Zynga (ZNGA) Q1 2018 Results - Earnings Call Transcript

Zynga, Inc. (ZNGA) Q1 2018 Earnings Call May 2, 2018 5:30 PM ET

Executives

Rebecca Lau - Zynga, Inc.

Frank D. Gibeau - Zynga, Inc.

Gerard Griffin - Zynga, Inc.

Analysts

Timothy O'Shea - Jefferies LLC

Eric J. Sheridan - UBS Securities LLC

Colin Alan Sebastian - Robert W. Baird & Co., Inc.

Michael J. Olson - Piper Jaffray & Co.

Justin Post - Bank of America-Merrill Lynch

Doug Creutz - Cowen & Company LLC

Brian Nowak - Morgan Stanley & Co. LLC

Christopher Merwin - Goldman Sachs & Co. LLC

Mike Hickey - The Benchmark Company, LLC

Dae K. Lee - JPMorgan Securities LLC

Richard Greenfield - BTIG LLC

Benjamin Schachter - Macquarie Research

Stephen Ju - Credit Suisse Securities (USA) LLC

Operator

Good day, ladies and gentlemen, and welcome to the Zynga First Quarter 2018 Earnings 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. As a reminder, this conference may be recorded.

I will now like to turn the conference over to Ms. Rebecca Lau, Director of Investor Relations. Ma'am, you may begin.

Rebecca Lau - Zynga, Inc.

Thank you, and welcome to Zynga's first quarter 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'll 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 our 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 Relations website in a few hours.

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

Frank D. Gibeau - Zynga, Inc.

Thank you, Rebecca. Good afternoon, and thank you for joining our call. Zynga had a great start to 2018, outperforming guidance in the quarter across all key financial measures and delivering our highest mobile audience in over four years. We're pleased with the player engagement we're seeing in our forever franchises and we're well on our way to achieving our near-term margin goals.

Before we detail our Q1 performance, today we announce that Mark Pincus, Zynga's founder has converted all of his high voting shares into our Class A common stock. This decision enables us to simplify our stock structure and move from a multi-class to a single-class structure. Mark's share conversion establishes voting rights parity for all Zynga shareholders creating a one-share, one-vote structure. While there is no change to Mark's economic interest in Zynga, his decision reduces his overall voting rights in the company from approximately 70% to approximately 10%.

Moving forward, Mark will continue to serve on Zynga's Board of Directors as Non-executive Chairman. We welcome this decision as a significant sign of confidence from Mark in Zynga's future growth prospects.

Turning to our Q1 financials. Revenue was $208.2 million and bookings were $219.5 million, both ahead of our guidance. We continue to improve our profitability moving from a net loss of $9.5 million in Q1 2017 to net income of $5.6 million this quarter, an improvement of $15.1 million and ahead of our guidance. Our positive performance in the quarter was driven by growth in our forever franchises. In particular, CSR2 and Words With Friends, as well as our recent Casual Cards acquisition which has been a great addition to our live services portfolio.

Our mobile momentum also continued with mobile revenue up 13% year-over-year and mobile bookings up 10% year-over-year. We significantly increased our mobile audience from

18 million average DAU in Q1 2017 to 23 million this quarter, up 24% year-over-year.

Our Q1 performance is an example of our team's execution against our growth strategy of focusing on our live services, launching new games, investing in emerging platforms and accretive M&A. First, we're committed to delivering growth in our live services and CSR's performance in the quarter shows what's possible when our forever franchise teams deliver on bold beats innovation.

Last quarter we released a new events series with Universal's Fast and the Furious that gave players the opportunity to acquire the most in-demand cars in the history of this blockbuster franchise like the Honda S2000. Additionally in Q1, we deepened our auto partnerships and worked with Lamborghini to release two new vehicles in CSR2 that were timed with the real world launches of these supercars at the 2018 Geneva International Motor Show.

These efforts drove 2% year-over-year revenue growth and 25% year-over-year bookings growth, highlighting how innovation in our live services can contribute to strong year-over-year growth. Second, we're focused on building new games with the goal of creating new forever franchises. Our latest release the successful sequel Words With Friends 2 benefited from strong momentum following us holiday relaunch. We saw continued player engagement in our boots features like tile swap, hindsight and word radar as well as new features such as solo challenge and lightning mode, which have delivered players more value and enhance their game experience with friends and family. This new game continues to capture the attention of new and lapsed players increasing engagement overall.

As a result, average moves per DAU were up more than 20% year-over-year and we increased mobile average DAU by 8% year-over-year. Words With Friends delivered mobile revenues up 18% year-over-year and mobile bookings up 32% year-over-year highlighting our team's ability to launch new games to strengthen our portfolio of forever franchises. In addition to Words With Friends 2, we have new games in development in the Action Strategy, Casual, Invest Express and Social Casino categories. We expect to launch new titles in some or all of these categories beginning in the second half of 2018 and continuing into 2019 and beyond. Today, we're excited to share that we've entered into soft launch with a new Casual mobile game, Willy Wonka's Sweet Adventure, which combines Match-3 and Builder gameplay to innovate within the popular Match-3 genre.

