Zynga (ZNGA) CEO Frank Gibeau on Q4 2018 Results - Earnings Call Transcript

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About: Zynga (ZNGA)
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Earning Call Audio

Zynga. (NASDAQ:ZNGA) Q4 2018 Results Earnings Conference Call February 6, 2019 5:00 PM ET

Company Participants

Rebecca Lau - Vice President of Investor Relations and Corporate Finance.

Frank Gibeau - Chief Executive Officer.

Gerard Griffin - Chief Financial Officer.

Conference Call Participants

Eric Sheridan - UBS

Timothy O'Shea - Jefferies

Brian Nowak - Morgan Stanley

Colin Sebastian - Robert Baird

Mike Ng - Goldman Sacks

Drew Crum - Stifel

Mike Olson - Piper Jaffray

Justin Post - Merrill Lynch

Doug Creutz - Cowen

Ryan Gee - Barclays

Ben Schachter - Macquarie

Ray Stochel - Consumer Edge Research

Operator

Good day, ladies and gentlemen, and welcome to the Zynga’s Q4 and Full Year 2018 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. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference, Ms. Rebecca Lau, Vice President of Investor Relations and Corporate Finance. Ma’am, you may begin.

Rebecca Lau

Thank you, and welcome everyone to Zynga's fourth quarter and full year 2018 earnings call. On the call with me today are Frank Gibeau, our Chief Executive Officer; and Gerard Griffin, our Chief Financial Officer. Shortly, we will open up the call for live questions.

During the course of today’s call, we will make forward-looking statements related to our business plan and strategy, as well as expectations for our future performance. Actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed Form 10-Q as well as elsewhere in our SEC filings for further clarification.

In addition, we will also discuss non-GAAP financial measures. Our earnings letter, earnings slides, and when filed, our 10-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 Gibeau

Thanks, Rebecca. Good afternoon and thank you for joining our Q4 earnings call. We finished 2018 strong delivering Q4 results ahead of our raised guidance and are entering 2019 with tremendous momentum.

In Q4, we generated revenue of $249 million, up 7% year-over-year and bookings up $267 million, up 19% year-over-year. We achieved record mobile revenue in bookings with mobile revenue up 12% and mobile bookings up 26% year-over-year. These results were driven by all-time mobile revenue and bookings highs in Words With Friends, Merge Dragons! and CSR2.

We surpassed our near term margin goal for the second consecutive quarter and [Technical difficulty] is $907 million up 5% year-over-year and bookings were $970 million up 14% year-over-year. Our strong results were led by Words With Friends, Zynga Poker and CSR2, which collectively delivered double-digit year-over-year growth in mobile revenue and bookings.

We also completed our acquisition of Gram Games in May as well as Small Giant Games effective of January 1, 2019. These acquisitions added teams, talented teams who are expanding our life services portfolio with two new forever franchises, Merge Dragons! and Empires & Puzzles.

In 2018, operating cash flow was $168 million, up 78% year-over-year, our highest since 2012. Zynga’s turnaround is now complete. Our operating fundamentals are in place and we are well positioned for significant growth in 2019 and beyond.

We are focused on scaling the business by executing on our growth strategy which includes growing our life services portfolio, successfully launching new titles and exploring emerging platforms and technologies.

We will also pursue opportunities to add talent and new franchisees through acquisitions. Beginning with life services, we have grown our portfolio forever franchises from 3 to 5. Words With Friends, Empires & Puzzles, Zynga Poker, Merge Dragons! and CSR Racing.

We will grow our life services portfolio by introducing innovative bold beats designed to attract new audiences, get existing players to play more and bring back lapsed players.

In 2019, we expect the growth of these franchises to more than offset declines in web and older mobile games. In particular, Merge Dragons! and Empire & Puzzles are in high growth mode and were recently in the top 20 grossing U.S. games chart on the Google Playstore.

Both these games also expand our presence in international and android markets. Building upon this live services foundation, we have a pipeline of exciting new games, featuring owned IPs and strategic licenses including CityVille, FarmVille, Game of Thrones, Harry Potter and Star Wars.

In addition, Gram Games and Small Giant Games are also working on new titles. Our goal with new Game development is to create titles that have the potential to become new forever franchises. We will begin launching games from this pipeline in the second half of 2019 which will further enhance our growth potential in 2020 and beyond.

Over the next few years, we expect to make meaningful progress towards achieving margins more inline with our peers on a like-for-like basis.

With that, I will now turn the call over to Gerard to discuss our Q4 and full year 2018 results in further detail as well as our Q1 financial guidance.

Gerard Griffin

Thank you Frank. We capped off 2018 with another great quarter beating our raised guidance across key financial measures and delivering margins ahead of our near-term goal for the second successive quarter. Our better than expected results in Q4 were anchored by record mobile revenue and bookings off a stronger than expected holiday performance and effective cost management.

Revenue was $249 million, comprised of bookings of $267 million offset by a net increase in deferred revenue of $19 million. Revenue was $6 million ahead of our guidance, and up $15 million or 7% year-over-year.

The net increase in deferred revenue was $2 million ahead of our guidance, and compares to a net release of $9 million in the prior year quarter. Bookings were $7 million ahead of our guidance, of $43 million or 19% year-over-year.

We delivered our best mobile top line performance in Zynga history with mobile now representing 92% and 93% of total revenue and bookings respectively. Mobile revenue was $228 million, up 12% year-over-year. Mobile bookings were $248 million up 26% year-over-year.

