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Zynga Inc (ZNGA)
Q3Â 2019 Earnings Call
Oct 30, 2019, 5:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen thank you for standing by and welcome to the Zynga Third Quarter 2019 Results Conference Call. [Operator Instructions]
I would now like to hand the conference to your speaker today Rebecca Lau Vice President of Investor Relations and Corporate Finance. Please go ahead madam.
Rebecca Lau -- Vice President of Investor Relations and Corporate Finance
Thank you and welcome to Zynga's Third Quarter 2019 Earnings Call. On the call with me today are Frank Gibeau our Chief Executive Officer; and Ger Griffin our Chief Financial Officer. Shortly we'll 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'll 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 the call over to Frank for his opening remarks.
Frank Gibeau -- Director and Chief Executive Officer
Thanks Rebecca. Good afternoon everyone and thank you for joining our earnings call. In Q3 we achieved our highest quarterly revenue and bookings ever driven by strong momentum across our live services as well as contributions from our recently launched titles. In the quarter revenue grew 48% year-over-year to $345 million and bookings increased by 59% year-over-year to $395 million. Additionally we operated cash flow of $69 million up 67% year-over-year and finished the quarter with approximately $1.45 billion in cash and investments. Based on this strong performance we are raising our full year 2019 guidance which Ger will discuss in more detail later on this call. We're on track to deliver our best annual revenue and bookings in Zynga history and continue to be one of the fastest-growing public game companies in 2019. Now I would like to discuss the key drivers of our performance in the quarter including our strength in live services successful new product introductions and growth in international markets. First we have strong momentum across our highly diversified portfolio of live services.
Starting with Merge Dragons! this franchise has taken our bold beat strategy to a whole new level with new events challenges and meaningful social interaction. It has more than tripled its Q3 revenue and bookings year-over-year and achieved another record top line quarter. In the period, players enjoyed a steady cadence of themed events that featured unique items in game rewards and special dragons. We also released dragon dens a new social feature that gives players the ability to play and chat with friends in game for the first time. Together these bold beats enabled merge dragons repeatedly break into the top 10 Android and top 15 iOS us grossing game charts. Next, empires and puzzles once again achieved its best revenue and bookings quarter driven by a synchronized series of bold beats. The franchises unique combination of player versus player competition, single player quests, Hero collection and Alliance features create a highly engaging and social ecosystem for players into three empires and puzzles repeatedly broke into the top five US grossing game charts on both Android and iOS. Finally CSR2 broke new ground in the quarter with the unveiling of the Pagani Huayra Roadster BC marking the first time an auto manufacturer has premier an exotic supercar in a mobile game before releasing it to the public.
This debut generated tremendous press and community excitement as well as extensive support from our platform partners. In addition alongside the release of the blockbuster film we introduced a new Fast & Furious: Hobbs & Shaw event in collaboration with Universal games and digital platforms. These key partnerships and the continued featuring of exclusive content from iconic automotive brands are what makes CSR2 one of the highest quality and most engaging racing games in the world. Second the investment in our new product pipeline is paying off. On September 18 we launched Merge Magic! to worldwide audiences and it is off to a great start. We are seeing strong engagement from players as they discover enchanted tales and quests in the mysterious world of media, where they can combines and collect magical creatures and items using our innovative merge mechanic. In addition, Game of Thrones slots casino became our fastest growing slots titled in its first full quarter post launch. We expect these titles become meaningful contributors to our live services foundation over the coming quarters. We are also making good progress with the titles we have in soft launch. Farmville three recently exited its technical soft launch phase and joins puzzle combat in rigorous testing for engagement and monetization. We are continuing to make adjustments to both games to optimize for long term success.
Potential worldwide release timing will be determined based on key performance indicators and player feedback gathered in soft launch. Finally we are making meaningful progress in growing our portfolio internationally. In the quarter our international revenue in bookings grew 67% and 89% year-over-year respectively and now represent 38% of total revenue and 41% of total bookings both up 34% a year ago. This performance was primarily driven by the addition of Empires & Puzzles and growth in Merge Dragons! as these 2 titles have strong Android and global audiences. Further expansion into Asia is a key element of our growth strategy. As a result we have self-published Empires & Puzzles in South Korea and Japan. We are especially pleased with the engagement we are seeing in these markets and while it's early the title has recently broke into South Korea's top 20 grossing game charts on Android. We expect to invest additional marketing in these countries over the coming quarters.