Third, we're continuing to innovate and engage with new audiences on emerging platforms like chat. While we don't expect monetization to have a meaningful impact in 2018, we see a big opportunity to make social gaming more accessible. Our approach is to move fast and apply proven mechanics, simple design and lightweight tech to iterate quickly and determine what's resonating with players. We're starting to see chat platforms have a positive impact on our audience. In fact, chat audiences were a key contributor to growing our overall mobile average MAUs 30% year-over-year from 63 million in Q1 2017 to 82 million in Q1 of 2018. In the coming quarters, we expect to accelerate our launch cadence of chat games on Facebook Instant Games, which could cause our average revenue or average bookings per DAU metrics to fluctuate over the near-term.

Fourth, as we've shown through our recent Casual Card (sic) [Casual Cards] (00:07:33)acquisition, we'll use the strength of our balance sheet and positive cash flow from operations to execute M&A opportunities that will enhance our growth potential. Q1 mark the first full quarter contribution from the Casual Cards acquisition. Our Istanbul studio team is meeting our expectations and we're pleased with their successful integration into our publishing and studio operations.

Looking ahead, our Istanbul team will continue to focus on delivering world-class experiences to our Casual Cards gameplayers through new content and innovative bold beats. We'll continue to take a diligent approach towards M&A, prioritizing opportunities that are accretive to near-term margin goals and create shareholder value.

In summary, we are proud of the way that we have started 2018 and we're confident in our performance and execution in the year ahead. We're excited about how we're bringing to life our growth strategy as we continue to prioritize delivering value to our players and shareholders over the long-term.

With that, I'd like to turn the call over to Gerard, so that he can further discuss Q1 results and our Q2 guidance.

Gerard Griffin - Zynga, Inc.

Thanks, Frank. We've kicked off 2018 with another strong quarter as we continue to progress towards our near-term margin goals. Our delivery was driven by strong player engagement and monetization across our live services coupled with effective cost management. Our revenue and bookings both exceeded our guidance. Revenue which is comprised of a net change in deferred revenue and bookings was $208.2 million, $8.2 million ahead of our guidance and up $13.9 million or 7% year-over-year.

The change in deferred revenue was a net increase of $11.3 million versus our guidance of an increase of $10 million. The increase in deferred revenue was primarily driven by the first full quarter of bookings from our Casual Cards acquisition. Bookings were $219.5 million, $9.5 million ahead of our guidance and up $12.1 million or 6% year-over-year. Our top line beat in the quarter was driven primarily by better than expected monetization across our live service portfolio, in particular CSR2, Words With Friends and our recently acquired Casual Cards portfolio.

Taking a minute to double-click on mobile which now represents 88% of our revenue in bookings. Mobile revenue was $182.6 million, up $21 million or 13% year-over-year. Mobile bookings were $193.4 million, up $17.3 million or 10% year-over-year and mobile user pay revenue was a $139.8 million, up $12.6 million or 10% year-over-year. And mobile user pay bookings were $150.4 million, up $10.3 million or 7% year-over-year. This performance was driven by a full quarter contribution from our Casual Cards acquisition and double-digit growth collectively across our forever franchises, partially offset by declines in older mobile games. Mobile advertising revenue was $42.8 million, up $8.4 million or 24% year-over-year and mobile advertising bookings were $43 million, up $7 million or 20% year-over-year. This growth in advertising was driven primarily by Words With Friends and Solitaire.

Turning to our Q1 operating expenses. GAAP operating expenses were $134.9 million, down 2% year-over-year representing 65% of revenue, down from 71% of revenue in the prior year. Stock-based compensation was $14.1 million, down 19% year-over-year, representing 7% of revenue, down from 9% of revenue in the prior year. Non-GAAP operating expenses were $120.3 million, down 1% year-over-year representing 55% of bookings down from 58% of bookings in the prior year. All of this contributed to a net income of $5.6 million, $10.6 million ahead of our guidance and an improvement of $15.1 million year-over-year. Our adjusted EBITDA, which includes $11.3 million of a net increase in deferred revenue was $26.6 million. This was above our guidance and up $9.9 million year-over-year.

We had a net use of operating cash flow of $3.9 million as compared to a net use of $4.7 million in the prior year quarter. This year's cash flow was negatively impacted by a one-time legal settlement payment of around $11.9 million.

We ended the quarter with cash and short-term investments of $635 million and today, we announced a new $200 million share repurchase program. This program follows the completion of our existing $200 million program where we repurchased 67 million shares at an average price of $2.99 per share.

And now to Q2 guidance, which is as follows. Revenue of $208 million and net increase in deferred revenue of $10 million, bookings of $218 million, net income of $1 million and adjusted EBITDA of $27 million.

Some additional factors to consider in assessing our Q2 guidance, include the following. We expect Q2 to be similar in profile to the performance we delivered in Q1, driven by our live services and our planned cadence of bold beats against those live services. Similar to Q1, we anticipate our year-over-year growth to benefit from a full year contribution from our Casual Cards acquisition. We expect low double-digit growth collectively across CSR2 our social slots portfolio, Words With Friends and Zynga Poker. This growth will be partially offset by declines partially by declines in web and older mobile games. We expect our gross margins and operating expenses to be broadly in line with Q1 levels.

