Take-Two Interactive Software, Inc.

Good day, ladies and gentlemen, and welcome to the Zynga First Quarter 2019 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. 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.

Thank you, and welcome to Zingo's first quarter 2019 earnings call. On the call with me today are Frank Jabot, our Chief Executive Officer, and Jer Griffin, our Chief Financial Officer. Shortly, we will open up the call for live questions. During the course of today's call, we will make forward-looking statements related to our business plan and strategy, as well as expectations for our future performance. Actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed Form 10-K as well as elsewhere in our SEC filings for further clarification. In addition, we will also discuss non-GAAP financial measures. Our earnings letter, earnings slides, and when filed, our 10-Q will include reconciliations of our GAAP and non-GAAP financial measures. Please be sure to look at these reconciliations as the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. This conference call is being webcasted and will be available for audio replay on our investor-relation website in a few hours. Now I'll turn over the call to Frank for his opening remarks.

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 Jer 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 was driven by our live services portfolio, in particular by strong revenue and record bookings from Empires and 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 multi-year 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, CSR Racing, Empires and Puzzles, Merge Dragons, Words with Friends, and Zynga Poker. We will grow this live services portfolio by delivering innovative bold beats, new content and gameplay modes designed to attract new audiences, engage current players more, and bring back lapsed players. In any given year, we expect strong, predictable growth from this portfolio and for live services to account for the vast majority of our total revenue and bookings. Second, our goal is to create and acquire new Forever franchises to add to our live services foundation. We have an exciting new game pipeline that includes titles based on existing and new intellectual properties such as Farmville, Cityville, Puzzle Combat, and Merge, as well as strategic licenses such as Game of Thrones, Harry Potter, and Star Wars. These new titles are built within our global studio organization by teams that have been together for years and have a proven track record for developing successful games. We maintain a rigorous approach to engineering hits and recently soft launched two titles, Game of Thrones Slots Casino and Puzzle Combat. Over the coming quarters, we will soft launch additional titles, and based on player feedback and long-term engagement metrics, we expect to release new games worldwide in the second half of 2019. Third, we are investing in emerging markets, technologies, and platforms to accelerate future growth. As mobile devices continue to proliferate globally, more people will be playing games than ever before. We're pursuing this opportunity by expanding our Android audience and building games that appeal to players worldwide. In Q1, we've grown our Android revenue by 43% year-over-year and doubled our Android bookings. In addition, the arrival of 5G and streaming technologies will enable higher performance games, more streamlined player experiences, and innovative new forms of distribution. New platforms and categories such as chat and hyper-casual, as well as the emergence of cross-platform play, will also expand the overall accessibility of games and therefore Zynga's total addressable market. With that, I will now turn the call over to Jer to discuss our Q1 results in further detail, as well as our raised outlook for the future.

