drop off from that perspective. How we see advertising evolve through this year will be a function of obviously the engagement level within our games with addressable ad audience and also the yields we can negotiate with our partners. As it relates to CSR and Poker, we’re happy with how those games are progressing. We’re not expecting a significant growth quarter-on-quarter, but they’re both performing well within the portfolio and we expect them to sustain nicely in Q1.

Operator

Our next question comes from Mario Lu with Barclays. Your line is now open.

Mario Lu — Barclays Bank PLC — Analyst

Hi, thanks for taking the questions. I haave two on Empires & Puzzles, specifically the Valor Pass. So, the Valor Pass was released a couple of days ago. And you mentioned in the shareholder letter that is a seasonal subscription. But, I think as I understand it currently, players have to manually renew their Valor Pass each time as new season begins. So is there a reason why gaming companies do not make their Valor Pass’s subscription model? I would think it would potentially help with churn at least on mobile and potentially lower the platform you see from Apple and Google?

And then secondly, unlike other Valor Passes that offer an experienced multiplier through the seasons, I don’t see any major incentives to buy the pass on day one? Therefore, do you expect revenues from the pass to be more front-end loaded? And the reason I ask is potentially there could be a couple of seasons start in Q1 versus just one in Q2? Thanks.

Frank D. Gibeau — Chief Executive Officer

Yeah. Thanks for the question, Mario. The Valor Pass is something that we’re testing and innovating. We’re also looking at its applicability to other franchises. And honestly, we’re going into this in a very methodical way. We want to test the current offering. And we want to test how players react to it, understand whether you can switch to a recurring subscription model as opposed to a onetime 50-day transaction. So we don’t disagree with you that moving into subscription models has all the benefits you highlighted with platform fees, with recurring revenue. And we just want to make sure that the value we’re providing is well received by the players and that we see the engagement games without altering the overall fairness of play in the game. And so that’s one of the things that we’re doing as we start to roll these out is we’re carefully putting out an offer, understanding it and then tuning it based on player feedback and player reaction.

And so, as they sequence in, we’ll look at how we time those against season 3 for Empires & Puzzles, how we would time it against expansion — other games that we have tied to bold beats. We think the two can operate in a very complementary way. But, we see this as a long term positive for players and for Zynga. And so we’re going to treat it in a way that we don’t go too fast, too quickly with it where we make a mistake. We want to understand how the dynamics work for scaling it up even bigger.

Mario Lu — Barclays Bank PLC — Analyst

Great. Thanks.

Operator

Our next question comes from Brian Nowak with Morgan Stanley. Your line is now open.

Brian Thomas Nowak — Morgan Stanley — Analyst

Thanks for taking my questions. I have two. Just the first one Frank to kind of go back to earlier where you were talking about sort of the globalization and 5G and the new player distribution funnel. I’d be curious, have you — as you step across and look at your whole portfolio and sort of the genres you address, you talked about sort of getting more into mass casual. Talk about sort of how you think about consumer behavior and similar expectations and what are the biggest under-addressed opportunities you see for Zynga to invest in, either through R&D or through M&A to really kind of capitalize on the way in which the global mobile players may change the next few years?

And the second one. Gerard, just to go back to your comment on the advertising strength, talk us through again to why you typically see the seasonal drop off from 4Q to 1Q? And have you already seen that in the current quarter, and is that why you’re taking a more pragmatic approach with the guide? Thanks.

Frank D. Gibeau — Chief Executive Officer

Yeah. Brian. I’ll start. In terms of the total addressable market, our Company is a little different than a lot of the gaming companies out there where the majority of our players are women. They’re busy adults who want to have fun session lengths that aren’t 45 minutes on a couch. We want to be as accessible to people as possible. We want to be as global as possible. So when it comes to our intellectual property, when it comes to our designs, when it comes to our platform mix on Android and iOS, we still think we have a tremendous amount of opportunity to grow the business. And when we look at areas inside of our portfolio where our brands and our style of development can work, we do see opportunities in Asia, we do see opportunities in mass casual, albeit the evolution of how hyper casual is going. The short session length games that appeal to everyone and can be played in any place; that feels really good to us in terms of an investment opportunity. We’ve seen the early positive turns on Asia. So, we feel like there’s brands and IP that we can invest in more there in the pipeline and the current live services portfolio.