With respect to fiscal 2018, we continue to believe that our financial performance in the year will broadly follow the financial themes we outlined in our Q4 2017 quarterly earnings letter. In particular, we remain on track to deliver low double-digit growth in mobile bookings and expect live services to deliver more than 95% of our revenue and bookings. We remain on track to achieving our near-term margin goals and are committed to delivering margins more in line with our peers over the long-term.

In summary, we're proud of the way we started 2018 and are confident in our performance and execution ability in the year ahead. We're excited about how we're executing against our growth strategy as we continue to prioritize delivering value to our players and investors.

With that, we are happy to take your questions.

Question-and-Answer Session

Operator

Thank you. And our first question will come from the line of Tim O'Shea with Jefferies. Your line is open.

Timothy O'Shea - Jefferies LLC

Yes. Good afternoon and thank you for taking my question. So with Fortnite and PUBG recently coming to mobile, I'm just curious if you've seen any measurable impact to your business. What's the audience overlap there if any? And then maybe just broadly speaking, I'd love to hear your thoughts on competition as publishers bring established gaming franchises to mobile? Thanks.

Frank D. Gibeau - Zynga, Inc.

Thanks for your question. Tim, this is Frank. We've seen no impact on our business from Fortnite and PUBG, in fact, we like the fact that there is new innovation and a new genre on mobile in shooters and bringing new audience to play there. The fact that you can play cross-platforms is an innovation that I think is drawing a lot of attention to mobile as a destination gaming platform. The audiences that we serve with our game services, we've seen no impact from those two games. But we are excited about the attention it brings to mobile.

In terms of the second question, we're a big believer in big brands and big IPs. We think that those are the way to generate audiences both organically and to sustain them over the long-term. We have a lot of brands in our company's history and a portfolio like FarmVille, like CityVille, obviously Words With Friends, CSR2, Zynga Poker. So we're a big believers in that type of brand power coming to mobile, more console brands or PC brands coming over is again – I think it's great to establish mobile as a destination gaming platform and as the devices get more and more capable, from a performance standpoint, it's really going to blur the line between traditional gaming platforms and mobile as a place to spend your time and money.

Timothy O'Shea - Jefferies LLC

Thank you.

Operator

Thank you. And the next question will come from the line of Eric Sheridan with UBS. Your line is now open.

Eric J. Sheridan - UBS Securities LLC

Thanks for taking the question, maybe two if I can. You continue to show nice progress in terms of leverage – getting increased leverage in the business on the margin side of the equation. Maybe talk a little bit, question one, about leverage, how we should think about that going through the model going forward versus the demands for capital, the demands for OpEx inside the business model where you want to make those big bets for the medium to long-term.

Second, we get a lot of questions from investors intra-quarter on the federal court ruling with respect to Social Casino. Just want to know if you have any comment there or way in which investors should think about that? Thanks guys.

Frank D. Gibeau - Zynga, Inc.

Thanks, Eric. This is Frank. I'll start with the Washington State Social Casino question, and then hand off to Gerard for the leverage in the margins topic. At this time, we don't foresee any material impact on our business from the Washington State ruling. It goes against President decisions in our view and in the view of many. It's something that will take years to resolve and we'll continue to watch. For our perspective, the business risk is extremely low less than 1% of our total bookings, our Social Casino in Washington State. Other states have different positions on this issue so from our perspective, it's a very narrow issue, it's a very manageable issue and it's one that's going to take a lot of time and not have an impact on Zynga.

Gerard Griffin - Zynga, Inc.

Eric, it's Gerard. In terms of leverage, the way we think about it as we spent the last few years right-sizing the ship and refocusing the company in terms of our investment against live games and new development. And we feel good about the shape of our operating structure to support our live portfolio in addition to innovating into new games and innovating into new areas like chat. As we think forward, we're looking to drive scale, we're looking to continue to drive strong bookings from our live business, obviously get a contribution from new games as they come into the live portfolio over time. And we believe that's what will drive improvement in our margins over time.

We will also leverage the balance sheet to add talented teams in IP into our portfolio with the same ambition obviously is to drive stronger growth and a stronger appeal for our player base, so that we can continue to drive a strong bookings growth and then obviously, a stronger margin profile. And we're very happy at the progress we're making against that and looking forward to showing more of that over the course to come.

Eric J. Sheridan - UBS Securities LLC

Great. Thanks so much.

Operator

Thank you. And the next question will come from the line of Colin Sebastian with Robert Baird. Your line is now open.

Colin Alan Sebastian - Robert W. Baird & Co., Inc.

Great. Thanks. And hopefully you can hear me. My first question is maybe a follow-up on the Social Casino and more specifically on Poker. You didn't talk as much about the product development roadmaps for that title. Is that reflective of the maturity of that game or maybe a changing approach to the franchise?

And then secondly, I wanted to ask about the Instant Games in Messenger. Are you seeing that more as a customer acquisition vehicle or do you see the monetization capabilities unfolding? And long-term, what sort of context should we think about that platform relative to other platforms? Thank you.

Frank D. Gibeau - Zynga, Inc.

Yeah. Thank you for the question, Colin. On the first one, I think when you look at Poker, we have a lot of bold deeds planned for the franchise, it's very healthy and doing well. In the second half, we have – we've announced in the past that with World Poker Tour is going to be a major bold beat for us in the second half. We have a lot of features planned to be able to flesh out that tournament structure and the ways that you can compete in Poker and grow it into the second half of the year. It's done very well in the first half of the year. We just had a lot of news today to get out. So the absence of Poker wasn't a communication there.