Thank you, Frank. We had a phenomenal start to 2019 with Q1 finishing well ahead of our expectations on strong live service 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 booking 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 and 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. Our year-over-year bookings growth was driven by our live service portfolio, including full quarter contributions from Merge Dragons and in-person puzzles, both of which performed well ahead of our expectations. The growth in our Forever franchises more than offset continued declines in our legacy mobile and web games. The significant increase in deferred revenue was primarily a function of the deferral of the majority of bookings on Empires and Puzzles, which was added to our portfolio this quarter, as well as continued bookings growth in Merge Dragons. In assessing year-over-year variances, please note that the year-over-year increase in the change in deferred revenue represents an 83 million negative component of the year-over-year variance in revenue, net income, and adjusted EBITDA. We delivered our best mobile topline performance in Zynga's history, with mobile now representing 93% and 95% of total revenue and bookings respectively. Mobile revenue was 246 million, up 35% year-over-year, and mobile bookings were 341 million, up 77% year-over-year. Turning to Q1 operating expenses. Our GAAP operating expenses were $285 million, up $150 million, or 112% year over year, representing 108% of revenue, up from 65% of revenue in the prior year. There are a number of items in Q1 2019 GAAP expenses I would like to call out when comparing our GAAP expenses year over year. As previously noted, Merge Dragons and Empires and Puzzles are performing well ahead of our expectations. Based on our latest assessments of these deals, we've raised our lifetime value estimates for Graham Games and Small Giant Games, as well as their respective acquisition earn-outs. Accordingly, this quarter, we booked additional contingent consideration of $86 million to Gap R&D, $76 million ahead of our guidance. Included in GAAP G&A expenses are $7 million of one-time expenses related to the acquisition of small giant games, and we also have a one-time credit of $10 million related to the net proceeds received from the settlement of the derivative lawsuit. Our non-GAAP operating expenses were $183 million, up 63 million or 52% year-over-year, representing 51% of bookings down from 55% of bookings in the prior year. The year-over-year increase in non-GAAP operating expenses is primarily due to a full quarter contribution from Graham Games and Small Giant Games. We reported a net loss of $129 million, $70 million below our guidance, and a decline of $134 million in net income year-over-year. The variance to guidance was driven primarily by the higher contingent consideration accrual as well as a higher deferred revenue partially offset by better than expected operating performance and profitability. The variance to the prior year was heavily influenced by the significant increase in deferred revenue versus prior year, as well as the contingent consideration accrual and acquisition-related expenses we booked in Q1 2019. Our adjusted EBITDA was a loss of $19 million, better than our guidance by $10 million, on better than expected operating leverage and a decrease of $45 million year-over-year due to the significant increase in deferred revenue which more than offset the strong year-over-year improvement in operating performance. We closed the quarter with $252 million of cash and cash equivalents, and we had $100 million of debt outstanding on our $200 million revolving credit facility. We continue to actively assess a number of actions to increase our cash reserves to further fund through acquisition as well as other actions to enhance long-term shareholder value. These include the potential sale east back of our San Francisco building as well as raising additional funds through debt financing alternatives. Turning to expectations for 2019 and beyond. Given the strong momentum in our live services, we are raising our full year 2019 guidance to $1.2 billion in revenue, up 32% year over year, and an increase of $50 million versus our prior guidance. We are also raising our bookings guidance to $1.45 billion, up 50% year over year, and an increase of $100 million versus our prior guidance. We expect a net increase in deferred revenue of $250 million, up 301% year over year, and an increase of $50 million versus our prior guidance. This puts us on track to deliver the strongest annual revenue since 2012 and the highest bookings in Zynga history. Our performance in 2019 will be primarily driven by our live service portfolio anchored by growth collectively in our Fight Forever franchises. We have an exciting pipeline of new games under development and expect to launch a number of games in the second half of 2019, which will further enhance our growth in 2020 and beyond. We anticipate that our bookings growth in 2019 will outpace revenue as we defer bookings primarily from the recently acquired title Empires and Puzzles, as well as growth in Merge Dragons and bookings from new game launches. We expect this to result in a $250 million net increase in deferred revenue, which represents our largest build in this GAAP financial metric. While the release of this gap deferral will have a positive impact on revenue and profitability in future years, it represents a $250 million reduction in revenue, net income, and adjusted EBITDA in 2019. In 2019, we continued to anticipate pressure on gross margins due to higher user pay mix and an increase in royalties on licensed intellectual properties. In addition, We are increasing our development spend on our new GEM pipeline and expect to invest in launch marketing on titles releasing in 2019. These investments will modestly weigh on our overall operating margins in 2019, but are expected to deliver returns in future years. Continued execution against our 2019 plan should position Zenger for further growth in 2020. We expect low double-digit revenue and bookings growth, with greater operating leverage as our live service growth in 2020 is further enhanced by full contribution from our 2019 new game launches. Over the next few years, we expect to make meaningful progress towards achieving margins more in line with our peers on a like for like basis. As to Q2, guidance for the quarter is as follows. Revenue of $280 million and net increase in deferred revenue of $80 million bookings of $360 million, a net loss of $70 million, adjusted EBITDA loss of $18 million. There are some factors I would like you to consider when assessing our Q2 guidance. Q2 2019 will benefit from a full quarter contribution from Graham Games and Small Giant Games. In Q2, we expect $280 million in revenue, up $63 million or 29% year-over-year, with bookings of $360 million, up $126 million, are 54% year-over-year. Our Q2 bookings performance will be driven by our mobile live services, anchored by our Five Forever franchises. We expect the year-over-year growth in bookings to be primarily driven by full quarter contributions from Graham Games and Small Giant Games, in addition to strength in Words with Friends and CSR2. We expect this growth will be partially offset by declines in web and older mobile games, as well as year-over-year softness in Zynga Poker. Our bookings growth in Q2 will outpace revenue driven primarily by the continued deferral of bookings on Empires and Puzzles and Merged Dragons. This will account for the majority of the $80 million net increase in deferred revenue, up $63 million, or 374% year-over-year. While the release of this defer will have a positive effect on revenue and profitability in future quarters, it represents an $80 million reduction in revenue, net income, and adjusted EBITDA in Q2 2019. We expect a higher billed and deferred revenue and an increase in amortization of intangible assets from acquisitions to result in gross margins declining meaningfully year over year, but increasing sequentially. Excluding these factors, we expect our gross margins to be comparable year over year. We expect our GAAP operating expenses as a percentage of revenue to increase significantly year over year, but to be down on a sequential basis. The year-over-year increase as a percentage will be driven by the higher built-in deferred revenue and an increase in contingent consideration expense in Q2 2019 as compared to Q2 2018. The sequential decline will be primarily due to a reduced acquisition expenses and contingent consideration expense in Q2 2019 as compared to Q1 2019. We expect our non-GAAP operating expenses as a percentage of bookings to be broadly in line with the prior year quarter. Similar to Q1 2019, we expect the mix to be more heavily weighted to sales and marketing, offset by lower R&D and G&A expenses on a percentage of bookings basis. We expect our non-GAAP operating expenses as a percentage of bookings to increase sequentially, primarily due to higher marketing investment to further enhance our live service momentum as well as initial pre-launch marketing on our next new game launch. We also expect to see a slight ramp in R&D expenses as we continue to invest in our new game pipeline. In summary, we are very pleased with our Q1 execution and the positive momentum we are seeing in our business. With that, I would like to turn it back to Frank.