And in addition to that we do see more PDP experiences being well received on mobile. Our Zynga Poker game, our Words With Friends product are heavy PDP, so is Empires & Puzzles. And so, we have some expertise about how PDP works in elder game designs. And as we look at the core market and we look at where PDP designs could appeal most, we are looking at IP with regards to whether it’s a Star Wars title or CSR or new game. We are investing more in elder game PDP systems to start to lever that more as we get into an even bigger market as the years progress globally. So from our perspective, the company’s well positioned for multiple takes.

Gerard Griffin — Chief Financial Officer

Yeah. On the advertising front, basically, we’ve seen historically coming from Q3 and Q4 a pickup in demand with our network partners. You’ve got traditional advertising in our space, which is in the gaming category, but you also see verticals index a little bit more into Q4. We saw that start earlier. I think, it’s a function of whether it’s traditional retail, traditional demand for games. It definitely inflected quicker into the quarter than we anticipated. We generally see as — and this is what’s implied in the guide, and based on our understanding of our own network deals and yield profile for Q1 that we’re going to see some drop off purely based on demand. And then also when you look at it year-on-year, the overall profile of our network optimizations. If you look at our performance and advertising over the last two years, we’ve significantly grown the business. We’ve had very strong double-digit growth in both years. And so we’re playing off a very strong base. When we compare the yields year-on-year just in terms of the deals, there is some weakness there in Q1 versus Q1 of last year. So you’ve got to double that I’m dealing with. One is the traditional, what I would say seasonality drop-offs that we’ve seen every quarter since I’ve been here and the data science teams have looked at it. And then secondly, we’re looking at a little bit more weaknesses as it relates to the just the yield profile in Q1, which we expect to pick-up during the year as we negotiate some of these deals under new terms.

Brian Thomas Nowak — Morgan Stanley — Analyst

Great. That’s super helpful. Thanks guys.

Operator

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

Douglas Lippl Creutz — Cowen and Company, LLC — Analyst

Hey, thank you. In the letter, you mentioned your decision to self-publish Empires & Puzzles in Asia and how that would benefit. I was wondering if you could just go in a more detail on that. What was the thought process there? How has it helped you? And what have you learned from that?

Frank D. Gibeau — Chief Executive Officer

Yeah. Doug, we looked at Korea initially with Empires & Puzzles, and we felt that we could put the game into the market, get the player feedback directly without having to go through a partner. And what we found is, as we looked at Japan and Korea and even China to a degree, they’re becoming increasingly performance-based marketing. There used to be a lot more power in the distribution channel and what sites you were on and how it was promoted. That is lowered in its impact over-time. What we’ve seen is they’re starting to operate much like you see western markets where paid acquisition tied to some organic programs really moves the needle in terms of audience generation. And we felt that we wanted to have a direct line from the player to our data science teams really understand the player behavior without an element in between trying to interpret it for us. And so there is a bit of a risk, but the Small Giant team up in Helsinki is really sharp and understanding their games and looking at these things. And so, that’s what we proceeded with. And we like the results. And so, we’ve been slowly rolling out, we went Korea and then we went Japan, we’ve looked at Hong Kong, Taiwan, Macau, and then we’re going to continue to roll it out country by country and use performance marketing as well as direct feed telemetry back from the market to make the right adjustments and changes to the game for [Technical Issues]. We definitely altered some things in the game. And we will continue to do so to keep the chart position, the performance there.

Douglas Lippl Creutz — Cowen and Company, LLC — Analyst

Great. Thank you.