Year-over-year average mobile DAUs increased by 6% while average mobile MAUs decreased by 1%. As noted in our investor letter, moving forward we plan to no longer publish certain audience metrics as part of our earnings materials as many of these have become either less representative of or less relevant to total company performance.

Specifically, we are evaluating our unique audience metrics, which include audiences with -- excuse me which exclude audiences from our recent acquisition and chat games given the inability to identify our de-duplicate users across data systems. And secondly, web audience metrics, which account for an increasingly smaller portion of our total company performance.

Turning to Q4 operating expenses. GAAP operating expenses were $165 million up $5 million or 3% year-over-year representing 66% of revenue down from 69% of revenue in the prior year.

Non-GAAP operating expenses were $141 million, up 12% or 10% year-over-year representing 53% of bookings down from 58% of bookings in the prior year. We delivered a net income of $1 million, $2 million better than our guidance, and a decline of $12 million in net income year-over-year.

Our adjusted EBITDA was $37 million. This was above our guidance by $4 million and a decrease of $9 million year-over-year. In assessing year-over-year variances, please note that the year-over-year movement and change in deferred revenue represents a $28 million negative component of the year-over-year variance in revenue, net income and adjusted EBITDA.

We generated operating cash flow of $90 million, our best performance since Q4, 2011. This was driven by strong operating results in the quarter and effective working capital management. We closed the year with $581 million of cash, cash equivalents and short term investments, $100 million of debt outstanding on our $200 million revolving credit facility and $174 million of capacity remaining on our current share repurchase program.

Effective as of January 1st 2019, we closed the acquisition of Small Giant Games for $364 million in cash, and 231 million in equity. In January 2019, we received $12 million related to the settlement of the derivative litigation case from which 2.3 million will be distributed to stockholder plaintiff counsel as a court approved fee later in the quarter.

We are currently assessing a number of actions to increase our cash reserves to further fund growth through acquisitions. These actions include the potential sale leaseback of our San Francisco building as well as additional debt financing alternatives.

Turning to expectations for 2019 and beyond. For 2019, we expect to deliver revenues of $1.15 billion comprised of bookings of $1.35 billion offset by a net increase in deferred revenue of $200 million. This represents a 27% growth in revenue driven by a 39% growth in bookings partially offset by a 221% growth in the net increase and deferred revenue.

Our performance in 2019 would primarily be driven by strong growth in our life service portfolio, anchored by the combined growth of our 5 forever franchises and the launch of a number of new games in the second half of the year. We expect this top line performance deliver the strongest mobile bookings growth in our company’s history.

We anticipate our bookings growth in 2019 to outpace revenue as we defer initial bookings from our recent acquisitions of Empires & Puzzles as well as new game launches in the second half of the year. We expect this to result in a 200 million net increase in deferred revenue, which represents the largest build in this GAAP financial metrics since 2010.

While the release of this GAAP deferral will be a positive impact on revenue and profitability measures in 2020, it represents a $200 million reduction in revenue, net income and adjusted EBITDA in 2019.

We expect our top line performance to be similar in Q1 and Q2 driven primarily by our mobile life services. In the second half of the year, we expect to layer additional growth from our new game launches as well as from a seasonal lift in advertising.

In 2019, we also anticipate pressure on our gross margins due to a higher mix of user paid versus advertising as well as an increase in royalties on licensed IP. In addition, we will also ramp development spend on our new game pipeline, and in fact to launch excuse me and to invest in launch marketing on titles releasing in the second half of the year. These investments will modestly weigh on our overall operating margins in 2019, but deliver returns in future years.

In 2019, we expect to grow operating cash flow excluding the impact of tenant improvements. Similar to prior years, we expect our operating cash flow generation to ramp over the year from seasonally low levels in Q1 to stronger levels throughout – through the end of the year.

From our core operating cash flow, we expect to pay collectively $50 million in tenant improvements across Q2 and Q3, related to the leases on the excess space in our San Francisco headquarters.

Execution against our 2019 plan will position the company for continued growth in 2020, where we expect low double digit revenue bookings growth with greater operating leverage as our live service growth in 2020 is further enhanced by full year contribution from our 2019 new game launches.

Now to Q1, we expect Q1 to be a great start to 2019 driven by our mobile life services anchored by our five forever franchises, including a full year, excuse me, a full quarter contribution from Merge Dragons! and Empire & Puzzles.

Guidance for the quarter is as follows. Revenue of $240 million and net increase in deferred revenue of $85 million, bookings of $325 million and net loss of $59 million and adjusted EBITDA loss of $29 million.

Some factories to consider in assessing our Q1 guidance include; we expect to deliver $240 million in revenue, which is comprised of a bookings of $325 million offset by a net increase in deferred revenue of $85 million.

This represents a 15% growth in revenues, driven by a 48% growth in bookings, offset partially by 656% growth in net increase in deferred revenue. It is important to spend a little bit more time double clicking on the net increase in deferred revenue as this financial GAAP metric will have a material timing impact on revenue and profitability recognition in Q1,FY 2019 as well as the comparability of financial metrics.

Our strong bookings growth in Q1 will outpace revenue driven by the deferral of initial bookings from Empires & Puzzles and Wonka’s World of Candy as well as continued bookings growth in Merge Dragons! We expect these titles to be the primary drivers of the $85 million net increase in deferred revenue in Q1, FY 2019, which is the largest quarterly build for this GAAP financial metric since Q4, 2009.