In terms of Instant Games in Messenger, it is a pre-monetization platform. But what we like about it is, it's a new channel on mobile. The most social part of the phone is in chat, that's where people like to spend their time and it's becoming more and more technically capable to entertain people there. And so as we look at Facebook Instant Games as well as some of the other investments some of the other social platforms are making, we see a real opportunity to reach a younger audience, an audience that engages with games on a more frequent basis and they're also lighter more bite size games that appeal to that audience. And so we found actually with Words With Friends on chat versus Words With Friends in native, is that it's a different audience, it's younger more male, it engages differently, in terms of its dynamics. But overall, they love playing games and chat.

Facebook and others will start to develop and there's been some recent announcements on how they propose to monetize the platform, but one of the things we really like about it is it's an organic acquisition channel. We're able to bring players into the games, without resorting to paid acquisition, like you sometimes have to do on native. And we believe that pursuing the high velocity release schedule that we have for a lot of our games, we're going to be able to build a very nice position on those platforms, a very nice audience, that will be able to introduce new experiences over time and innovate for the long-term. So, we see it as an innovative channel within mobile, and it is the third leg of our four point strategy in that we want to always be in position for the platform transitions that come within mobile, whether it's chat becoming a gaming platform, whether it's 5G, AR/VR, we're constantly experimenting and looking at those new opportunities for growth.

Colin Alan Sebastian - Robert W. Baird & Co., Inc.

Thank you.

Operator

Thank you. And the next question will come from the line of Mike Olson with Piper Jaffray. Your line is now open.

Michael J. Olson - Piper Jaffray & Co.

Hey, good afternoon. I had a couple of questions. First, DAU was up a lot on the Casual Cards acquisition but ARPU was down a bit and I missed the prepared remarks, so I apologies if you mentioned it, but first of all, why was that the case? And then secondly, just any thoughts on over what time period you'll execute the $200 million share repurchase program, maybe you could remind us how long it took you to work through the previous $200 million authorization? Thanks.

Gerard Griffin - Zynga, Inc.

I'll start with the share repurchase. The first share repurchase we announced was when I joined, it was my first quarter. So we did it in just over a year, it was a year and a quarter. So as it relates to this one, it really will depend on ultimately the market in terms of the share price out there and our ability to execute against that. The first one we essentially got it done in essentially a year, year-and-a-quarter at an average price of $2.99. So we feel really good about that given where we believe the stock should be. In terms of the DAU question, could you just repeat that again, please?

Michael J. Olson - Piper Jaffray & Co.

Yeah, it was really more around ARPU, so DAU I was just mentioning was up a lot and I was explained the Causal Cards acquisition, but why was ARPU down is basically the question.

Gerard Griffin - Zynga, Inc.

I think one of the things Frank talked about it earlier, as we think about audience, we're growing our chat audience, which is it's great groundbreaking in terms of building obviously new players into our ecosystem, but those players are not monetizing at the moment, so it is diluting the overall average.

Michael J. Olson - Piper Jaffray & Co.

Okay. Thanks.

Operator

Thank you. The next question will come from the line of Justin Post with Merrill Lynch. Your line is now open.

Justin Post - Bank of America-Merrill Lynch

Thank you. Appreciate it. Hi, Frank, hi, Gerard. I wanted to ask about the new franchises and whether you think about these incremental titles over the next year-and-a-half as kind of big brand new franchises or kind of more incremental on the franchises you have. How are you thinking about that? And then, on the R&D, it's nice to see the leverage there you got it down to $61 million with a lot of potentially new stuff and both beats coming over the next 12 months. How do you feel about where you are with that $61 million now and where it could go in the future? Thank you.

Frank D. Gibeau - Zynga, Inc.

Thanks for the question, Justin. I'll take one and Gerard can talk about number two. In terms of new franchises over the next year-and-a-half, we're looking at a portfolio opportunity there. There will be titles that will be released that will be original IPs that haven't been seen before. There will be brands that we have brought back from the Zynga vault in categories, where we've been successful in the past. We've been very open about the idea that we want to get back into the Invest Express category where CityVille and FarmVille have traditionally been very successful, so you'll see new products in that category.

In addition to that we are looking at strategic licensing as an opportunity. We feel that there's room in our portfolio and we have audience adjacencies that lends itself to pick up some additional licenses. Obviously, we announced today and in that Wonka's Sweet Adventure is in soft launch right now, which is a Match-3 game but uses some of our experience in builders. And so it gives us an all new experience there, but it's a brand that we've been successful within the past that we've built an audience with. So it'll be a mixture of adjacencies, all new titles, strategic licenses and sequels.

Gerard Griffin - Zynga, Inc.

Justin in terms of the R&D leverage, you know, as I said in one of my previous answers, we're very happy with the efforts we've taken to essentially sharpen the operating model across the company. As it relates to R&D, we spent a lot of time focused on the core talent realigning our focus within live and within new. You know as we think about that going forward, the core studios we have in the company right now are obviously driving the momentum you've seen in our live business, but they're also building games in the four genres as we are operating in. So we have the capability today to support our live business to build new games and also to invest in new areas like chat. So we feel good about that. I think over time as we add more games to the portfolio, we potentially acquire additional studios you may see a take up in that absolute dollars.