Thanks, Jer. Before we open the call for live Q&A, I want to take a moment to highlight how Zynga is uniquely positioned within the video game 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.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and the number one key on your touchtone telephone. In order to get through all the questions in queue, we do ask that you limit yourself to one question and one follow-up. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that star, then one to ask a question. Our first question comes from Tim O'Shea with Jefferies. Your line is open.

Yes, hi. 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 and 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 Jer mentioned some increasing investment in certain areas like R&D. Thank you.

Yeah, 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 life business, there is the potential that that could be offset. But right now we're 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.

Thanks, and congrats on the quarter.

Thank you, sir. Thank you.

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

Great. Thanks so much for the question. Jared, 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 SGG now? I believe the previous expectation was 250. And anything else? Thank you very much.

In terms of the guide, predominantly most of the 1.45 has been 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 and Puzzles are driving a significant amount of that, given the build-up and contingent consideration and just the momentum we're seeing in those games. But we're also seeing, obviously, strong contributions from Words of Friends CSR. In terms of new, the way I would characterize this outlook versus the outlook we had last time around is there's less attached to new games. That's not to say that there won't be a contribution for new games, but as we were 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 of what you're looking at, similar to the 1350, is off live.

Great, thanks. And just as a follow-up, are you able to just let us know or remind us 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. Thanks.

Yeah, we're not going to go into detail. We have a variety of games in development, as we said before. We've got two games. We've got a Cityville and a Farmville game. We've got a number of games in development. You know, under a licensed IP, 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 Dave 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.

Great. Thank you very much.

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

Thanks for taking the question. Maybe two if I can. Of the acquired IP that you've sort of put in the market and are now supportive of, we'd love to get a little bit of additional color on what's driving the strength there and Is it marketing dollars? Is it approach to the marketplace? Is it things you're learning from the live services platform as you transform the business over the last couple 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 and could it have a different approach either between acquisition or how you think about marketing channels in terms of positioning in the marketplace. Thanks, guys.

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 has 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 Merged Dragons into new markets. Our partners at Google and Apple have really helped get behind the title. So it really has been bringing Graham's franchise into the Zynga publishing platform using the data science, the advertising, the product management, the go-to-market teams to really amplify and multiply the overall impact. But it really does start with a really high-quality game team building great, bold beats that drives player engagement and high-quality product. It's very much the same story for Empires and Puzzles. That is an extremely high-quality team in Helsinki that really has blended a very accessible gameplay mechanic in Match 3 with really proven PvP 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 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 five. It was the number one game on 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 it will give us advantages in terms of how we go to market in acquiring audiences. Obviously Game of Thrones is at a very high pitch 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 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.

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

Hey, good afternoon. I just had one question. You mentioned 5G, and I was just curious, does that change anything in any material way for kind of how you'll I have to look at game development and even potentially which genres you'll 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 could then maybe result in some changes by various players in the space to really position themselves for that? Thanks.

This is Frank. I'll take the question. The capabilities and potential of 5G, we think, can be profound for growth inside of mobile because we believe that it will enable higher performance games, games that will have much larger worlds will be possible, more massively multiplayer experiences, 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 new 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 tried to highlight in our remarks and our letters is there's numerous platform innovations coming to mobile over the next few years that will act as tailwinds for growth in companies like ourselves. Thank you.