While the release of the deferral will be a positive impact on revenue and profitability measures in future quarters, it represents an $85 million reduction in revenue, net income and adjusted EBITDA in Q1 FY 2019 and a $74 million negative component to the year-over-year change in those financial metrics.

We expect our Q1 bookings performance will be driven by our mobile life services, anchored by our five forever franchises. We expect the year-over-year growth in bookings to be primarily driven by a full quarter contribution from Gram Games and Small Giant Games as well as growth in Words With Friends, Wonka’s World of Candy and CSR2. This will be partially offset by declines in Zynga Poker, as well as web and older mobile.

We expect the build in deferred revenue and an increase in the amortization of intangible assets from acquisitions to result in gross margins declining meaningfully year-over-year and sequentially.

In addition, the stronger user pay mix and seasonally lower advertising in Q1 FY 2019 will further reduce gross margins on a sequential basis. Excluding these factors, our gross margins are comparable year-over-year. We expect our GAAP operating expenses as a percentage of revenue to increase significantly year-over-year and sequentially due to the negative impact on revenue of the higher build in deferred revenue in Q1 FY 2019, as well as the following impacts to non-GAAP operating expenses.

We expect our non-GAAP operating expenses to increase year over year primarily due to a full quarter impact from our Gram Games and Small Giant Games acquisitions and a ramp in development investment against our new game pipeline.

That said, we expect total non-GAAP operating expenses to remain flat as a percentage of bookings year-over-year but that the line item mix to change meaningfully. Given our recent acquisitions, we expect our operating spend to be more heavily weighted to sales and marketing offset by lower R&D and G&A expenses as a percentage of bookings.

Specifically, we are investing a significantly higher percentage of bookings in sales and marketing's and key acquired titles, namely Merge Dragons! and Empires & Puzzles both of which are in high growth mode.

We expect our non-GAAP operating expenses as a percentage of bookings to increase sequentially primarily due to the ramp in investment and development costs against our new gas pipeline as well as the Q1 seasonal lift imperial costs.

While we expect operating cash flows to be marginally up year-over-year, we still expect to generate minimal operating cash flows in what is normally a seasonally low quarter. As noted previously, we expect our operating cash flows to ramp through the balance of the year and to be up year-over-year for fiscal 2019.

In summary, we’re really looking forward to delivering a strong Q1. And with that, I will turn the call back to Frank.

Frank Gibeau

Thanks, Gerard. Before we open the call for live Q&A, I want to take a moment to highlight how Zynga is positioned today. Zynga’s turnaround is now complete. Our operating fundamentals are in place and we are entering 2019 with tremendous momentum. As a leading free to play, live services developer and publisher on the largest and fastest growing platform in the world, we are uniquely positioned to capitalize on the rapidly, evolving gaming landscape at a time when demand for interactive digital experiences is reaching new highs.

Zynga is a mobile first company, and has a highly diversified life services portfolio anchored by five forever franchises. We are focused on driving strong, predictable growth from this portfolio by delivering long term player engagement through a steady cadence of innovative, bold beats. Building upon this robust life services foundation, we had exciting new games under development, which will begin launching in the second half of 2019.

In addition, we will continue to explore through emerging platforms and technologies as well as opportunities to add talent and new franchises to our portfolio through acquisitions. Executing on this growth strategy will enable us to scale the business and drive significant top line growth and margin expansion over the coming years.

It is an incredibly exciting time here at Zynga, and we are confident in our ability to generate more value for players and shareholders.

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

Question-and-Answer Session

Operator

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

Eric Sheridan

Thanks for taking the question. Maybe two parts. As you look out to 2019, and you see an array of opportunities to put marketing dollars behind existing franchise or launching franchises. How do you think about allocating those marketing dollars? Where should we think about the velocity or what this sort of key agenda items you’re trying to promote with more dollars versus less as you look out to 2019?

The second part is, as you think about allocating those marketing dollars, how should we be thinking about what it might do to turn the dial on mobile DAUs, an engagement with franchise broadly across the company? Thanks everyone.

Gerard Griffin

Eric, this is Gerard. I’ll take that and Frank may chime in as well. As we look -- as we look at our marketing, we’re obviously looking at our existing lives services portfolio, some of those titles are more mature and they’re doing some very nice metrics in terms of engagement of monetization. Overall, what we look at is, we look at the life time profitability against each of the franchisees and they’re obviously in different parts of their lifecycle.

So as I mentioned earlier, you’ve got titles like Merge Dragons!, Empires & Puzzler fairly early in their in their lifecycle that are spending a significantly higher percentage of bookings on marketing out there. They are driving some meaningful return on that investment, and we will continue to obviously index there.

But as we go through the year, we’ve set our budget for the full year, and we’ve set it against our titles, and DUA teams are continually looking at how bold beats are inflicting against each of our games and where they see an opportunity to reallocate or invest differently, they will. But it’s fundamentally driven off our expectations of lifetime value for acquired audiences.

And then, in terms of your second question, obviously for Games that are in growth mode we expect to see those audiences to increase over time, and that’s where we are with some of some of the newer titles. As it relates to the rest of our portfolio, what we’ve actually found is by driving deeper bold beats and engagement within the existing game, we can actually drive organic growth in addition to driving growth through user acquisition.