But I think from an operating leverage perspective, we feel like we're in a good place and we obviously continue to manage that business very carefully. One of the things that Frank and I and Matt Bromberg, our CEO and our studio leadership have a lot of experience in, is making sure we're managing the roll-on and the roll-off of teams from new into live and then ultimately into new projects, and that's a – there's a lot of focus in that area. I think the development framework that we've put in-place is a solid one it's one we've used in our past lives. And so, as you look at the future, we are going to focus continually on our live business new bold beats, building new games and obviously investing into new areas.

Justin Post - Bank of America-Merrill Lynch

Great. Thank you. Appreciate it.

Operator

Thank you. And the next question will come from the line of Doug Creutz with Cowen and Company. Your line is now open.

Doug Creutz - Cowen & Company LLC

Hey. Thanks. I noticed over the last couple of quarters, the web portion of your business seems to be just about flat sequentially, which is a pretty noticeable change. Is that something sustainable or is it something you're doing something differently, any color you can add there would be helpful? Thanks.

Gerard Griffin - Zynga, Inc.

As we've said in the past we do expect our web business to decline. However we're not giving up on those players. Just like our players on the mobile side, we continue to focus on bringing entertaining games to them. And what we found is, when you look at Q1 in particular, our web business performed well, it's still declined overall in terms of 21% or down quarter-on-quarter 6%, but our aim there is to continue to excite and delight those players. It's a fairly core audience at this point.

And I think with the challenges around Flash, we obviously still believe there's choppy waters ahead as we go through the year. But again, just like other parts of our business, we're very much focused on the player and what I would say is right now, it's – that's an audience if you're still playing on web, you're going to hang around and as long as you keep bringing compelling content to them, I think we've got an opportunity to sustain it. However, the Flash issues and the deprecation is probably the biggest issue we see in the future as it relates to that business.

Doug Creutz - Cowen & Company LLC

Great. Thank you.

Operator

Thank you. And the next question will come from the line of Brian Nowak with Morgan Stanley. Your line is now open.

Brian Nowak - Morgan Stanley & Co. LLC

Thanks for taking my questions. The first one, Words With Friends 2, you've done a good job at showing a blend of in-game bookings and monetization and advertising. If you look across the other franchises, talk about the potential to sort of develop a dual revenue stream model across some of the other franchises you have?

And then secondly, good to hear about sort of the investments you're making on the existing versus new IP? Is there any way you can help us to understand is the level of investment in the new IP now just so we can sort of understand for investment spend versus or core spend? And lastly really fast, any updates on new potential financing arrangements around the building? Thanks so much.

Frank D. Gibeau - Zynga, Inc.

Yeah. I'll take number one, Brian. So Words With Friends 2 was always an ad driven model and this year we innovated with some new features that allows players to get engaged with the game in new ways, like with the boost system that we created around Tiles Swap, Hindsight, and Word Radar and those have been proven to be very popular especially when you look at some of the new multiplayer modes we've added like Team Battle, that has been something that has helped really drive engagement, but also has created value inside the game that players are really excited about engagement within Words With Friends 2 is up 20% year-over-year, which is a phenomenal result.

So I think our ambition to create a more diversified kind of stream of business from Words With Friends is well underway and doing well. We also look at our other IAP businesses, things like CSR2 or Zynga Poker, and we look for opportunities for advertising there. Our advertising business year-over-year is up double digits and doing quite well in the first quarter. A lot of that has to do with the optimizations that we've been doing adding new inventory and looking at ways that we can better serve advertising to our players in a way that enhances engagement in the gameplay. We always operate with what if our players thanked us for a player first orientation, but what we've found is that Watch To Earn is an ad unit for example drives engagement. So we are actively looking at that in addition to what we've been doing with IAP and inside Words With Friends.

Gerard Griffin - Zynga, Inc.

Brian, on your new IP investment, I think what I would say is sort of what I said earlier in some of the other questions, as we look at our R&D investment in our talent pool holistically and right now, we feel like we've got the right shape to deliver growth of our live portfolio that we have in the market today and that includes the Casual Cards acquisition, and it also gives us the ability to build games in the four categories we're operating in, in addition to chat.

So it's very important obviously in the development organization to make sure you've got a lot of good creativity going on to keep the teams focused on innovating what are in their games, and that's what we're doing. In terms of the overall shape of that spend, the only reason that spend should grow in absolute terms is if you add – you add more studios into the mix either through acquisition or through build out new studios.

And the profile is different obviously by studio. If we were in Helsinki right now, that team is totally new. They're building a new game and they're very much focused on that. But if you go to our studios in London, they are managing live businesses like CSR2 Dawn of Titans, but they're also building innovative new IP and the action strategy category for release sometime in the future.

So it's a mix. What I would say to you is, if you look at our P&L today, I like the shape of that P&L, and I think the main variability in that P&L on the operating spend is more around marketing as we – you know we inflect that in absolute terms against growth on bookings, and on a percentage basis look into drive efficiency. Oh, sorry the building, excuse me.

