Zynga's (ZNGA) CEO Frank Gibeau presents at UBS Annual Global Media and Communications Conference (Transcript)

Zynga (ZNGA) UBS Annual Global Media and Communications Conference December 3, 2018 3:15 PM ET

Executives

Frank Gibeau - Chief Executive Officer.

Analysts

Operator

Unidentified Company Representative

You’ve joined the company a couple of years ago now. Zynga’s been through a really interesting transformation, as you look at where it was a couple of years ago when you took on the job versus where we are today. Maybe just start by reflecting back to what the company was like, where it’s come over these last two years and bring us sort of up to date on the transformation that you've sort of overseen.

Frank Gibeau

Okay, sure we can do that. It feels like it was just yesterday. And time has really gone fast. We have a saying at Zynga. It’s called Zynga Speed, which is to go really really fast and we’ve definitely embraced it. As we’ve looked at these the last couple of years, we’ve really focused early on about unlocking the value of the company. With the early days, when we got there and we’ve looked at the company with this incredible collection of brands, really talented people, some clear competitive advantages in product management, data analytics, great advertising stacks, really killer brands, growing market, great balance sheet but for whatever reasons things weren’t getting executed on. And there was too many projects underway, not enough attention was being paid to some of the biggies like Poker and Words With Friends. And so what we did very early on was just focus in on what we felt was going to be the key – the key issue, which is get our live services going.

And if we can execute there, and do what we said we were going to do, we thought we could rebuild our credibility as a management team, as a company. And then, I’ve been through a few turnarounds in my career, so if you can flip the bit and get that momentum going, things really start to unlock for you.

So I think we started around 600 million top line, around 2% on the bottom when we got there. This year we’re going to be closer to 950, and in this last quarter, we had 21.6% on the bottom. Words With Friends, Zygna Poker has hit all time highs. Zygna Poker’s 10 years old. Words With Friends is eight years old. We have larger audiences, deeper engagement, higher quality. We successfully launched CSR2 and Dawn of Titans’ got out as well. We got the NaturalMotion's products going, and along the way we’ve bought a few companies. We bought a Solitaire Company, Peak and recently we just acquired a company called Gram, which is a great super shop in Istanbul and London, they make high -- hyper casual games and they have a franchise called Merge Dragons! that we really, really love.

And so, that that kind of core focus on life services, building franchises and having kind of that operating discipline and execution has really paid off. And I’m happy to report that I think we’re kind of through the turnaround phase. I think, we can turn the page on the turnaround, and what we’re really focusing on is growth. How do we start to layer in new products, new services, new ideas in terms of companies we can partner with to really start to grow the top line, grow profits and grow audience. This is really exciting time for the company.

Unidentified Company Representative

So against that backdrop that the turnaround is more behind us than ahead of us, and now we’re focused on growth as a company, maybe give us a snapshot looking across the franchises of how far along the curve you’ve come to getting to where you want to be on live services, which franchises are already there, which franchises are sort of work in progress, and which franchises are you most excited about when you look out 2019 and beyond.

Frank Gibeau

Well I think, when you think about live services, you’re never done, and you never, I don’t think that you ever reach your full potential; you’re constantly striving for it. There’s – there’s a if you look at the overall mobile market, it’s a $100 billion market over the next you know by 2021, two and a half billion smart devices enabled. It’s really hard to saturate a mobile market.

So when you’re looking at a live service game, there’s always people that haven’t played your game yet. And there’s always going to new markets to open up. And so that’s the constant drive that we have inside the live services is we’re not done growing. There’s new people to play our games, there’s people that have played our games and moved on to something else that we can bring back.

So just thinking culturally and kind of tonally, we think about that way for Words With Friends, for Poker, for CSR2 and to really think about how we innovate, bring new features, new ways to play, new experiences to bear, so that we can then market them and acquire these players.

So I would say that if you look at Words With Friends 2 right now, it’s on a tear. It’s up 47% year-over-year. We introduced a sequel version of it late last year and we introduced all new features. You can play single player. You have new competitive mode, team play. We introduced a new economy where you have boosts, like Word Radar and Hindsight that allow you to kind of play the game in a new way, be more competitive and it’s had a huge impact.