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

Great, thank you. I'd just like to ask about Empires and Puzzles. You know, obviously doing quite well on the charts. Can you tell us anything about how that revenue compares to Merge Dragons, which I appreciate the disclosure there, but how that revenue is trending and what you see the opportunity relative to some of your other large games? Thanks.

Just in terms of... In absolute terms, obviously, Empires and Puzzles is a bigger game. But both games are showing even pre-acquisition, post-acquisition, Empires and 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 against. 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 of Friends, but the growth we're seeing in Empires and Puzzles and Merged Dragons is being driven, as Frank said, by the quality of the game and the long-term engagement and monetization, but it's also being fueled by significantly higher marketing than the company average. Now, 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 the P&L is that way, mainly because it's a smaller development investment against those games. So, Ned, the trajectory and growth on both games is comparable, but from a size perspective, Empires and Puzzles is obviously larger.

Got it. 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 disclose your top 10 games. I didn't see it in there. I'm just wondering about that.

It's not greater than 10% of revenue, as we mentioned. One of the technicalities of accounting is when you bring in a game into your portfolio as a new game that already has a meaningful bookings, the majority of those bookings get 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'll take care of itself. But similar to Merge Dragons, even though Merge Dragons has now been out well over a year, it continues to grow, and we continue to defer a portion of its bookings. With Empires and Puzzles, for the next two quarters, On average, you amortize over nine months. So as you can imagine, there's a bucket 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.

Thank you.

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

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

Thanks, Brian. You know, you're talking kind of about, it's kind of the day job at the company. We're running live services, and they span lots of different categories from, you know, brain puzzle to PVP match three to driving games. And we learn 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. It's kind of a continuous improvement process where if we learn something in Words with Friends or learn something in Empires and 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'll see features that are generating big lifts in 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 you know, one of the key objectives for us was to start 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's the key to doing that in a lot of the emerging markets, and that's why we're pleased with the big lift that we've seen, but we think there's 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. 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 begin the journey in Asia for Zynga as we look forward over the next couple of years.

Thank you. Our next question comes from Doug Krutz with Cohen, and your line is open.

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

Look, I think Apple is our largest platform partner. We have a really good relationship with them. We're 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 The part that we're not participating in is we don't really build premium games. However, if they do evolve it to include freemium, 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 these 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 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 the near term, we see opportunities in several of our 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.

Great, thanks.

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

Okay, thanks. Good afternoon, guys. Frank, can you remind us what your exposure is to loot boxes? And given what seems to be increased scrutiny on those, does that in any way change how you design the in-game spending mechanics for your titles going forward? Thanks. 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 option part of freemium design. Again, our games are free to play. You don't start with a premium purchase and then get to loot boxes. So the way that we design the loot boxes is very much part of that player journey. There is a lot of fun and delight that people get from them. It's like buying baseball cards back in the day. Who did you get in the pack? And we try and be as pro-consumer as possible in disclosing the odds on the individual loot boxes. So if you go into our games... and you click on the little eye icon, you'll 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 a very level playing field for how people can compete. So we really try and use loot boxes as a really special reward for behavior inside the game that fans really love to engage in. But it's not a gate system. to being able to play the game at a high level.

Thank you. Our next question comes from Ben Scatster with Macquarie. Your line is open.

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.

So I'll start with 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's more platform differences in Android than there are in iOS based on the open standard in a lot of the different manufacturers. So we've definitely worked hard on getting to more performant games that work across more device configurations. 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, those little differences between Android and iOS that make a lot of the 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, it's a very vibrant category for us. Between the casual cards group with poker, in addition to what we've been building with our slots businesses, we see a very good return from our investments there. 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. For example, social casino is more weighted towards North America and Europe than rest of the world. And in addition to that, we do have games that we're actively investing in. Our Hit It Rich product is doing very well for us right now. It's going from strength to think. The team has really invested heavily in elder game features and more social features. And obviously we have a Game of Thrones social casino product in soft launch currently that we're excited to finish up test marketing and take out into the global marketplace.

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

Thanks for the question. Looking at that overall, I mean, a lot of the organic bookings that we're seeing are is tied to the existing live services franchises that we have, like Words of Friends, CSR, Poker. So there's lots 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, when you pull the acquisitions out, because we're making decisions against that that commingle with the new titles. So It's not totally a fair analysis to segment it that way, but if you segmented it, it's up, it's doing okay, there's puts and takes.

Overall, if you take out the Merge Dragons and Empires and Puzzles, if you look at Q1, even Q2, you would see that our core mobile, and I'm talking about if you take the poker, CSR2, Words of 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, as we said in our remarks, obviously the layers on top was what gave us very strong growth in the quarter.

Great, thanks.