So that’s the other lever that we continue to look at. Is there -- is there a stronger opportunity like we’ll say true a bold beat like legends within CSR2 to bring lapsed and new players into the game as opposed to spending paid acquisition. So we’ll continue evaluating that as well.

Eric Sheridan

Thank you.

Operator

Thank you. And our next question comes from Tim O'Shea with Jefferies. Your line is now open.

Timothy O'Shea

Yes. So thank you for taking my question. Two if I may. So first just looking at Poker, we’ve talked about the Facebook issue for several quarters now, it just. Is this a situation where we’ve simply reset the player base at a lower level and we’re now growing off of this new lower base or is this a situation where we’re still maybe losing active users and sort of progressing through this issue, and then just a follow up.

So first really appreciate this annual guidance. But there’s a lot of puts and takes around the margin. We’ve got 200 million of deferred revenue. We have some new games that are that will arrive in the second half with some more marketing spend and then we talk about this pressure on gross margin due to the mix shift away from user pay or towards user pay away from ads.

How should we think about margin, I guess holistically across 2019. Is there a way to quantify, the overall impact from all of these, from all these issues. I understand that this is that this is optics, right. But when we’re thinking about building up our models, is there any way to you know to help us quantify the overall impact from all of these trends? Thank you.

Frank Gibeau

Thanks, Tim. This is Frank. I’ll take the Poker question, and then Gerard can tackle the 2019 part. In terms of Poker, as you know as we’ve talked about, we had a platform issue mid-to-late summer on Poker that set us back in terms of our audience. And we also saw at the same time, weakness in the web platform for Poker as well, which has been a good part of that businesses in addition to the mobile offerings. So that that happened in the mid-to-late summer. We’ve been working our way through that.

In addition, we’ve had some challenges inside the economy. We need to look at how to tune the levels of currency, against how the tournament structures have unfolded. And so we are in a place where when you have life services, there points and time in their life cycles where you see some strain inside of the economy, you see some strain in terms of existing players, and you take the opportunity to kind of go after some of the fundamental quality of life issues inside the game. You clean up interfaces, you go back and reacquire players through paid acquisition and organic means, you tighten up the ASO and then you also make the adjustments over time in terms of the currency balances. And that’s kind of where we are right now in Poker.

You know Poker has been matching it’s 2017 performance, which was quite good, but it isn’t growing to the level that we want it to. And so we are very focused on returning Poker to growth in 2019. And I think it points to one of the strengths of Zynga in terms of our resiliency. We can have a problem in Poker in terms of growth that can last for a couple of quarters. And at the same time the rest of the portfolio will continue to prosper.

Words with Friends seeing you know some of the best numbers that’s ever generated in eight years. CSR2 having the best quarter it’s ever had. Empires & Puzzles and Merge Dragons! coming in as the fourth and fifth new forever franchises. So, it’s the nature of that foundation of life services by having a resilient diversified portfolio that allows us to adjust and make changes to Poker that are in the best interests of our players and growth, while at the same time continuing to be able to grow the company going forward.

Gerard Griffin

Tim, in terms of thinking about the full year, you have simplistically I spent a lot of time talking about deferred revenue purely because it is a material GAAP metric and it's important to understand it. But it is fundamentally a timing issue between quarters and between years. And so, for internal purposes we actually take that out of our analysis. We understand what it is. We understand what’s driving it, but bookings is the top line metric we use, and we flow through our profitability based on that metric and so we excluded from our internal view of EBITDA. So I would suggest you do the same.

In terms of looking at the dilution that what we refer to for 2019, I would think about it in terms of broadly speaking what I said last time around somewhere in the range two-point. One point coming from gross margin where they’ll be some pressure just purely because we’ll be driving stronger user pay growth as opposed to the growth we will see in an advertising. And secondly there's an element of royalties that will come in with some of the licensed IP games.

And secondly, as you think about the other point that’s is coming primarily from Opex which is a mix of our ramp and new game development in addition to obviously the investment in new game launches from a marketing perspective. And then, as you think about the year-over-year and you think about what could inflect either our. You could see that becoming one point or it could be 2.5 points depending on the level of marketing that we would invest against our games. But I guess the most important thing I would leave you with is, as we execute against our 2019 objectives, obviously driving strong in our life services and bringing new games to market. We will see that margin did return in terms of we’ll see it dissipate into 2020 where we expect our margins to grow back into the 20% plus range.

Operator

Thank you. And our next question comes from Brian Nowak with Morgan Stanley. Your line is now open.

Brian Nowak

Thanks for taking my questions. I’ve two. Just the first one, really appreciate the commentary about 2019 and 2020. Was wondering, if you can just sort of investors to understand the type of analysis you performed, you talk about sizing the new IP. How material are those titles to the forward commentary? How do we think about the puts and takes here? How you thought about the new IPs potential? And then, could you just talk us little bit about Merge Dragons! in Asia or in China? Where are you in that potential opportunity at this point?

Frank Gibeau

Hey, Brian, this is Frank. When we look at new game development we have a very rigorous green light process that looks at the ability, does the game have the potential to become a forever franchise. And we define forever franchise games that can last for five years or more, that can deliver north of $100 million when they’re at run rate per year. And -- so when we start a new game like a Harry Potter Game or Game of Thrones Games or Star Wars or CityVille, Farmville, those were kind of the initial criteria that we look at. And we go through fairly rigorous market sizing exercise. We take a lot of internal use on potential CPIs, what the retention and engagement rates are? So from that standpoint when we back and we started the production we had a fairly rigorous and clear goal that we want to achieve.