We’ve seen engagement in the game raise 20% year-over-year, so that’s more more moves per day, per player. And that’s had a correspondingly positive impact on the overall growth business. Our advertising business is mainly what you see in Words With Friends and we’ve seen an incredible outcome there. It’s up over 40% as well.

So if you think about the franchises as the hottest right now, I’d say Words With Friends is right there. Zynga Poker is in a more of a flattish period right now. It just matched its best quarter ever in Q3, but we’ve seen some troubles in terms of some platform issues that we ran into.

But the good news is, we launched a new [indiscernible] called WPT or World Poker Tour, that’s starting to have a very positive impact on engagement. And I think, we’ll be a little bit flattish with Poker over the next couple of quarters, but then it will return to growth in 2019.

One of the rules about live services is, you can’t always be up into the right. Sometimes you’ll grow like crazy. Then you’ll have to level out, kind of retool the business, and then curve it up again. That’s kind of where we’re at on Poker.

CSR2 is having monster quarters. It’s matched its best performance to date. This is a game that just had a huge new feature added into it which is Legends, which if you remember CSR had a game called Classics, which was all the hot rods that you go in and restore. And so we’ve added that as a bold beat to the product that we anticipate will have a huge huge win.

The franchise that I’m most excited about right now there’s two of them actually. The first is Merge Dragons! from Gram. This is a company that joined Zynga about midpoint last year this year. And we’ve been integrating them very slowly, but they had a franchise that we just absolutely fell in love with and soft launch called Merge Dragons! which is a puzzler game, but it’s also a collection game where you acquire Dragons, and you grow them up over time and you can do different things with them and different challenges. That game is on a tear right now, it’s doing really well, it’s growing very fast and starting to establish a market in Asia. And working with the Gram guys, they just, they have such a creative culture and such a strong set of developers that partnering them with our publishing and our ad teams has been a wonderful combination.

And the last game that I wanted to reference is Wonka’s World of Candy, which we just launched early November. It’s kind of the first of the new wave of games that we’ve been working on. It came out and is off to a really good start. Engagement, monetization, retention are all ahead of our expectations. Quality is up above four seven stars. It’s doing really well and we’re excited to scale that business up into 2019.

Unidentified Company Representative

Okay. Yeah, with 1010, which is a Gram game, it’s my guilty pleasure at the end of a very long day and the 9, the 3X3 square is in the bane of my existence. But, let’s talk about acquisitions, because that was part of your capital allocation strategy over the last couple of years; we saw a couple of targeted acquisitions that you did, why were those the right acquisitions for Zynga? What did they bring to the table? And how did they play a role in positioning Zynga for sort of the medium to long-term?

Frank Gibeau

Well I think we started with purchasing a – we’ve brought three companies over the last two and a half years. From a capital allocation standpoint, we’ve spent about $400 million total in acquisitions, around $227 million in buyback, so we’ve got a nice blend of investing in ourselves and as well as investing in companies that could come in and be accretive. We started with the Solitaire business because we saw an opportunity to bring a card based network to bear around Poker.

And one of the most popular and enduring franchises on mobiles is Solitaire. People love to kill time playing Solitaire, it’s a great feeder product into the rest of the network, and we found a group that wanted to sell off their asset, and we found an opportunity to plug it into the business and it literally was code only, no people and we plugged it into our card base team and off we went. And that’s proven to be a very successful acquisition. It was kind of our first one, so we called it a tuck-in, and tuck-ins for us are below $100 million and you can kind of slide it into an existing business, and it works kind of linearly.

The next one we acquired was a Peak games, they had a card based business that had Okey Go, which is very popular game in the Middle East, they had Spades, and they had hearts. And again, pursuing that world’s largest card game network that plugged in nicely as well. That has been returning extremely well to us. It’s in a low cost center in Istanbul. We built out a development organization there, and that was yet another tuck in that worked beautifully.

Gram’s a little bit more of a growth asset. That was a business that we had built a relationship over time with the founders, and they got to a point where they were looking at how do we grow to the next step. And they were really thinking about do we get another round of investment, do we go strategic. And we had that conversation with them where we could take their games, couple them with our publishing platform, and we felt that we could have outsized returns.