Operator

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

David Karnovsky — JPMorgan Chase & Co. — Analyst

Thanks for taking the question. Merge Dragons! looks decelerated slightly in the quarter. Just wondering how much you would attribute this to Merge Magic! ramping up. And then just clarify, when you say — or when you lift Merge Magic! now as a forever franchise, does this mean the game is currently at run rate for $100 million of bookings annually or is it that you now feel certain the game will stay out of that point sometime in the future? Thanks.

Frank D. Gibeau — Chief Executive Officer

Yeah. The Merge Magic! is on a run rate to reach forever franchise status. So it’s doing really well. In the quarter, Q4 Merge Dragons! had a little bit of softness. It was largely related to their holiday soft launch — their holiday bold beat launches. Some of them didn’t perform as well as we’d hoped. And in addition to that, we did see a little bit of cannibalization from Merge Magic!, but it was certainly manageable. When you look at the combination of the two franchises, it’s certainly a positive. And when we look at the player dynamics, the crossover cannibalization rate was actually in line with expectations. So a little bit of it was that. But I think as you see Q1, Q2, those games will start to diverge even more in terms of their feature sets and their player bases. So we’re very encouraged where Merge Dragons! is going in the coming quarters as a very strong bold beat plan in front of it.

Also Read:  Zynga (ZNGA) Q2 revenues rise 47% but miss estimates

David Karnovsky — JPMorgan Chase & Co. — Analyst

Okay. Thank you.

Operator

Our next question comes from Matthew Thornton with SunTrust. Your line is now open.

Matthew Corey Thornton — SunTrust Robinson Humphrey, Inc. — Analyst

Hey. Good afternoon. Thanks for taking the questions guys. Two if I could. I guess, first on user acquisition. Just wondering if you can maybe give us an update on just the kind of trends you’re seeing here as we exit 4Q and into 2020 here. And just remind us how you think about maybe user acquisition costs as a percent of revenue, and maybe a launch quarter versus a non-launch quarter.

And then just secondly, you talked a little bit about the pipeline, obviously, for 2020. I think, in the past, you’ve talked a little bit about some of the other titles further out. So, a couple of Star Wars titles, CityVille, Game of Thrones, anything there that maybe has — maybe joined the pipeline or exited the pipeline? Just any color you’d be willing to provide there would be helpful. Thanks guys.

Frank D. Gibeau — Chief Executive Officer

Yeah. In terms of UA, we’re constantly evolving our UA strategy and execution. We learn a lot from Small Giant and Gram in terms of how they developed games and how they rolled games out. And we see that an important part of the soft launch process is to gain deep insight into the CPI, the cost to install versus the overall LTV of the game. So, we spend a lot of time making sure that we can actually scale through multiple bands of CPI increases. And so that’s an interesting thing that might be a little bit new for folks to think about in terms of how much of that time in soft launch is going against that particular item. We did in the quarter, in Q4 — you saw our EBITDA margin jump up. It was because we got the marketing into a place where we felt like we had Merge Magic! and Game of Thrones slots were moving out of launch mode and into sustain and growth mode. So, you see the efficiency start to gain there.

I like where we’re going with UA in 2020. We still have to invest in some of the new launches. But as we get the overall live services business, we’re starting to scale, emerge in our performance as it relates to audience acquisition organically as well as paid. There’s always new techniques and tools coming along. But at the end of the day, we’re looking at this daily. And if we’re not seeing positive ROI on a spend, we don’t spend. And we do have a global perspective. And so, if one market like iOS US gets a little expensive but we see really positive returns on Android in Eastern Europe or Android in Asia or Android someplace in South America, we’ll move the money. We have a very flexible and very global point of view in terms of how we deploy our marketing capital.