We then aim for soft launch. We go into soft launch. We verify what the data assumptions were going into the production cycle. And if we see the results hit what we believe we need to attain and in order to regenerate that return on invested capital then we proceed and execute the launch. So as you think about the contribution of new games in 2019 that’s kind of the system underneath it whether it's 2019 or 2020, that’s the process we’re going through. And for 2019, we’ve indicated that you’ll see games in the second half. You’ll see games starting to enter soft launch in the first half and that’s when we’ll be doing our rigorous market testing.

In the contribution therefore to the top line bookings guide of 1.35 billion is relatively small. We’re really looking at growing our five forever franchises. It’s going be high – very high growth year for Merge Dragons! for Empires & Puzzles and good growth for our existing three CSR, Poker and Words With Friends. And then you’ll start to see the new games that start to contribute in the second half of the year. They really pay back in 2020 and that's where they start to stack. And if they're successful in their market introductions then we’re going to be talking about more forever franchises and the portfolio. And then you'll see a new slate of games coming in 2020 and we will modulate how much money we’re putting into new game development and new game marketing as it relates to our margin goals and how the years progressing off the core life services franchises.

On your second question related to Merge Dragons! both Merge Dragons! and Empires & Puzzles are relatively untapped in Asia. They have not launched at scale. And we’re working through on. Our go to market plan to bring those to audiences across Asia. We have high hopes that those games can do well there. But it is Asia. It’s a very difficult market to enter at times. And so from our perspective we’re taking a very careful and thoughtful approach to launching those games. Merge Dragons! is available in certain markets in Asia and we’re seeing some promising indicators. And then we’ll look to -- start to bring Empires & Puzzles to Asia later in 2019.

Brian Nowak

Great. Thanks, guys. Thanks Frank.

Operator

Thank you. And our next question comes from Colin Sebastian with Robert Baird. Your line is now open.

Colin Sebastian

Great. Thanks and congrats on the quarter and the year. With respect to the growth in Words With Friends, I know each of the games in the portfolio is different, but does this serve as a template in any way as you look to improve performance of some of the older legacy games that you have in the pipeline for later this year? And then secondly, with respect to Words With Friends alive, can you talk a little more about that format in terms of some of the traction, other trivia games have had with that formats. Do you see this as a customer acquisition tool? Or would you expect more engagement with existing users and how monetization might evolve? Thank you.

Frank Gibeau

Thanks Colin. If you look at Words With Friends lessons from Bold Beats, Words With Friends actually benefited from lessons from Poker and from CSR2. We actually share a lot of the key learnings that we develop from live services and one game across our total portfolio. So it's a really -- it's a great competitive advantage that we can take learnings from one franchise and apply to others. The key lessons that we learned in Words With Friends was looking at engagement levels and what types of activities and new features we could put into them to increase basically the daily engagement that players are putting into the game. And that led to things like single player mode led to a team-based plays. And we also had some very good market research on those different player segments and what they were looking for next.

And so, those lessons are being applied to other games like CSR2 this year.You'll see a greater investment in new player modes that are PDP oriented, that allow players to compete more against each other. One of the other things that we did learn from Words With Friends is -- because it's an advertising driven game in many respected it now has a micro-transaction user pay economy, but its still majority of its revenues generated from advertising as we learned a lot of ways to utilize advertising products and data science to understand the impact on engagement that as we start to look at inventory opportunities across the rest of the mix we’re using those learnings in terms of how we’re placing them in and what types of products we place inside those products whether it's a racing game or a hyper casual game.

In terms of Words With Friends live that was a feature that was very innovative. It's in beta. We’re still shaking it down and getting the user flows and understanding the questions and the cadence on the hosts. All those things are being fine-tuned and polished for eventual broader rollout of the feature. But what we found with the feature is that it generates new audience, its part of the core game experience, it should be a game based around words. And we’ve done a lot of research in terms of the types of questions and humor that people want to see in it. And the impact on engagement has been very solid, very strong. The idea that there is now an appointment time mode has really resonated with key members of the Words With Friends community and it still – I’d like to say in beta, so we still got some more work to do to get it into a position where we’ll then start to it roll out and really market it more aggressively.

We obviously have looked at how the other trivia products have done out there and there’s some really encouraging performances that they've attained. But we thought that instead of launching a standalone game we have a – we had better adoption and a higher positive impact on engagement by rolling it out as a new mode in Words With Friends.

Colin Sebastian

Thanks.

Operator

Thank you. And our next question comes from Mike Ng with Goldman Sacks. Your line is now open.

Mike Ng

Hi. Thanks for the question. I have one for Frank and one for Gerard. Frank, I was just wondering if you could talk about how you define success for a new mobile game and what you consider the typical success rate for new games? And also what you’re doing with your new titles to increase that likelihood of success whether that’s from a development or marketing perspective? And Gerard, I think when Zynga acquired Gram game that generated about $100 million to $120 million in bookings annually, so call it, $25 million to $30 million a quarter. Could you just remind us how much merges as a percentage of Gram and with merge up 54% sequentially what’s the new quarterly run rate for Gram games? Thank you.