Gerard Griffin - Zynga, Inc.

On the building front, you know I've been here now a year-and-a-half, and I think one of the first questions I got from an investor is what's going on with the building. Since then, what's going on with the building is it's appreciated in value, it's not a cash generating asset, and we're happy with – you know obviously the value that that creates for our shareholders and for Zynga. But we continue to evaluate other ways to optimize the building book, but for now we're happy with that.

Q – [06V833-E Brian Nowak]>: Great. Thanks.

Operator

Thank you. The next question will come from the line of Chris Merwin with Goldman Sachs. Your line is now open.

Christopher Merwin - Goldman Sachs & Co. LLC

Okay. Thank you. So a couple of questions, so in the letter, you talked about the mobile ad marketing, competitive and price sensitive, but you also had solid growth for ad bookings in the 1Q and Frank, I think you talked about some of the reasons for that. So in light of those comments, can you help us shed some light on the trajectory of ad bookings going forward in the context of your 2Q guidance and beyond as well?

And then just a second question you mentioned your intention to leverage balance sheet for M&A, you just obviously completed one acquisition. Are you looking to expand into more genres and did anything change in the competitive environment or what you're seeing with the private companies that made M&A more of a focus as of late? Thanks.

Frank D. Gibeau - Zynga, Inc.

Yeah, I'll start with the M&A question, then Gerard can talk about advertising as it relates to guidance. Look, the M&A has an opportunity with mobile has always been hard, it's a very large global development community that has a lot of change in it. And so from our perspective, we've always been interested in growing the company through acquisition, if we find the right team with the right talent, the right cultural fit with franchises that fit in with the Zynga mission of social gaming. Obviously we have a very large casual offering and we have a very large player base that are women.

So we tend to look at acquisitions that are able to fit into that overall construct. And so we've been participating ever since we started the turnaround in looking at opportunities. We just have been very disciplined about not being overly fixated on growing through M&A and trying to get the organic growth part of the business going, which has been our focus over the last nine quarters, and then be able to plug in the inorganic opportunities as we've seen. So we've done two acquisitions, the Solitaire business as well as the casual card games out of Turkey.

So I wouldn't say that our activity in M&A has increased. I would just say that we continue to look at it and when we find the right opportunity that's accretive, that fits with our culture, that is on the same mission that we are, we feel like we should be able to execute on that. And it feels good to have the momentum inside the company now, because there's a lot of good conversations inside the industry going on right now about how things are going to evolve. But overall, it's – after we focus on live games then we focus on new games, then we focus in on chat and then we finally get to M&A in terms of how we spend our time and prioritize.

Gerard Griffin - Zynga, Inc.

Yeah, I would just add that when you're in a company that's got momentum in particular in the creative industry like ours, acquiring talent whether it's organically through people joining the company or through acquisition is a lot easier. So, we do see opportunities out there. But to Frank's point, we're being very judicious in terms of looking at what we want to bring into the company.

In terms of the ad market, I will continue with my position that it is a competitive space. We had a very good Q1 and that was down to obviously the power of Words With Friends and the innovation we've put into that brand and the rejuvenation of the franchise plus Solitaire. As I think about the year, ultimately, we expect we'll grow our advertising business over the course of the year. We do expect it to be competitive, but the one thing we will continue to do is look for our relevant addressable audience against our advertising business model, and ways to optimize that audience as it relates to the imagery we have. So right now we expect to grow it. I would say it's in that sort of low single digits right now. But again, I do believe it's one of those areas where you're going to see ups and downs. Right now, we feel good about our advertising business and we expect to grow it over the course of the year.

Christopher Merwin - Goldman Sachs & Co. LLC

Okay. Thank you.

Operator

Thank you. The next question comes from the line of Mike Hickey with Benchmark Company. Your line is open.

Mike Hickey - The Benchmark Company, LLC

Hey guys, thanks for taking my questions. Appreciate it. Two from me. I guess first on Peak, if you could maybe size the contribution in the quarter, obviously I wouldn't ask you to do that an ongoing basis, but perhaps it's helpful as a starting point in new bookings and DAU. I'm also curious if you're including within Peak within Zynga Poker, if you can strip that out, if you are still able to grow Zynga Poker sequentially or year-over-year?

And the second question on FarmVille, forgive me if this was asked, but obviously this has been deteriorating year-over-year for a while, it looks like, but pretty aggressive fallback here in Q1. Just any insight there and what we're seeing – what looks to be a little more aggressive deterioration for FarmVille? Thank you.

Frank D. Gibeau - Zynga, Inc.

Mike, this is Frank. I'll start with the – talking about Peak a little bit. In terms of the over performance in the quarter, it had a lot more to do with CSR2 and Words With Friends 2 and Peak was a contributor in that mix. It did help on audience, certainly on the MAU front, but chat and also the growth in Words With Friends was a good one. Poker did grow in the quarter, so that is not being impacted on the negative front by our expansion into casual card games, it was up 7% year-over-year in bookings and up 13% year-over-year in revenues with a focus on the second half around the World Poker Tour being our big issue there or big opportunity there.