In terms of the title plan beyond 2020, there’s not a lot of new updates I’d give you there. We are in active development on a number of titles including the Star Wars product still. I think, the new news is really the faster cycle time development that you’re starting to see us experiment with, much to the games from Gram, some of the mass casual games like Puzzlescapes. We’re going to start to look at those opportunities as — increasing those opportunities for the Company to grow beyond just the set piece kind of tent-pole titles that we’ve delivered over these last couple years. We think that that is something that as we’ve developed our studios and we’ve learned from Small Giant Gram, we think that’s an area for us to lean in more.

Operator

[Operator Instructions] Our next question comes from the line of Ryan Gee with Bank of America. Your line is now open.

Ryan Gee — Bank of America Merrill Lynch — Analyst

Yes. Hi. Good afternoon. Thanks for taking the question. So, just real quickly on Asia and that opportunity. So, our data kind of shows that when you think about China, Korea, Japan, that’s probably 60% to 70% of the mobile market out there. RPG titles, when you think about that genre, it’s probably 50% of revenue in those countries, whereas casual and casino genre come in much less, probably single digits. I’m not sure if you agree with that. But, how do you guys go out and really tackle the opportunity in Asia? I know you’ve mentioned acquisitions in the past and attention for that. Do you think that acquisitions are your way in? Do you have other games in the pipeline that we should look forward to or do you really feel that maybe your existing markets, there’s still so much room left, it’s not really a focus for you now? Anything on Asia would be great.

Frank D. Gibeau — Chief Executive Officer

Look, Asia is a massive market for mobile, and it’s an important market for Zynga long-term. And I think as we look at how to enter that market, rushing in with a bunch of titles to do a big deal or over-investing too quickly is a strategy that we personally in our career seen fail. And so, when we said it from the standpoint of Zynga, we do think that there’s opportunity for our existing intellectual properties to perform in Asia, both the ones that you guys know about and ones that we have in the pipeline. I don’t disagree with you that RPGs and core experiences are very valuable in Asia. I think, if you look at Empires & Puzzles, it has RPG elements inside the design and also Merge Dragons! and Merge Magic! to a degree. So, one could argue CSR as a car RPG. So, I think within our portfolio, some of those systems and mechanics will translate to Asia with the proper testing and with the proper go-to-market plans.

So what we’re trying to do is take a very careful and methodical approach to growing our business in Asia. Totally agree with you, Casino doesn’t work in Asia. You’re not going to see any of our slots, games or poker products going east. But we do think that when you look at Gram, Small Giant, NaturalMotion, I think with the right incorporation of learning from those markets, they can work. FarmVille is a brand that historically has done well in Asia. Star Wars does well in some markets in Asia. And I think if you look at Harry Potter, that’s a brand that’s done well. So, we’re going to continue to chip away at it. We can’t forecast overnight success but know that we’re committed to it to the long term, and that if there is opportunities to acquire assets that perform in Asia, that certainly is part of the things that we look at. But, we’re not really forecasting any of those right now.

Ryan Gee — Bank of America Merrill Lynch — Analyst

Okay. And then, just a follow up if I could. We’ve seen some of your console competitors partner with some big publishers over in China specifically. And it’s delivered them some early success. Is that something that you guys have looked into, maybe partnering with one of the big publishers in any one market, leveraging some of their know-how and their local knowledge to convert your IP into a great game?

Frank D. Gibeau — Chief Executive Officer

Yeag. I think that’s an option for us. And we certainly don’t rule that out. The challenge for us though is as we look at the from revenue down to what you actually take away in profit after you have a large partner in the mix. Because remember, we don’t have the same scale as some of those console guys. It’s not as attractive. And so the risk reward is such that you might — you don’t have much to lose by going self publishing route. And in fact, you might actually learn more faster to get you better prepared for the second generation of games that you put out there. But, we wouldn’t rule out that type of arrangement. But right now, we feel good about what we’re doing with our current strategy.

Ryan Gee — Bank of America Merrill Lynch — Analyst

Great. Thank you guys.