With that I would now like to turn the call over to Ger to discuss our Q3 results in more detail as well as our raised outlook for the year.
Gerard Griffin -- Chief Financial Officer
Thank you Frank. We closed out a great Q3 with strong mobile life service momentum and operating leverage. Building on our strong performance to date we are raising our full year outlook for revenue and bookings but first let's discuss Q3. Revenue was $345 million comprised of bookings of $395 million offset by a net increase in deferred revenue of $50 million. Revenue was $20 million ahead of our guidance on a $15 million bookings beat and a lower increase in deferred revenue of $5 million. Our top line beat was driven by strong mobile live service performance in particular outstanding performances from Merge Dragons! and Empires & Puzzles as well as initial contributions from Merge Magic! which released on September 18. Revenue was up $112 million 48% year-over-year driven by bookings growth of $146 million or 59% year-over-year partially offset by growth in deferred revenue of $34 million. This was driven by our best mobile revenue and bookings performance in Zynga's history with mobile revenue of $328 million up 54% year-over-year and mobile bookings of $378 million up 64% year-over-year.
Our year-over-year bookings growth was driven by our mobile live services including a full quarter of Empires & Puzzles continued growth in Merge Dragons! and initial bookings from our recently released games. The net increase in deferred revenue of $50 million was driven primarily by bookings growth from Empires & Puzzles and Merge Dragons!. While the release of this GAAP deferral will have a positive impact on revenue and profitability in future periods it represents a $50 million reduction in revenue net income and adjusted EBITDA in Q3. On a year-over-year basis the difference in the change in deferred revenue represents a $34 million decrease in the year-over-year change in revenue net income and adjusted EBITDA. We ended Q3 with a deferred revenue balance of $403 million versus $174 million a year ago. Turning to our Q3 operating expenses. GAAP operating expenses were $285 million up $135 million or 90% year-over-year. This was primarily driven by higher contingent consideration expense and increased marketing investments versus the prior year. The increase in marketing was primarily due to a full quarter of Empires & Puzzles as well as the ramp on Merge Dragons! and our recently released titles.
The contingent consideration expense was driven by the recent acquisitions continuing to perform ahead of our expectations. This resulted in an expense of $61 million up $59 million year-over-year and $46 million ahead of our guidance. Year-over-year GAAP operating expenses increased from 64% to 83% of revenue. This is a function of the significant increase in deferred revenue marketing and contingent consideration expense partially offset by improved operating leverage in SBC and in other R&D and G&A expense lines. Non-GAAP operating expenses were $203 million up $75 million or 58% year-over-year primarily due to the increase in marketing investments. Year-over-year non-GAAP operating expenses remained consistent at 52% of bookings. This was due to improved operating leverage in R&D and G&A expense lines which offset the higher sales and marketing as a percentage of bookings. Our strong operating performance in addition to the $314 million of onetime gain related to the sale of the San Francisco building enabled us to deliver our highest quarterly net income of $230 million up $220 million year-over-year.
We were $20 million lower than guidance primarily due to the higher contingent consideration expense which more than offset the better-than-expected operating performance in the quarter. Our adjusted EBITDA was $28 million $21 million better than our guidance and a decrease of $11 million year-over-year. The variance to guidance was driven by better-than-expected operational performance as well as a lower build in deferred revenue. The variance to prior year was heavily influenced by the significant increase in deferred revenue which more than offset the strong year-over-year improvement in operating performance. We generated operating cash flow of $69 million in Q3 up 67% year-over-year. On July 1 we completed the sale leaseback of our San Francisco building which provided net cash proceeds of approximately $581 million after taxes and fees. As of September 30 we had approximately $1.45 billion of cash and investments which we anticipate will be used primarily to fund future acquisitions to further accelerate our growth. Turning to guidance.