And they have a pipeline of games coming that we’re really excited about, not just Merge Dragons! but future titles, and so we think of that more as a growth asset, that was about a $250 million deal and so far it’s off to a great start. With the Merge Dragons! moving into forever franchise status, which we consider a game to be a forever franchise if it lasts for more than five years and does over $100 million a year, we think that Merge Dragons! is on that track. And we feel like we’ve got a really good track record so far across those three investments.

As we look further afield, the mobile business has a lot of opportunity for consolidation. We see other assets out there that are growth oriented, that we think we can potentially bring in -- bring into the company. But at the same time, we have a lot of organic growth in front of us, both from the billion dollar live services business that we’re going to exit 2018 with, to the pipeline and new games that we announced on our last earnings call. Combination of those two organically is going -- is really going to be incredible including the three deals that we’ve done. But if we along the way also find other opportunities for growth assets, we’ll definitely act and would be additive to those things that I’ve talked about.

Unidentified Company Representative

Okay. I think the biggest question we’ve got from investors coming out of 2017 and going into 2018 and through most of this year is when are we going to hear about new games from Zynga? And sure enough, you had a fair bit to talk about over the last couple of months, maybe set the table for what we all should be expecting from the company in terms of new IP in 2019 and beyond, and some of the investments you’ve made against that roadmap and some of the investments that are still to come.

Frank Gibeau

Right. What. Again, I think it all starts with the live services games that, that we’ve got established, because that’s the base, the foundation for the company. And that’s Words With Friends, CSR2, Zynga Poker, Merge Dragons!, our slots business and now Wonka. Think of those businesses, a billion dollar business going into 2019 and it’s going to grow single digits to low double digits over the long term.

That’s, that’s our goal with having a strong base, because what we don’t want to do is ever put that performance at risk with new games. So we start there, then we say okay, what games can we launch on top of that base that would be taking advantage of the huge audience that we have, that would be in position for some of the categories that we’re in, and we started by looking at the overall portfolio, and we realized that we needed to bring the Ville business back.

We needed to bring FarmVille back to bear; we needed to bring CityVille back to bear into the marketplace because those were traditionally huge brands for Zynga, hundreds of millions of people who have played those games over the years, a lot of latent demand. But there’s -- there needs to be a really strong game there, a reason for why you’d want to play it again, and you’d be modernized for mobile.

So, we built a team in San Francisco, and then we worked with a team in Helsinki, that had built SimCity in its past. We put those two guys to bear, they are working on FarmVille and CityVille and those will go into soft launch in early 2019. We think that that'll be a really compelling new games slate for us in the builder category.

We then looked a little bit further afield and we said, okay what type of strategic licenses are out there that we can go and get, that we can start to build businesses around? And the reason I wanted to go get strategic licenses is when I looked at the overall portfolio, I felt that, we had the opportunity to partner with a big brand and enduring brand that lasts for a long time, that could bring incrementally new audience into our company. And the new audience that we bring in, we would be able to do a lot with, given our strength in publishing and given our network effects.

And so we looked at some of the categories we had. And we started to build a Match-3 business. And the reason we started to build a Match-3 businesses is we did a lot of research with our Words With Friends fans, with our social casino fans, and the next most likely game that they would spend a lot of time and money on, guess what, it was a Match-3 design.

But we had to find a way into that category, because it’s a competitive category with King and Playrix and Peak. So we started to look at licenses like Harry Potter, like the Willy Wonka brand and some others that we felt could give us organically day one audience that would be tremendously large, and give a scale opportunity that we paired it with the right game, and a high quality game team, the combination of the two could really get us on the radar.

And so, we went out and we signed the Harry Potter license and we started to build out a game that will be ready in the second half of 2019. We had started building it before we announced, because we just had some circumstances we had to deal with there and then we looked at the category as it relates to social casino and we thought there’s an opportunity to bring another machine to bear. We’ve learned a lot from Hit It Rich and Wizard of Oz, and one of the machines that’s really, really popular in the casinos is, Game of Thrones. And this is the last season of this current chapter of Game of Thrones, and we’re able to go out and work with HBO and so we’re going to have a social casino Game of Thrones experience that can release over the summer right around the time of the series. That’s, that was kind of the next bet that we made.