Frank Gibeau

Thanks, Mike. In terms of how we think about success in mobile, I talked a little earlier on the call how one of the dimensions we look at is does the game deliver long-term engagement and therefore can it become a forever franchise, game that can be around for five years or more much like, Zynga Poker has been around for 10 years, Words With Friends has been around for eight, CSR Racing is now in its fifth year. So we look at long-term engagement and how it plays into delivering that long-term relationship with players, and that’s a very systematic approach. We like to think that we engineer it at Zynga. And so what we try and do is go into every aspect of the product development and look for ways to drive innovation, but at the same time understand as early as possible whether or not we’re on track, and how to test market as much as possible, our play mechanics, our elder game systems and really apply those learning across the portfolio.

And so, from our perspective we define success is can create another forever franchise because if we add one more to our publishing platform it scales beautifully in terms of our growth and in terms of the impact on profits. When we look at the broader market overall in terms of chart position we do look for the ability to start to get into the top 100, top 50, top 25, top 10, so forth and so on. We look at IOS. We look at android. We are only green lighting games that really have the opportunity to reach global markets. The mobile market is so global, so gigantic that to look at an idea that can't work across the full spectrum of that market is really a missed opportunity.

So, we combine those decisions on IP brand, engine, features and then get into the rigorous testing on it. And ultimately we do want to get into the charts. And we talked about in the prepared remarks how Empires & Puzzles reach the Top 10 on android top grossing charts recently, Merge Dragons! have been Top 20 on android we’ve see our other games perform as well. And so those are the different dimensions that we look at. Now the one thing that is beneficial by being on mobile is that you can create pretty big businesses that are very profitable and it's got such a large coverage that you can do that in ways that allow you to be building forever franchises that will scale out the business but don't definitely be in the top five every time. And so you see some games like that in our portfolio mix. We typically don't focus that as the main effort of our studios, but you do see that as opportunity as well.

Gerard Griffin

Just in terms of Gram, obviously I don’t want to get into deep slicing and dicing of individual studios, but as it relates to Merge Dragons! Merge Dragons! was at the majority of the bookings and in the studio it definitely north of 80%. And when I quoted numbers historically I said, think about existing run rate and for the total company about $100 million with a ramp in that run rate to 120 all in. So it is obviously driving a little bit higher than that at this point. The only caveat we put is its really strong performance in Q4. That is a holiday quarter. So even though it is ramping nicely you got to be careful to take data point out of holiday quarter as a run rate.

Mike Ng

Okay, great. Thank you, boss.

Operator

Thank you. And our next question comes from Drew Crum with Stifel. Your line is now open.

Drew Crum

Okay. Thanks. Hi, guys. As you think about some of the acquired new games coming on board, are there any title that lend themselves to more advertising? And I guess asked differently, is there something aside from Words With Friends that’s driving the expectation for continued growth for ad booking 2019? And then separately can you address the sequential improvement and payer conversion in 4Q and how they might trend with some of the additions you’ve made or making to the portfolio this year? Thanks.

Frank Gibeau

Hi, Drew this is Frank. I’ll start with the first question. We also develop hyper casual games and we had games out on messenger services in the past that are advertising driven. So you will see in our -- not included in our title plan that we’ve talked about are a slate of games that are more casual that are light products that you see in the free charts that are ad model driven. We are doing some experiments there to see if there's an ability to grow out that portfolio more. Examples of that type of game, Gram has does an incredible job there as a studio with the 1010! franchise and that continues to be a very popular franchise out there and is available through advertising in terms of its business model.

Gerard Griffin

Yes. In terms of the payer conversion, in terms of the quarterly growth, obviously we launched Wonka's World of Candy in the quarter which helped. More macro as you think about payer conversion, it's fundamentally down to -- our focus on engagement creating a deeper engagement with players and ultimately giving players the opportunity to add value to their experience through in game monetization. And as you think about that that's why we’re very much focused on Bold Beats driving more immersive experiences within existing live services that obviously build that relationship with players and give us more opportunity to taken from being highly active player that isn't spending much to somebody who's actually highly active and monetizing because they see real value in and what they're getting from the game.

Obviously the addition of new games when you think about a Merge Dragons! That’s obviously a very strong user pay game as is Empires & Puzzles. And as we go through the years as we add further titles into the mix that will give us more opportunity to obviously grow our audience base and ultimately through deeper engagement retention monetization grow the payer conversion.

Operator

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

Mike Olson

Hey, good afternoon. I’m not sure if you’ve said it, but at this point are you confirming a specific number of new titles in the back of the year. It sounds like its going to be three or four but not sure you said this specifically. And then relating to that maybe I could ugliness from the guidance you give, but could you sort of break down what percent of 2019 bookings comes from existing titles versus the title that will be released in the second half the year that three or four titles. In other words I guess I’m just trying to kind of get a sense for how much of the 1.35 billion is dependent on those new titles versus just kind of continued solid performance of the title that exists in the portfolio today? Thanks.

Frank Gibeau

Hi, Mike. Yes. I think it’s safe to assume that there is three to four titles available in the second half of 2019. In terms of the total really the majority of that 1.35 billion is driven by the big five for forever franchises. The contribution of new games in the second half is a very small percentage.

Mike Olson

All right. Thank you.

Operator

Thank you. And our next question comes from Justin Post with Merrill Lynch. Your line is now open.

Justin Post

Great. Thank you. Just a couple of follow-ups here. First, Gerard, can you talk about the contribution from Small Giant, contemplating your guidance or just remind us what the run rate is and how things went in January there? And then secondly, just on Wonka, I know it’s very early. How are you thinking about the monetization of that and how that trending right now? Thank you.