Guidance for Q4 is as follows: revenue of $365 million up $116 million or 47% year-over-year and net increase in deferred revenue of $50 million; bookings of $415 million up $148 million or 55% year-over-year and net loss of $44 million and adjusted EBITDA of $25 million. Some factors to consider in assessing our Q4 guidance include: our top line performance will be driven by our mobile live services where we expect sequential growth collectively across our 5 forever franchises as well as initial contributions from Merge Magic! and the continued ramp of Game of Thrones Slots Casino. These games will be partially offset by declines in older mobile and web titles. are top line guidance does not assume the launch of any additional new titles in q4. We anticipate that our gross margins will be broadly in line with q3. And we expect a decrease in our operating expenses sequentially, with a lower contingent consideration expense, more than offsetting increases and other expenses in particularly higher marketing investments on our recently launched cycles, and life service portfolio. However, should our recent acquisitions continue to form a head of our expectations, we may see a further increase in the cumulative contingent consideration accrual.
Turning to the full year. Building on our strong performance to date we are raising our 2019 outlook and should deliver our best annual revenue of bookings in Zynga history. We are raising our revenue guidance to $1.28 billion up 41% year-over-year and an increase of $42 million versus our prior guidance. We expect a net increase in deferred revenue of $263 million up $3 million versus our prior guidance. While the release of this GAAP deferral will have a positive impact on revenue and profitability in future years it represents a $263 million reduction in revenue net income and adjusted EBITDA in 2019. We are raising our bookings guidance to $1.55 billion up 59% year-over-year and an increase of $46 million versus our prior guidance. We are on track to deliver results ahead of our profitability expectations that we outlined at the start of 2019 both on an absolute and a margin percentage basis. This better-than-expected performance has been driven by the strong momentum of our live services and the phasing of our new game launches.
These factors have more than offset the pressure on gross margins from a higher mix of user pay versus advertising as well as the incremental rent expense in the second half of the year. We're finishing 2019 with tremendous momentum. Looking toward 2020 we continue to expect low double-digit organic revenue and bookings growth on top of our raised 2019 guidance. We expect to improve our operating results in absolute terms in 2020 with operating leverage ultimately a function of our live services performance the timing of new game launches and the level of marketing investment we deployed to scale these titles. Over the next few years we continue to expect to make meaningful progress toward achieving margins more in line with our peers on a like-for-like basis. In conclusion we are very pleased with the momentum as we enter Q4 and the progress we're making on our multiyear growth strategy.
With that I will turn the call back to Frank.
Frank Gibeau -- Director and Chief Executive Officer
Thanks Ger. Before we open the call for Q&A I'd like to take a moment to discuss how we are uniquely positioned today. In 2019 we are on track to deliver our best annual revenue and bookings in Zynga history driven by the strength of our live services which is powered by our bold beats. We expect to build upon this momentum in 2020 by continuing to execute our growth strategy to expand our live services create new forever franchises and invest in emerging markets and platforms. We also see opportunities to further accelerate our growth through acquisition. It's an incredibly exciting time for Zynga. We are well positioned as a leading mobile-first free-to-play live services company on the largest and fastest-growing gaming platform in the world. We are confident in our ability to further scale our business and generate more value for players and shareholders.
With that we'll open up the call for your questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Michael Ng with Goldman Sachs. your line is open.
Michael Ng -- Goldman Sachs -- Analyst
Great, thank you for the question. I just have 2. First I was just wondering if you could update us on your capital allocation plans and what the M&A environment looks like? What criteria are you looking for in an M&A candidate? And then second could you just talk to us about the low double-digit organic revenue and bookings growth guidance for 2020? Would you just remind us what's assumed in there from a forever franchise growth perspective as well as any new title benefits?
Frank Gibeau -- Director and Chief Executive Officer
In terms of M&A -- I'll start and then Ger can talk about 2020. In terms of what we look for in the marketplace it starts with a recognition that mobile is a global platform and there is talent all over the world. A lot of the great teams in mobile are international and so we start by looking globally for teams that have great leadership strong creative cultures that have franchises that are either at scale or coming at scale that could really benefit from the unique publishing platform that Zynga has for live operations when you look at data science product management the marketing and the other platform capabilities we have in the unique studio culture that we have with so many diverse teams we look for those types of opportunities. We don't look at a particular size. It could be a company that is what we'd call a plug-in which is something that's smaller in nature it could be a company that's larger. We really don't walk in with too many constraints there. Our criteria really is looking at team leadership and also the nature of their franchises and the types of products that they build.