And then finally, we looked at our NaturalMotion studio, which is one of the high end, core game studios out there on mobile. Tremendous art production values. We call it console quality graphics on your phone, is kind of one of their pillars. But when we looked at the next wave of games, we wanted to pair the teams with a -- with a bigger IP than what we’d been looking at in the past.

And so think about CSR quality, CSR gameplay and art but combine it with a big IP like Star Wars. So we went and acquired the Star Wars license, which -- which in test was amazing, and I worked on it before my career, so we looked at the next wave of NaturalMotions games as being focused in on Star Wars and it’s been a huge win for us from a recruiting standpoint. The moment people heard that they could work on Star Wars mobile games and NaturalMotion resumes were pouring in.

And so, from a new slate standpoint, we’ve talked about around eight games over 2019 and 2020 based on the timing I just laid out, that’s when you can start to see them. But again, they layer on top of a growing live services business, and that’s where we start to see the progression in top line growth, audience growth, absolute profit generation and then the percentage of profit will flattish to down slightly in 2019, because we’ll be investing in marketing, but then it has an outsized return as you get into further into the year.

Unidentified Company Representative

Got it. One question that came in on Star Wars, may be just a bit of a follow up in terms of winning that mandate do you think that was - how much of that was you going in and sort of selling the Disney team on NaturalMotion versus necessarily maybe other publishers that had made mobile games for Disney under Star Wars maybe underperforming in the marketplace?

Frank Gibeau

We didn’t go to the latter point. We -- we are one of the benefits that we had at Zynga when we were talking at Disney is that I had worked on the Star Wars business. Our COO had worked on the Star Wars business, and the new studio had an NaturalMotion had worked on the Star Wars business.

So there was a real continuity of relationships there, and we made a really compelling product pitch for both games and you know the NaturalMotion studio had really good strong bonafides in terms with their performance we can show. In addition to that, we also agreed to take on Star Wars Commander, which was a game that Disney was operating and didn’t want to shut down or sunset on the fans. And we were willing to take it on and continue to operate it. And we think it’s a great place to continue to build features and learn, and so that will start to add into the overall portfolio in Star Wars as well.

Unidentified Company Representative

One of the biggest transformations, I think I’ve seen in the mobile game space over the last two to three years and it’s – it’s run sort of parallel to this shift to live services is a bit. The companies have gotten a little bit more discipline around user acquisition just for the sake of user acquisition and more and more marketing dollars are spent on long tailed engagement, long tailed monetization in the name of live services.

Maybe talk a little bit about how you have sort of reimagined or re architected the way marketing is spent inside the company and what that means for game launches and marketing trends looking out over the next couple of years?

Frank Gibeau

Well, I think we think about acquisition. We start with the A. We started with the acquisition on top, and I want to spend, I want the teams to spend as much time on organic acquisition as they do on paid acquisition. Paid acquisition is clearly a skill a lot of companies have, its arbitrage on CPI’s and LTV. And we’ve built a really kickass team there. And we’d use a lot of our PM and data analytics testing and resources to get into a position where we test very early in a product development cycle on what’s going to pull best in UA.

And we start at almost at preproduction with LTV and CPI estimates for the category we’re going into, the type of product we have. So we’ve really brought forward a lot of the decision making that you need to have in development early on. So we have the right kind of flow going forward. But you know the art of acquisition and organic is really important. That’s, that’s getting placement with Apple and Google. That’s doing things with partners. It’s doing things virally. It’s been one of the huge drivers of games like Fortnite, the viral channel, the streamers. So we try and spend as much time on the art of organic installation and that’s where the brands come into play, right.

If you have Harry Potter, Star Wars and Game of Thrones on day one, there’s a huge audience of high engaged players that want to come in and it makes you far more efficient on the paid acquisition front, and you can test the right kind of creative very early so that you can hit the launch of scale. So we spent a lot of time bringing it forward, testing, and then also spending more time on the organic side.