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

Yes, hi, good afternoon. Thanks for taking the question. So Frank, I believe earlier you mentioned 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 China for your Forever franchises? And then Merge and Empires and Puzzles, are those already launched in China? Or how much is expansion for those two titles in that specific geo and opportunity area? for you guys in 2019 or 2020? Thanks.

Yeah, 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 just getting started, especially with Empires and Puzzles and Merged Dragons have just recently gone into the geos. So we're looking at that as a long-term opportunity for us. We do like territories like Japan and Korea, Southeast Asia. We tend to prioritize those slightly higher than 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. Okay.

Thank you. Our next question comes from Ray Strochel with Consumer Edge Research. Your line is open.

Great. Thanks for taking my question. Could you talk about the incremental marketing investments that you're making? Can you give us a sense of maybe 1Q19 versus 1Q18 in terms of acquired versus non-acquired from a UA perspective? And could you give us a sense of whether or not you increased marketing spend for empires and puzzles in 1Q19 versus 4Q18?

I'll deal with it at 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 and Puzzles and Merged 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 it 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 booking. 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 said, are we being – overly conservative in terms of our investment. You know, as Frank and I have 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 in just to try and force it. And as it relates to those titles, I would say CSR and Words are others that are not, we're not investing at those kind 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 titles in Q2, which means the actual margin contribution, it's 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 may manage that in terms of once we see what the returns are, but that's why, 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 ROAS. And if they can find channels that are giving good returns, they'll invest. And if they can't find channels that are not giving good returns, they'll pull back. We saw a little bit of that in Q1, actually. So when I guided to 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.

Got it. That's great. And then a follow-up would be on if you could, again on acquisitions, if you could break down the advertising bookings between organic versus inorganic, and that'd be it for me. Thanks.

The majority is organic. You know, if you look at those businesses, I think all the businesses are roughly in sort of an 80-20 mix, broadly speaking.

Got it. Thanks.

Thank you. And as a reminder, ladies and gentlemen, that's star then one to ask a question. Our next question comes from Evan Wingring with KeyBank Capital Markets. Your line is open.

Thanks. 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?

This is Frank. As we look at how we're going to grow the company, it all starts with growing our live services It then moves into building a pipeline of new games, looking at new platforms, new markets, as we've 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 and scale, or if there's a new franchise or game team out there that could join the company, or if there's a new market or category that's interesting, we'll use our 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, you know, 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 that we've had a series of investments here, starting back with Peak and Graham and now with Small Giant, where we've seen some very good success on the theses. of what Zynga is all about and how bringing additional developers into the company can possibly result in better outsized returns. And so 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 it starts with a fit between the leadership teams, the team cultures, and then getting to 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. Thank you.

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

Hey, Frank, Jair. Congrats on an awesome quarter, guys. Just two questions. I was hoping to sort of remind us, I guess, more specifically, your long-term operating margin goal and sort of your playbook in terms of how you expect to sort of bridge the gap between where you are, say, 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 less so than prior quarters. And I think you said you expect it to reaccelerate in the second half of 2019. I'm just sort of curious your plan on driving growth in Zynga Poker second half. Thank you.

Obviously, our medium and long-term margin goals are to get more in line with our peers. If you look at our peers' margins, And 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 would report our bookings. So in the near term, we've said in the past, let's see, can we break 20? We did that in Q3, Q4. And we actually did that in Q1. So, aim one is to sustain 20, and as we indicated, at a high level, if we continue on 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 then grow from there. What gets you to beyond that? Obviously, as Frank has said and I have said, continue to focus on what is core to the business, our live services. Those businesses at scale deliver 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 21. If you get a breakout, that helps a lot. But that's the core organic strategy. Again, if we find additional talented teams or IP that can layer into that at the right kind of top line of margin goals, that also helps.

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 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. The growth has slowed down 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 you know, performing very nicely. And that gives, you know, the diversification of our portfolio is really one of our strengths.

Yeah, I'd just like to follow up. If you think about our business, it is actually a 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 21. Because when you look at our core forever franchises and our live business, as we said, that's predominantly the top line guide we're giving you guys for 2019. That business, you know, in terms of the live services, the actual games in the market is performing really well and driving, you know, 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 momentum when we see it in 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 performant portfolio of live franchises, five forever franchises now versus three a few years ago. And we have a very defined pipeline of new games that we're going to layer into that equation over the coming quarters and years. And so from our perspective, As Frank said, every day we wake up, we worry about the core live services, making sure the bolt beats are on track, that we're seeing the right level of player engagement and excitement in our games. 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.

Thanks, guys.

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.

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.

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.