Gerard Griffin -- Chief Financial Officer
In terms of -- just on the capital allocation as we said on the call the primary use of our cash and investments will be against acquisitions or against obviously the payout on some of the earn-outs that we're accruing on existing acquisitions. So as we look forward that is the primary use of our cash. Given the success we've had in the past with our acquisitions and the attractiveness of Zynga as a destination for creative teams we see opportunities to continue to grow through acquisition in addition to organically. To your question in terms of 2020 we're -- our expectation is that our forever franchises collectively will grow in 2020. We haven't given specific breakdown of the low double-digit growth but obviously a key driver of our business and key contributor to our overall bookings is our -- is the forever franchises followed by our Slots portfolio our Casual Cards portfolio. There will be an element of new in our bookings for 2020 but we'll give more color on the overall shape of the bookings when we get through our Q4 earnings.
Operator
Thank you. Our next question comes from Alex Giaimo with Jefferies. Your line is open.
Alex Giaimo -- Jefferies -- Analyst
Great. Thanks for taking the question. So 2 for me as well. First it looks like the commentary in the letter around outlook for 2020 margins changed a bit from last quarter not to get too nitpicky but I think the language last quarter was operating leverage now you're pointing toward operating results improving in absolute terms. So is there anything different planned on the expense side or am I just reading too much into that? And then going back to the previous question on capital allocation appreciate the color around M&A but I do think you guys have a $200 million buyback authorization. So maybe just general thoughts on potentially leaning heavily into that if there are no attractive options in the market right now?
Gerard Griffin -- Chief Financial Officer
So taking your last question first the primary use of our funds will be against acquisitions. We do have a buyback with $174 million outstanding. Obviously if we see the opportunity to buy back stock at the right levels we will. But again when we look at and we've done this analysis when we look at our investment against buybacks over the past years and our investment against acquisitions since the current management team took over the returns we're delivering to shareholders on the acquisition side have been more compelling. But again the next use of cash outside of acquisitions would be a return to shareholders. We don't have any other material uses of cash given we're a digital business. So it's not like we're -- we got a bunch of warehouses or nothing else to be building on. In terms of the 2020 outlook there was a clarification of sorts in the way I explained the operating results. Obviously we're ending this year stronger than we guided to at the start of the year if you look at the margin flow through and actually the absolute dollars and we started the year with a guidance of bookings of $13.50 expecting some points pressure in terms of our EBITDA our operating contribution.
We're actually ending the year well over $150 million above that. And in terms of bookings end we're delivering obviously in absolute terms and in margin terms a stronger result. Part of that is a function of the strength of our live services and part of that is a function in terms of how we've phased our new games. As you think about next year a very -- we've said this in the past we are going to increase the overall operating results of the company based on the stronger bookings contribution in 2020. In terms of the actual margin in any given quarter and for the full fiscal yes we do expect to continue to see very strong margins coming from our live services but the timing of new games and the level of marketing against new games can have an impact in any given quarter and ultimately on the outcome. So all we were trying to do there is just sort of reconfirm or reemphasize the fact that we do expect to grow in absolute terms but the ultimate percentage flow through will be highly dependent on the timing and scale of new game investments.
Operator
Thank you. Our next question comes from Drew Crum with Stifel. Your line is open.
Drew Crum -- Stifel -- Analyst
Okay. Thanks, guys. Kind of related to the last question let me ask this part first. The increase to your margin guidance for 2019 can you address the impact the timing of FarmVille and Puzzle Combat have if that in any way suggest some pullback in marketing spend that's getting to push into 2020 maybe that's having some impact on how you're thinking about margins? And then separately maybe for Frank you seem pretty optimistic on Merge Magic! I know it's very early but how is that trended relative to Merge Dragons! at the same point in its lifecycle?