Unidentified Company Representative

How much does the scale you’ve built as a company across multiple categories of mobile gaming work to your benefit when you’re trying to turn the dial on the marketing effort to sort of target you know if someone plays Merge Dragons! they are more likely to maybe be a Game Of Thrones, watch that kind of show and therefore may be willing to engage with that kind of content. How refined is it at this point that you can use your scale to your advantage across multiple categories and multiple player sets?

Frank Gibeau

Well I think, we have a really good sense of it but I think we have tremendous potential to do even more there. I think, Zynga really is a collection of brands that if you -- if you group them together there’s really strong affinity across groupings of it, but not necessarily at the whole company. But if you look at Match-3, Social Casino, Words With Friends and then you start to put in different brands there, you can really clearly see if any of you understand the player behaviors and you can really turn it into an advantage in terms of how you can bring a player in.

And if you -- if you understand you’re about to lose a player just because of natural churn, it’s better to lose them to another game inside your network than it is to have them leave entirely and so we worked very hard to try to understand the player’s journey across our games, so that we can always be putting the right messaging in front of them and see if they choose to stay in a different way.

So we look at the sub networks. We look at the affinity across different genres. 60% of our players with Zynga are women, and so we gain a lot of insight around how they play and it’s different in some way, it is very similar in other ways to the traditional core male target that you see with the consoles and PC game and some of more hard-core mobile games. But it’s a place where we spent a lot of data science, time and I think we can do even more there.

Unidentified Company Representative

One of the big opportunities we continue to get asked about by investors is the advertising opportunity within something like Words With Friends. You’ve built quite a large advertising presence. You built a lot of momentum around that property. How should we think about advertising is an opportunity across all of Zynga, when you try to balance between monetizing the advertisement versus payer monetization versus sort of the premium model?

Frank Gibeau

Right. So we typically, when we were talking to our players and with our players, we find that there's players that will engage in a game and they'll micro-transact and engage in the economy of the product and invest money for time and value. There’s players that don't want to do that necessarily, but they're willing to watch an ad. And in fact one of the most valuable ad units that we have is watch to earn. So if you’re a player in CSR2 and for whatever reason you don't want to spend, hit mom’s credit card or do something like that, you can watch an ad that gives you an ad message that has a very high quality presentation and in return you can get currency for in game. And so you’ll get gold pieces or you'll get parts for your car in CSR. That particular ad unit works extremely well in engagement.

So what we found in data science and going back and looking the outcome is players that watch, watch to earn engage longer. And so, we then start to program those types of units so that players that we feel are in a place where they would like to do that, we give them that shot. And so from our standpoint when we look at the advertising business its about maintaining engagement and retention while maintaining and building an ad business and we start by looking at the impact of the advertising on player engagement curves, player satisfaction.

And if we see any dips in engagement or retention we turn the ads off, we change the frequency. We ship the creative until we get to the right awful [ph]. We have a lot of machine learning and other teams, analytics teams on this. And we think we crafted the right type of system. And what we started to do is expand the advertising opportunities to the other franchises of Zynga. You’ll see it in CSR. You'll see in Poker. You’ll see in some of our other big franchises. It started with Words of Friends, because it was an ad driven business and in fact ads aren’t used in top-grossing charts.

If you look at Words of Friends with ads then it will be a top 10 game. It's that impactful, and it’s that at scale. And so we’re excited to continue to build out our network of ad partners as well as building out that analytics layer. We have some of the industry leading click-through rates on video ads, the viewability, the click -- all the things that advertisers are looking at the targeting. We can give it to them in a way that is very complementary and differentiated from the more traditional networks like Facebook and Google because these – the people are saying this is in context, a highly valuable interaction for them because its helping them extend their game play experience.

Unidentified Company Representative

Is that that the most successful ad you need or ad format you’ve seen to-date is the watch-to-earn sort of the video format work for you as a company?

Frank Gibeau

It’s probably amongst top three that we have. But there is also interstitials and more traditional versions that work as well. But in terms of the player satisfaction and impact on retention that’s the one we like the most.