In terms of the FarmVille fallback, actually Country Escape grew in that period of time. It was the web that saw a lot of the headwinds, Tropic Escape has also done okay and held its own on native. But with FarmVille 1 and FarmVille 2 on the web, it's operated out of our India group and we're doing a very good job updating that user base with new content, new ways to play. But overall, there's a decline there happening with regards to the overall platform that structurally as well as things like the deprecation of Flash having impact on installs, et cetera.

Mike Hickey - The Benchmark Company, LLC

All right guys, thank you.

Operator

Thank you. And the next question will come from the line of Douglas Anmuth with JPMorgan. Your line is now open.

Dae K. Lee - JPMorgan Securities LLC

Hello, this is Dae Lee on for Dough. So my question first is on how we should think about the timing of going from soft launch to full launch? And then on second, can you help us understand how resource-intensive messaging game (00:41:47) would it be similar to a big bold beat or is it more closer to new launches? Just trying to gauge how fast you can move there?

Frank D. Gibeau - Zynga, Inc.

Hi, this is Frank, the messaging game development model is very efficient. You're talking about very small teams less sometimes single digit in terms of the number of people, they can be very fast in terms of how you can bring them to market and develop them. So really comparing them to native is not a not a good comparison, they're very – they're a lot smaller, a lot faster. And you're able to you know fully fund those in a way that is already included in the R&D discussions that we've had and a bit of demonstrated.

In terms of soft launch to full launch, in terms of the process there, what we're trying to do is go into soft launch with more robust games so that we can have very clear reads on the game as quickly as possible. We also want to find the fun frankly earlier than going into soft launch. And so we tend to have

some benchmarks of six months to a year for soft launch. But really the focus is those on long-term engagement and when you feel like the core loop is in good shape and able to generate an audience, that would than retain, and we'll look at organic to paid ratios of acquisitions, we'll look at lot of different metrics but honestly it's one quality and engagement are where they need to be that's when we'll come out with soft launch.

That doesn't mean that we want to have soft launches that extend past – much past a year, but if the model makes sense in terms of a small development team that's iterating, that's kind of the beauty of mobile, we have lots of different ways to come to market. And the only thing I would remind in the context of this question is the reason we're still focused on growing the company through live services is that, we aren't reliant on the new games delivering one quarter or another. We're going to consistently grow our audience, our profitability, and our top line by focusing in on growing live services, so that when we layer in a new release like a Wonka's Sweet Adventure or some new game that we haven't announced yet, those will then be added in incremental to the portfolio as opposed to us having to bank a quarter on a new launch or not.

And so I just what you guys understand our mindset and our orientation that launching new games on mobile is a difficult endeavor and you really need to be able to take the right amount of time and focus in order to really pull that off.

Dae K. Lee - JPMorgan Securities LLC

Understood. Thank you.

Operator

Thank you. And the next question will come from the line of Rich Greenfield with BTIG. Your line is now open.

Richard Greenfield - BTIG LLC

Hi. Thanks for taking the questions. You were mentioning before the $2.99 average purchase price for your stock was pretty compelling. Wondering how do you feel about your stock at current levels, given the move it's had over the last year? And does the shift in voting control that Mark Pincus made, does that shift your view or impact your view in terms of how compelling your stock is to repurchase at these levels?

And then just a couple of quick follow-ups on other things that you've mentioned. You talked about Fortnite expanding the market for mobile gaming, which you liked. Should Zynga be in that category of shooters over time? And then lastly, just on Wonka, obviously there's a tradeoff between known IP and the cost of that IP. Can you just remind us of what that looks like in terms of licensing versus having your own IP in terms of how to think about the economics of the game?

Frank D. Gibeau - Zynga, Inc.

Yeah, this is Frank, I'll start and then maybe Ger can dive in a little bit on the repurchasing part. We're obviously looking at the Fortnite, Battle Royale, and PUBG category, it's really exciting place in mobile right now both in Asia as well as in Western markets. So it's something that we've definitely take a note of and we love the new audience that's coming into mobile in a more aggressive way there.

In terms of known IP versus original IPs, we have a lot of original IPs we own like Poker and Words With Friends and the Villes and when I mentioned earlier about strategic licenses being available to us, we believe that for the right price and the right rates, it is possible to build a very profitable strong business and we have a fairly good handle on that we believe in terms of being able to acquire and look at licenses that we feel are additive and contributive to us in the right risk profile. So, it's difficult to say there is a generic range, it really depends on the license. But we like licenses that are mass market in orientation, that are global and that can last for a number of years. That's really how we think about it, and ultimately, we think of a license and as a forever franchise potential, can it add one more new forever franchise to our overall portfolio. So that's how we think about that piece.

In terms Mark Pincus' decision to convert his high vote shares to common, that had no bearing or impact or any type of relationship to our go forward $200 million repurchase that we just announced today. So that was unrelated, and in terms of the average price of $2.99 on the last repurchase program, we believe in our company long-term.

Our job is to build long-term shareholder value. We think that is a tremendous amount of value in what we can do with our forever franchises, with our live services, the talent that we have at the company, the global mobile opportunity that presents itself in front of us. So we're here to really grow long-term shareholder value, and we believe that at current levels, there's an opportunity to repurchase stock in a way that makes sense.

Richard Greenfield - BTIG LLC

Thank you.