Gerard Griffin

In terms of, guys, as we said when we announce the acquisition of Small Giant. The title itself Empires & Puzzles is doing very well and it's growing -- it's growing both organically but also through a very high levels of marketing investment that is driving obviously an audience base with a really good return. In terms of for this year how I'm thinking about it. Our goal is to drive, obviously our longer term operating margins, i.e. through the end of this year and into 2020, north of 20% in internal definition. And right now, Small Giant is investing for the future. So it's more on that the 20 as opposed to 20 plus. But that could change dramatically depending on how we invest over the coming quarters. But for now my assumption is as we set our expectations for the rest of year is that it is at our near-term margin goals. Can it inflect higher? We believe so. But right now, we’re investing for scale in 2019 and into 2020 and beyond.

With regard to Wonka's World of Candy, we’re very pleased with how the game is started. The quality of the experience is very strongly. We’ve gotten very good data back in terms of engagement and retention. The monetization rate is actually pretty good. We want to do further tuning on the long-term engagement within the game as we scale it over these next few quarters, but we are profitably acquiring players into the game. Match-3 is a category that’s kind of a slow build. And you'll see it contribute to our 2019 with a full year contribution.

Justin Post

Maybe one follow-up, just on the bookings from Small Giant, can you just remind us of what you’re thinking there? And has that change at all based on what you’ve seen in January?

Gerard Griffin

When we did the acquisition we said, we’re somewhere between two to three times on the valuation. They ended the year somewhere in the $190 million and we expect to grow that obviously in the current year. So, somewhere in the sort of 240, 250 range is sort of like what we’re thinking. It could be a lot better, but in terms of our setting our expectations for the full year we weren’t trying to get ahead of ourselves.

Justin Post

Thank you.

Operator

Thank you. And our next question comes from Doug Creutz with Cowen. Your line is now open.

Doug Creutz

Thanks. You indicated that you’re looking for ways to raise additional capital. Obviously you got the sales-leaseback possibility to do more M&A. You’ve done three deals in the last 15 months sort of basically increased the size of business by I think roughly 50%. Is there kind of a target that you’re looking for in terms of scale that you feel like okay we’ll be fully scale at this point? Is it going to be – is it more opportunistic? Can you just talk about having done several deals where your uptick comes from? Thanks.

Frank Gibeau

Thanks, Doug. The focus for us in M&A starts with talented teams and the opportunity to create new forever franchises. And so, when we’re looking at the marketplace mobile is a really rich opportunity. There's a lot of great teams out there. There's new franchises being built all the time. Lot of them are international as you cited, we have been acquiring companies and the majority of those been in Europe in different places that you wouldn’t expect. And so from our perspective we’re looking at teams, the opportunity to create new franchises. It does add to a goal of scale and scaling our business to get to a top line number that’s multiple billions, is kind of where we would like to be headed. An M&A is a great tool for us as we increase the cash generation of our existing operations combined with the opportunity to convert the building asset into proceeds that could be used against that pursuit we see as a very strong opportunity create more shareholder value. So, we typically look -- we started on the team and talent franchise level and see where it takes us.

Gerard Griffin

Yes. I would just add to that. I think what we found with the last three acquisitions in particular, the feedback from those studios obviously more recently from Small Giant book from Gram and from peak back into the marketplace has been very positive towards Zynga. I think they figured out under Frank’s leadership, we've got to create a focus in terms of nurturing creativity and trying to grow really cool games and obviously games that can generate a lot of value. That has given us I would say a stronger position in the marketplaces. When you think about Zynga we’re big enough that we have scale, but we’re not big enough that you’re relevant if you're a studio with open coming game.

And so for a Small Giant, for Gram and for our Casual parts division at peak, each of those studios is very relevant to us and they are taking what they need from Zynga from publishing expertise, studio operations expertise and scale. And what they're delivering back to Zynga is a very talented studio that is driving meaningful growth from their games. And that's the ideal scenario for us. That’s not to say, we wouldn't buy a company that's got more meat to it, but the acquisitions today have been very great type from a creative point of view and they’ve been very easy for us to integrate back into the overall Zynga ecosystem.

Doug Creutz

Thank you.

Operator

Thank you. And our next question comes from Ryan Gee with Barclays. Your line is now open.

Ryan Gee

Yes. Hi. Good afternoon. Thanks for taking the questions. So, relates on the comments you made in the letter about margin expansion. I believe you said, how you guys aim to progress towards the margin, its more in line with your peers. I would be great, if you could just help us think about where that will settle out? Maybe who you consider in that peers that just who were on the same page? And then on a related note, I know you’re guiding to 2019 top line of around 1.35 billion in booking. And the last time you guys were kind of in that same range. You go back to 2011 and your EBITDA margins were around 26% during that high 20s range. So is there something different about the business today that you're not already has those margins given the higher booking base? And what its going take for you guy to get there to given your comments on progressing towards where your peers are? Thank you.

Gerard Griffin

This is Gerard. I think when we think about our margins, I guess, the first thing I would say is, when you look at our P&L work we’re going off for gross number. So when you think about 20%, this 20% over a 100 as opposed to 20% over 70 as with some of our peers and that's from a user pay perspective. So 20%, again, that's excluding the impact of deferred revenue. So, how we look at it internally is you’re talking it sort of 25% plus if you were to reverse engineer it into what an EA or Activision would be looking at.