Unidentified Company Representative

Got it. We’ve talked about this before on some of the public earnings call, but as you look out into 2019 and 2020 and you have a roadmap around product you want to bring to market, are there still categories or mix that you'd like to accomplish in the business? Or do you think now you got the company sort of playing in the various sectors of mobile gaming you want them to be playing in for the medium to long term and there were no real strategic holes or there’s a still thing where if the right opportunity presented itself inorganically or organically you would look at it?

Frank Gibeau

I think you can't be everywhere. You got to focus on where you have success, where you have momentum and where more importantly you have teams with talent and experience in that category. It’s hard to get a Words With Friends, teams to build a shooter, right? They’ve got to really have some familiarity with the category.

Unidentified Company Representative

Its depth of the curve on the – this is ability, yes..

Frank Gibeau

Right, example there, but -- so we go -- we look at it from a couple of different dimensions. Do we have teams that know how to build them at quality? Is there an opportunity in the marketplace as an audience waiting that being built? But we also look at adjacencies to the existing audience we have. We have a business that scale with highly engaged users. And I don't think that we've given them enough Zynga games to play yet. And that was part of the calculation on why we invested Match-3 business. We saw a lot of familiarity in an overlap with skills and talent and brands. And then we had – we saw players who really wanted it. And then, also bringing the Ville back, we felt like that was to get back into the builder category in a significant way was important for us. So, over the next couple years I think those will be the places where you incrementally new bid in Match 3 and in builder and at that fit nicely into our existing portfolio. If for whatever reason we find an opportunity to part with the company that’s in a new category, great. I just want to make sure that we don't over build and we just focus in on what we’ve got us here.

Unidentified Company Representative

Got it. Still predominantly a U.S. driven business, still predominantly an iOS driven business. When you look out both Internationally and Android as a distribution mechanism for mobile games, how do you sort of think about the opportunities that still sits in front of you away from the U.S. and maybe on Android? And how do you allocate resources to make sure whether its design teams or engineering teams sort of capitalize on that opportunity?

Frank Gibeau

I think it’s a massive opportunity for our company because of how weighted we are in North America and Western Europe specially. And our Android market share is not where it needs to be. And I think it's because we don't build early enough for Android platforms, we don’t understand ecosystem as well as we could. And so we started -- people are now required to carry Android phones on teams. We’re starting to build from the beginning on Android as a lead platform in some cases. And we’re also looking externally at intellectual properties and how they travel. Now, we have Words of Friends which is an English-based game. So there's some logic to why we’re over weighted there, an social casinos is over weighted into that category, but if you would like CSR, it has a very nice blend globally.

If you look at Zynga Poker, very nice blend internationally, it’s the [Indiscernible] Poker game worldwide. And what’s particularly exciting about the Gram acquisition was the exposure on Android and also the exposure on emerging markets. Merge Dragons! is the game that works very well in markets in Asia for example, and its very performing on Android. So, we’re looking to build those capabilities out. And so from our perspective we think there’s a lot of growth in front of us.

Q - Unidentified Company Representative

One thing you talk little bit about on the last two earnings calls. Would you recall that Facebook messenger as a potential long-term distribution platform basically, so when you think about moving beyond sort of the traditional mobile app download model, but continuing to play in the mobile gaming space, how should investors think about what’s some of those emerging technologies or platforms are to gain distribution?

Frank Gibeau

I think it's broader than just gaming on social networks. I think that's one channel that's right for innovation and you see early day investments here from Facebook on messenger, but there’s other social networks in the West, and its also predicated on how successful Line, KaoKao and WeChat have been an ease. So I think that these still hold. I think its just early days in terms of building out what works and why. But I think if you think about mobile overall as platform. We referenced earlier 2.5 billion smart-enabled devices has been growing. If you think about the amount of technical innovations that’s going to be hitting those devices over the next several years, there's a lot of value creation opportunities. 5G is going to hit in a couple years, and it’s going to change a lot of performance capabilities of how you stream content, how you deliver content, the types of experiences that you can deliver. So you’ve got 5G on the horizon. I think its going to have a huge impact – positive impact on the entertainment on device.