Operator

Thank you. And the next question will come from the line of Ben Schachter with Macquarie. Your line is now open.

Benjamin Schachter - Macquarie Research

So there are a few questions. One on the chat, I believe Zuckerberg was talking a bit about changing the platform, simplifying a little bit. I was wondering how those changes might impact your strategy or how do you think go-to-market will be impacted there?

Secondly, obviously China, Japan, Asia in general is so important. Can you just talk about what opportunities that you might have there down the road? And then finally., given your tenure in the space, I was wondering if you can expand a bit more on Fortnite not just as it relates to Zynga but just in general for the industry, do you think this is sort of a fad, do you think this is the new franchise that could be as dominant as it has been recently going forward? How do you think this (00:48:29) over time? Thanks.

Frank D. Gibeau - Zynga, Inc.

Yeah. So on chat, there's been a lot of announcements this week as it relates to that platform. One thing to know about Facebook platforms and mobile is they change a lot and we stay very close with our platform partners to try and anticipate changes in monetization, changes in APIs, testing protocols the whole nine yards. So, from our perspective, we are positioned to be fast, be nimble and be in a position to leverage the growth within the chat platform as it is currently manifesting in the West on Facebook. But eventually it could be a potential opportunity in other ones. So we're excited to hear that they're interested in the platform, that they're investing in the platform and we think that it could be a great growth driver for Zynga. And in terms of China, Japan, and Asia, for Zynga, I talked about on prior calls and in some of our investor materials, we really don't have a significant business in Asia and it's a very – it's a significant if not the majority of the business in the mobile market. We are actively looking at ways to enter that market. But one thing to know about those regions is they're very competitive.

You have to have the right intellectual property, you have to have the right partners, you've got to have the right go-to-market strategies and you have to have a long-term view. So you can't really jump in really fast and expect that a lot's going to happen, you really have to lay the infrastructure, build the relationships, and then have the right game with the right kind of user experiences, right monetization schemes, in order to be successful.

So our Corporate Development group is looking at ways to get us into that mix and our publishing unit is looking at properties that we have currently in the market that are appealing, and we have actively in the last two quarters been buying advertising in some of the Asian markets to drive some of the franchises that we have that do have audience of significance there.

So long-term, we know we need to be there, but we don't – we want to do it in the right way that leads to success and not go too quickly. Look, I don't think Fortnite is a fad, I'm a fan. I've had to use case where I got one kid on an X-Box, a kid on a PC, and a couple other kids on mobile phones, all playing together and then jumping and watching the streams of what's going on from with Ninja or other guys. I think PUBG, there's a lot of Battle Royal dynamics and cross platform social game play available to the market in Fortnite. So I don't I don't think it's a fad, I think it's actually broken new ground. I think it's super innovative and super cool and it has a very broad base of players and it's also shown that shooters can come over to the mobile platform at scale.

They're just – there hasn't been up until PUBG and Fortnite recently. There hasn't been a shooter in the West, that's really jumped into the top of the chart. So, I'm a little biased because I love playing the game. But I think it's here to stay.

Operator

Thank you. And our last question comes from the line of Stephen Ju with Credit Suisse. Your line is now open.

Stephen Ju - Credit Suisse Securities (USA) LLC

Okay, thanks. So Frank, I wanted to lean in on a little bit on Ben's question, so it seems like the economics for instant game seems to be about a 30% fee paid on the booking dollar after you pay Google for platform fees. And if you look at the other sort of global messenger platforms, it's probably a range of 20% to 30% in terms of fee you may incur. So as you look at that acquisition cost versus your other channels, is this the same more attractive channel for you? I want to believe that despite what the margin structure may be ultimately this should be found free cash for dollars for you. Thanks.

Frank D. Gibeau - Zynga, Inc.

Yeah, it's a good point that it has a different structure, I won't go into detail about how the flow works there because it's actually not completely determined. Because a lot of these are new markets that are getting developed, and it's not – it's pre-monetization and it's still growing. There obviously are some precedents in WeChat, or Kakao or LINE, but that hasn't proven to be the case in the West yet. I'm not saying it is or isn't, but it's just pretty – too early to talk to detailed about specific numbers there. But on a theory level, you want to keep R&D pretty low. It's a fast moving market. The game engagement curves and how fast they come to market are extreme relative to things like a PC game or a native game.

So you really want to carefully manage the other parts of P&L so that you are conquering the scale opportunity, this really is a volume game. And it's also a game where you might be able to acquire audiences organically as opposed to paid. So you might pick up some room there, they're cheaper to build, you can build more of them faster and the channels are highly social. So we believe that there is a thesis to be successful on the platform regardless of how the margins shake out. But ultimately, we as a company had committed to a margin structure for this company to be in line with peers. And so as we look at lines of businesses, we're constantly evaluating our investment in different things like native or chat or emerging platforms and we're constantly keeping in mind that we need to do that in a way that provides a return for our shareholders.

Stephen Ju - Credit Suisse Securities (USA) LLC

Thank you.

Operator

Thank you. At this time, I would like to turn the call back to Ms. Rebecca Lau for closing remarks.

Rebecca Lau - Zynga, Inc.

All right. Thank you, Sabrina. We want to thank everyone for joining our earnings call today and look forward to connecting more over the coming weeks.

Operator

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