Operator

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

Raymond Leonard Stochel — Consumer Edge Research, LLC — Analyst

Great. Thanks for taking my question. So, the new focus or at least efforts around mass casual or things like Puzzlescapes, how do you think about developing and building out those titles and launching those titles relative to introducing them as new modes within your existing titles? So, Puzzlescapes as an example, we could see as a mode in theory within the Words With Friends, product.

And then, second to that, as far as the scale of some of these titles, is there any sense that you can give? There’s not as good data on advertising relative to some in-app purchase data. So can you give us a sense of the scale that some of these titles could achieve from an ad dollar perspective? Thanks.

Frank D. Gibeau — Chief Executive Officer

Yeah. We do innovate inside of games, for example, recently Words with Friends, we introduced the Word Wheel as a kind of a light mechanic that engages people in between product in between games. So we constantly look at is this a feature or is this a full game? And what we find in the hyper and mass casual is that they’re short session length, they’re shorter lifespans, in terms of engagement but they’re very inexpensive, they’re very fast to market, and they can generate massive audiences if you hit the right chord. There is a paid element, but there’s also an organic element. And they would also give a benefit to the overall network of Zynga Games, because we can bring those users into other products. So we see a lot of interesting benefits for being able to build out these short session mass casual, mass appeal games. And when we looked at the puzzle game, we decided that that had enough to be a full product. And when we looked at the case of Word Wheel, we felt that that was a good feature for Words With Friends. And so, we’ll make creative decisions along the way on that. If you look at the overall ecosystem in mobile right now, there’s a tremendous volume of engagement, user dynamics, installs coming from this category And we feel like it’s a place that we can continue to be successful and so, that’s what we’re embarking on.

In terms of the model that we’ll look at, it will definitely be weighted towards an ad model. But it will also have elements of IP in it. But, I think the majority of the revenue, as you currently see in these games is advertising driven. But I think over-time, you’ll start to see the engagement curves elongate a bit. And I think you’ll start to see IP emerge in some of these games. So, we think that if you look at chart position as it relates to advertising, one of the challenges we have with Words With Friends, which is if you included the advertising revenue, it generates — and the IP, at the top of the charts kind of game, but it doesn’t show up there because the charts don’t track ads. I don’t know how to help you — give you a good sense of the rule of thumb of what these are doing, but they can be very sizeable contributors.

Raymond Leonard Stochel — Consumer Edge Research, LLC — Analyst

Great. Thanks so much for that. And as far as stepping back to the bigger picture for hyper casual, do you view that as different than what you’re talking about with mass casual? And there’s always sort of a conversation about the sustainability of hyper casual. You guys now have the opinion that the model there is sustainable or are you applying tweaks to make it different from maybe the last year of hyper casual within the market?

Frank D. Gibeau — Chief Executive Officer

Hyper casual is constantly evolving. And I think it’s when — where we coin the term mass casual internally, we are looking at the space between hyper casual, in between a game like Words With Friends. And there’s a number of examples of very successful titles in that space. But I think what you will see in hyper casual, it’ll continue to evolve. I think it’ll sustain because of the volume and the percentages of audience generation are just so large, it’s hard to imagine that that disappears overnight and it’s sustained for many years. And it’s not like it just showed up last year. So I think what hyper casual is teaching the market is that there’s a space in people’s lives for short, one, two minute experiences that they can get in, screw around, have a good time and then pop-out and jump to the next game a few weeks later. So I think from our perspective, we see player behavior that’s rewarding these types of products. And if they do shift and change, but in general, there’s a lot of people playing these games globally, and they’ve been playing them for many years now. And I think we’re taking note of potential design changes and product — new product introductions that might tap into that.

Raymond Leonard Stochel — Consumer Edge Research, LLC — Analyst

Great. Thanks again.

Operator

I’m showing no further questions in queue at this time. I’d like to turn the call back to Rebecca Lau for closing remarks.

Rebecca Lau — Vice President, Investor Relations and Corporate Finance

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

Operator

[Operator Closing Remarks]

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