I think if you look at business model innovation, I think subscription are starting to become more and more popular in general for media, and I think games are the next step in that. People are already buying their music and watching their movies based on subscriptions. You can definitely imagine game franchises with subscriptions if not companies on the mobile. And then you things like mixed reality and VR and chat, as well as other things like streaming and I talked about with five-year earlier that there -- I don't think them as disruptors in a negative way but there are there opportunities. You have the treat transitions as your friend. And so as I think about mobile in terms of how vast it is, how large it is, how geographically distributed is, and how technically advanced, its going to continue to be. Every year we get you processors, we get new form factors, we get new features. It’s a really great place to be. I think that's why it’s going to be the fastest growing game platform for a while.

Q - Unidentified Company Representative

One of the other questions I had that came in from the audience was, you referenced Fortnite earlier, I think one of the lasting impact of Fortnite is its breaking down some of the traditional barriers between PC console and mobile gaming. Question I got was as a mobile gaming publisher or mobile gaming development platform would you partner with AAA publishers if they came to you looking for the ability to develop extensions of their PC and console games to better create experiences that moved across platforms? Would you be open to those kinds of conversations?

Frank Gibeau

We’re platform agnostic and I’ve been in the gaming business for over two decades, and it's finally here. You can play games across platform site and in high quality, right? Nobody believed you could have a high-quality shooter experience on a device -- mobile device, and willing hold two biggest games in the world and some ways, PUBG and Fortnite are right there, and so for my standpoints, really exciting. And I think that you’re going to start to see that console quality graphics in that part of the market become more and more important. The good news is we have natural motion that already does that. And so – and if you think about the Star Wars license and other things that we’re going there, I think we can build our own organic business. But if somebody approached us with an interesting opportunity to partner we’re all ears.

But the lot of folks in our game team and our management team spent time in console really understand the category. So as those features and components come over it’s going to be the next logical step for us to look at. How to expand platforms for our games, a really easy one of PC, the next wrung out in terms of consoles, so we’ll further out, but its one of the things you can scale up to if it makes sense. I’m not saying we’re doing that right now, but it’s within our capability set.

Q - Unidentified Company Representative

Got it. Wanted to talk little bit about investments and costs as you look out into 2019 and beyond. But before that one of the questions that’s come up little bit consistently today here at the conference was how to think through developments in 2019 beyond the route mobile app downloads. Apple’s got a case in front of the Supreme Court now. There may or may not be some changes over time between Google Play and the Apple App Store and how some of those unit economics might evolve. I can imagine you would certainly love if the tax on mobile app deployment went lower, certainly would be a nice tailwind to your margin structure, but any view or take you have on where we sit in some of the developments, so the old world order versus where it might go in terms of some of the economics are on these platforms?

Frank Gibeau

Look, I think we’re an interested observer and we like the discussion and conversation that’s going on. It is not a forecastable event. So it’s one those things that takes time. There are opportunities though when you think about the margin structure and think in that in advertising we don't pay those guys. It’s a direct relation with the higher margin revenue. So, as we build that out and scale that that's a benefit for us relative to others. Second piece is, the subscription model actually has a more beneficial percentage in the second year and beyond than it does in the first year. So if you're able to -- if you're able to successfully want subscriptions you can pick up margin there. So there all gaps and place in the channel where you could innovate and experience pick up there. But in general we’d like to see an ongoing conversation with partners in the channel to see if there is an opportunity to see improvement there.

Q - Unidentified Company Representative

Okay. One other topic just again since you’ve gone from the turnaround in the live services transformation to malware, we’re going to be talking about launching new IP and supporting new IP, you’ve talked a little bit on the last earnings call of just I think framing a narrative for investors of there’s going to be investments and then they’ll be more harvesting once we launch some these games and those investments happen. Let me just reiterate so people in the room understand what some of those key messages were about? How we should think about first half of 2019 versus second half of 2019 and some of the investments to support, the launch as you plan on doing versus when you might reap the benefits of those?

Frank Gibeau

Sure. Again I think you have to start with the first step which is we have an exit rate of almost $1 billion in live services. And we will staff and fully fund all those live services to carry us through 2019 and that's where we start. Then we look at what the percentage return on that is. And it’s very good. You’ve seen in the last quarters or so. You then have to then pay for some of the marketing investments that are required for the new product introduction. New product development on mobile is not as expensive as in the categories. It’s a single-digit million to get soft launch. The real capital requirements come into play on acquiring the audience and spending the money in paid acquisition and other places to bring people into the top of the funnel for the game. That’s a variable expense.