Gerard Griffin -- Chief Financial Officer
Yes this is Ger. In terms of -- when we started the year we outlined that the majority of our bookings was going to come from our live business. We did indicate that we had put a small amount in for new games. And as we upgraded that guidance through the year we derisk what was broadly speaking above $50 million that we had put in for new games. What we did say is though that we had at least placeholder initial marketing in particular in the second half of the year against potential new game launches. We have launched some new games. We've launched our Social Casino Slots game and we've have launched Merge Magic!. But when you look at the overall contribution from our live business that's been better than expected. So that's obviously helped margins. And also the phasing of marketing against our launches both the ones we've launched and some other placeholders for additional marketing is definitely less than we originally anticipated at the start of the year.
So the combination of those 2 things obviously help to improve the margins. And as you've seen in the past when we're dealing with purely a live service quarter we've delivered at or even above a 20% flow through that's EBITDA excluding the impact of deferred revenue as you're layering in marketing. So some of that marketing placeholder that we had in the second of the year yes some of that's going to turn up next year for obvious reasons. And in terms of the number of launches next year we're not going to give any color around that but depending on the number of launches and the timing of launches you could see some ups and downs but our expectations is still in terms of absolute terms that we'll grow the business. Obviously top line we will and then bottom line it'll be. The level of growth will depend on the overall level of marketing against new games.
Frank Gibeau -- Director and Chief Executive Officer
On your question about Merge Magic! the game is actually off to a very good start. It's actually scaling faster than Merge Dragons! did initially. It benefits from a lot of the key learnings that we developed over time from Merge Dragons. It has some similarities but it also has some very key differences in terms of the player experience the design how the elder game works especially. And so what we're finding is that the games are very complementary that they appeal to people for different reasons. There is some crossover clearly between the audience base but it's something that we're very comfortable with and we believe that the 2 together will perform very well for us over the long term.
Operator
Thank you. And our next question comes from David Karnovski with JPMorgan. your line is open.
David Karnovski -- JPMorgan -- Analyst
Hi, thank you for taking the question. I was hoping you could discuss your outlook for advertising ahead and what opportunities you see for further network optimizations? And then just on Game of Thrones Slots how much do you think the brand value of the IP was the driver in making that game a success ready to start? And if you sort of move further away from the TV show in HBO does that create any engagement risk around the game at all?
Gerard Griffin -- Chief Financial Officer
This is Ger. On advertising as we have said in the past and through the first half of the year we saw really strong growth in advertising around 33% and we expect it to obviously hit some tougher comps for the second half. So we still expect our advertising for the full fiscal to be in the double-digit growth level. In terms of where it will be for next year I'm going to hold off until the end of the year to deal with that. For those of you that have heard my advertising soliloquy before we've grown advertising over the last 3 years. But again it's better to wait to see how we end the year and see how we're trending into next year. I would just add we do spend a lot of time as we've said in the past working with our partners to optimize our yields and we also look very closely with our studio teams to see how we can introduce additional inventory or addressable advertising inventory into our games but always in a player-focused manner. So it is true to say that we will continue to look for ways to grow our advertising but in terms of what next year's advertising outlook will be I'll give you more details on that on the Q4 call.
Frank Gibeau -- Director and Chief Executive Officer
All right. For the question about Game of Thrones Casino the product is obviously doing great. It's first full quarter it's the fastest-growing Slots game we've ever produced. A lot of that yes does have to do with the license. There is a very strong user base there that is familiar with the Game of Thrones machines that are on the casino floors in the real world. And the idea that they can play those at home is very compelling but in addition to that we spend a lot of time innovating new Social and RPG mechanics that allow players to play together that can join different houses compete in a social group jackpot kind of manner and we found that that is a very compelling product feature for our fans. We haven't seen any dip in the intensity or the time that the people are spending in the game as we move further from the television show. So I think this will be one of those evergreen brands for this particular category and given the stickiness of the design I think that we'll be able to hold and grow the audience base over the long term.
Operator
Thank you. Our next question comes from Brian Nowak with Morgan Stanley. your line is open.
Matt -- Morgan Stanley -- Analyst
Hi, guys. It's Matt on for Brian. So 2 if I can. On FarmVille exiting like the technical soft launch which you mentioned in the prepared remarks is that faster than expected and kind of how is the game tracking? And then just in terms of that and Puzzle Combat I apologize if you're explicit here but are we no longer expecting Puzzle Combat to potentially be in 4Q? Or is it more likely a 2020 event? And then if you wouldn't mind just an update on what you're seeing in Korea and Japan for Empires?