Mission one for us is to get 20. We delivered 20 in Q3 and Q4. That was a function of obviously driving our live services continue to invest in our live services in addition to new games. As we think about this year 2019 we’re going to inflect the investment in new games up a little both from an R&D perspective and obviously from an marketing and that's why we’re saying we’ll go back to go forward. But when we think about 2020 we want to get back into the 20s and then the next port of call for us will be to get the 25 TBD [ph] when we get there. But when you’re talking about 25 you're talking more like 30% in company's that report on the net basis. So, that's how we think about it.

We've also said if you want to go further, if you think net 40 gross 30 how can we get there? I think that final five is going to require what I would call a breakout, something that scales to a new level. What you saw with King [ph] when they hit the Motherload with a Candy Crush. And again when you think about some of our games that the smallest part of those games actually is the R&D investment with the largest portion being marketing, but if you get a game that can actually breakout to a different scale of bookings on a sustainable basis that obviously gives you an ability to really inflect into higher flow through.

Operator

Thank you. And our next question comes from Ben Schachter with Macquarie. Your line is now open.

Ben Schachter

Hey, guys. Can you about some of the things that are happening around platform fees and specifically Epic games and how they talked about that the fees can change there and what they’re going to trying to on android? How you might participate there? And then secondly, just beyond chat what other emerging platforms are you looking at that that might be meaningful? Thanks.

Frank Gibeau

Thanks Ben. In terms of the channel and the related fees, there’ not really much for me to comment there. There's a great partnership between our company and Apple and Google. They help us, bring our games to market and reach audiences. There’s obviously been some innovation recently on Epic’s front. But I think it’s too early to tell exactly how that all going to shake out. It's certainly not a forcastable event. So I'll leave that to let events unfold more to be able to comment on it.

In terms of other platforms there are – and mobile is a really dynamic marketplace. You’ve guide 5G on the horizon which will allow for higher fidelity experiences, experiences that can reach more players simultaneously, new ways to deliver content, streaming will start to be interesting down to the device. And you’ll start to see chat, it’s still something that's trying to figure out its way in the West, but it’s still a platform that has potential. In addition to that there is a there is a category of games out there that lot of people call hyper casual that are very snack size kind of quick games that build big audiences very quickly or ad driven, use a lot of cross promo and you see a lot of those dynamics already at play in the marketplace or at least us getting into position for that.

Another technical innovation is coming that -- that’s already happening frankly that I like is the cross-platform play between mobile and PC for sure and in some point console. So, as we built Zynga and we look at the types of franchises we have and we chart how these platform and technology shifts are start going to unfold. I think we’re in a pretty good position to be able to build the businesses at the right time when those just start to get critical mass. We don't need to be the pioneer on some of these, but if we’re not in position to be able to ride the wave that's not something we want to be out of position on. So we’re really looking carefully at those opportunities.

Operator

Thank you. And our last question will come from Ray Stochel with Consumer Edge Research. Your line is now open.

Ray Stochel

Great. Thanks for taking my question. For starters, how should we think about a reasonable total addressable -- total addressable market for CityVille or FarmVille titles, by which genre, other titles in the market we can compare it to or previous user basis. And then, if you had any quick thoughts related to acquisitions, would you be willing to acquire a studio that has a large game with a third party license, or are you solely focused on owned IP? Thanks.

Frank Gibeau

Thanks, Ray. In terms of the category for Farmville and CityVille, it’s kind of a unique opportunity traditionally the builder category as best represented by Hay Day or Sin City or Township has been a very robust and strong category.

So you look to that, those as example titles, but at the same time, Farmville and CityVille are products that had massive audiences on Facebook and on the web and so there’s a lot of late in a demand, there’s a lot of awareness for those brands and so as we think about the builder category going forward, we're not going to build just strictly a builder that would squarely fit in that category. We're trying to match up other mechanics and look more broadly to the larger base that has the opportunity there. So, look for innovation from us on those titles.

In terms of acquisitions and strategic licenses you never say no, there’s nothing that I can think of right now, that fits that particular profile that you called out, but I would say the following, which is we have a very good collection of strategic licenses here at Zynga.

With Star Wars, with Game of Thrones, with Harry Potter with Wonka’s and Wizard of Oz. So from our perspective, we are not really coveting any licenses right now that we don't already have or we don't really already have game development plans against, but you never say never, when it comes to M&A, you just make sure you get a good deal..

Gerard Griffin

Yeah, I would just add to that, I think similar to our on -- our assessment of our own game development and we look we look at talent, we look at the IP in the game. I think there are three fundamental factors you need to get right to give yourself a shot at a success in this business. So if there’s a company out there that’s got a licensed IP as long as it's a sustainable IP and the economics makes sense from a natural point of view we’ll take a look. But to Frank’s point, we’re very happy with the portfolio of licensed IP we’ve built over the last few years, and we’re looking forward to bringing those games to market over the coming years.

Operator

Thank you. I would now like to turn the call back over to Rebecca Lau for any closing remarks.

Rebecca Lau

We just want to say thank you to everyone for joining our earnings call today. We look forward to connecting with you more of the coming weeks.

Operator

Ladies and gentlemen. Thank you for participating in today’s conference. This does conclude today’s program. And you may all disconnect. Everyone have a great day.