You'll spend as much as you can profitably and the moment it's not profitable anymore you stop spending. So that’s a really big benefit for us. But as you think about the shape of next year, think of the first half of that live services business continuing to grow. Think of the second half as of starting into second half of 2019 and going into 2020, kind of the rolling releases, you start of the Game of Thrones, Harry Potter, FarmVille, the CityVille. Star Wars and maybe new merge game coming, that's when you’re going to start to see marketing start to increase. And what we’ll do is we’ll move the marketing dollars to the highest return opportunities. And we do approach it like a salary cap. We do think about the overall shape of the companies return and so there might be some opportunities that we wait on or delay based on maintaining a certain level of performance. But the goal is to drive topline revenue, it’s the goal to drive audience growth, release the new games, grow absolute profitability in terms of total number.

And I think what you’ll see is, the percentage is going to dip a little bit like 1% or 2% from where we’re exiting this year just to get the investments in position for the new games. When you get into 2020, once you spend those marketing dollars they tend to reduce and get efficient with regards targeting. And that's where you start to see -- the return really start to take hold. There's an okay return initially, but it really takes off in year or two. And that's why when we design these games, if we’re able to achieve forever franchise status which is a $100 a year for five years or more off of a single-digit million-dollar development budget and with marketing hovering in the 20s and then maybe lower, it actually is a very good investment in terms return on our invest capital and that’s how we think about it.

Q - Unidentified Company Representative

One more for me before we run out of time, just over the last couple years I think the message I kept hearing was striking the balance between returning some capital to shareholders and doing some strategic M&A. Now we’re going to get into a period of growing live services, launching new games, how would you think about those buckets of allocation, investing back in the business, being organically finding opportunities to expand the portfolio, returning capital to shareholders. Is the rank order of those changing at all as you think out over the next couple of years?

Frank Gibeau

You know I think we have some real interesting new opportunities as we look over the next couple years. We’re now cash flow positive. So we’re generating cash which makes my CFO really happy. So we’re putting money back in the bank which is great. And our ratio so far has been 40 million in acquisitions, 227 million in buybacks. We had a $200 million buyback authorized right now. And as we look into the marketplace we see opportunities to acquire growth assets. And so I can't forecast what those will be, but we'll look for them.

The other asset that we get a lot of questions about is we have a building in San Francisco that owned and we’re not in the real estate business. And we’re in a position where we’ve now got the footprint of Zynga in the building in a great position. We've Airbnb and others fully leased up. It's an asset that’s fully utilized now and it's a good position. Its values up. So we’re also looking at opportunities like that to set the course over the next couple years where we maximize the capital allocation strategy, return value to shareholders through operating, through buybacks and looking at the overall balance sheet.

Q - Unidentified Company Representative

Maybe just one last follow-up because you touched upon it with M&A, when you think about M&A for the company as a piece to allocate capital which is more important as you look out to the next chapter of the company, finding unique talent in the marketplace add to your employee ranks or possibly finding games and/or games that plug more easily into the live services model?

Frank Gibeau

I think its talent plus franchises.

Q - Unidentified Company Representative

So, it’s looking for both.

Frank Gibeau

It is. The company has a lot of momentum right now. And bringing in the brands that we have, the success that we’ve seen in live services and the new slate, we’re actually winning a lot of recruiting wars. We aren’t having a problem bringing talent into the company to staff out teams and fill out teams. And we also trying to do it in locations like Eastern Europe, Bengaluru, in places that are lower cost for us. So that part we’re okay. So we’re not looking for acquihires so much. We’re really looking for is they’re a great game team with great leadership, strong culture that has a hit franchise or franchise that’s merging that we could bring into our publishing organization and scale up. And then they can continue to maintain that business and then build new businesses and bring them in. That’s more the thesis we’re interested in right now.

Unidentified Company Representative

Perfect. Please join me in thanking Frank and the whole Zynga team for being part of the conference this year.

Frank Gibeau

Thank you.

Question-and-Answer Session