Frank Gibeau -- Director and Chief Executive Officer
In terms of FarmVille 3 technical soft launch went according to plan. So we're in it just as long as we were supposed to be in it. The results were very good. The device coverage the frame rate the downloads everything was exactly where we wanted to be. We now moved into the stage where we're looking at retention engagement monetization player reaction. Early results we're very encouraged by. We think we've got something really interesting in terms of what's coming together in FarmVille 3. We'll continue to expand more countries as soft launch unfolds. As Ger noted our guide for Q4 of $415 million in bookings does not include any contributions from FarmVille 3 or Empire -- or Puzzle Combat. I think what we need to really understand overall here is that we're in a position as a company where we've got tremendous momentum coming from live Merge Magic! and Game of Thrones Slots are off to a very good start.
And we're in a position where we can really take our time with making sure that these games have the right long-term engagement and retention metrics so that these are games that can be successful over many years and be forever franchises for us. We don't feel any quarterly pressure to rush the games. It's really one of those things where we're going to put it put through a rigorous test market. And when we see green indicators and we can go-to-market like we did on Merge Magic! and like we did on Game of Thrones Slots we'll release those titles. And that's one of the reasons why we've configured the company this way and why we have emphasize growth in live and how it's contributing overall the majority of our revenue and profits year-on-year we like where we're positioned and we think that that configuration will serve us well. In terms of Korea and Japan we took an approach there where we did not partner with any local companies. We self-published the games in the markets.
We bought performance marketing initially. We made some changes in the titles not extensive ones. And we started out by releasing the games into the market without a lot of marketing just to see how they settled in just to see what the fan reaction was and we saw a very encouraging results in terms of engagement retention especially in Korea largely in Android market as you know and it's very encouraging for us to see it pop into the top 20 on Android this quickly after introduction. So we like what we're seeing there. And as we look at Asia for Empires & Puzzles longer term we'll start to address additional countries. It just went into Japan and it's starting to move up the chart. So it's exciting to see a global IP like that find audiences in Asia. Traditionally Zynga has not generated very much revenue at all from Asia. So this is a very positive development for us.
Operator
Thank you. Our next question comes from Eric Sheridan with UBS. Your line is open.
Eric Sheridan -- UBS -- Analyst
Thanks for taking the question. So guys just curious maybe a bigger picture question on the marketing side. It sounds like obviously one of the things you're sort of indicating is as we get into 2020 and we see more games launches that will put the pressure on the overall marketing budget of the company. But as the company continues to scale and you have of breadth of offering in a number of different sectors of the industry are you gaining scale efficiencies of being able to cross-promote games across your player ecosystem? And/or can you give us a little bit of color of what some of the more successful channels have been for you in terms of both launching games and promoting sort of reengagement with the game so we could get a better understanding of what sort of ROI you're getting on the marketing dollars as you continue to scale the company on the back of all the M&A we've done over the last couple of years?
Gerard Griffin -- Chief Financial Officer
Eric in terms -- this is Ger. In terms of scale obviously growing the company from close to $1 billion of bookings last year to a $1.5 billion gives us more air cover in terms of having a stronger and contributing portfolio forever franchises plus the rest of the games in our portfolio. So from that perspective there is more scale. And obviously with the new teams on board we're leveraging our existing publishing capabilities. But obviously they brought some interesting insights to the table as well in terms of marketing their games preacquisition. As it relates to where we go fishing for players I think we're a digital business. So we're obviously investing in the digital channels. I'm not going to specifically call out any specific channel that's better than anyone else specifically because I'd like my competitors to go figure that out for themselves. But we have a very talented UA group and they're investing in a lot of different channels and testing a lot of channels to see where we can engage with players. Some of those channels will be obvious. Games do advertise another games but we also are looking broader at channels where our target player bases are.
Frank Gibeau -- Director and Chief Executive Officer
This is Frank. I'll just add one thing which is the Zynga historically has had hundreds and millions of installs across multiples of our brands like the FarmVille days and Zynga Poker or Words With Friends. And so we spend a lot of time in data science product management and in our marketing platform looking at how do we recapitalize players that have lapsed. Many times those players are more efficient to reacquire. And especially if they come back to a game that has evolved and has a whole bunch of new features than the last time they were there. So we look at what were their experience like the last time they were in the game why did they leave and we start to make adjustments to potentially how do we market to bring them back. And so Words With Friends is a great example as we've added more and more features like the boost like the daily challenge like dual like lighting round. We're able to go out and remarket onto those folks all these new features that in the game that they love they just for whatever reason moved on we're able to bring them back pretty efficiently. That's one of the real strengths of Zynga's publishing platform is looking not necessarily at brand new player acquisition but really looking at recapitalizing lapsed players and getting existing players to play more.
Gerard Griffin -- Chief Financial Officer
Sorry and the only other 2 points I would make because I think it's important to understand and we've talked about this in the past when our UA team looks at their overall budget for User Acquisition for the year they're obviously looking at on a total basis but they're also looking at it by game and by genre. And given the diversified nature of our portfolio they're always looking for the best returns and where they feel they need to invest the money to continue to drive growth are sustainability and individual franchises. So there is a continual rebalancing and reprioritizing of money. So it's not always additive. In other words there's many times where I've had discussions with my studio and UA teams where one studio will say "Hey listen we're performing well. It'd be good if we had a few more dollars." But when we've looked at the overall prioritization we've invested that across on some other titles.
The other thing I would say is when you think about 2020 and you think about the second half of this year what we're indicating in terms of the 2020 teams is not that there is a permanent push down in margins. What we're saying is that as you launch new games there is an additive element to that marketing investment. You can redeploy live services UA marketing to new games but in general terms there is a pickup as you start to launch the game. As that game becomes what I call a contributor to society. In other words it starts generating bookings then it becomes obviously an operating contribution contributor as well. And so you move through that sort of phase of the life cycle but you need to get through that life cycle. And depending on when those titles arrive and the level of scale you want to invest against them that can impact your margins in any given quarter and potentially over the fiscal.
Operator
Thank you. Our next question comes from Doug Creutz with Cowen. Your line is open.
Doug Creutz -- Cowen -- Analyst
That last answer is a good lead-in to the next question I'm just curious for the launches you have had this year. Have they been contributors to EBITDA positive contributors? Or you're not at that point in the lifecycle yet?
Gerard Griffin -- Chief Financial Officer
Like Game of Thrones Slots is a net noncontributor at the moment from an EBITDA perspective. Obviously it's contributing bookings. But as you know with these -- with Slots games they scale on a very measured level and they grow over time and we're very happy with the results we're seeing in terms of engagement and monetization. But over time as we invest against that title we'll see it grow. Merge Magic! just launched. So from that perspective it's really early stage. Again early indicators are really good in terms of the player engagement. But again as we scaled that business it won't be a surprise to you that the marketing investment against that title will be higher than the gross margin contribution in its early months.
Doug Creutz -- Cowen -- Analyst
Okay, thank you.
Operator
Thank you. Our next question comes from Ryan Gee with Bank of America. your line is open.
Ryan Gee -- Bank of America -- Analyst
Hey, guys, thanks for taking my questions, Two if I may. So in the letter you guys mentioned how you expect to continue making progress toward achieving margins in line with your peers on a like-for-like basis. So I would really love to unpack that a little more? Maybe help us ring fence the opportunity. So against the 19% EBITDA margin that you'll probably exit 2019 at what are the peers that you guys are referring to when you make that statement? Is it companies like NCSOFT and Nexon in the 40% EBITDA margin? Is it companies like EA and Activision in the high 30 operating margins? Just help us think about what you see as a peer that you guys could target? And then what do you mean on a like-for-like basis? And then I have a follow-up.
Gerard Griffin -- Chief Financial Officer
Yes. We look at our Western peers and our Eastern peers. So it's all of the above. What we mean on a like-for-like basis one of the vagrancies of our industry is some of our peers report on a net basis. They're showing net bookings in other words they take the revenue share with the platforms and they deduct that from the revenue numbers. So their 100 is 70 even though they call it 100. And so that gives their operating margins -- they look higher. So if you take a 20% margin and you literally more a pure play user pay business the 20% is actually 28%. So when we look at our peers we have to obviously dissect our numbers because some of those numbers you quoted are often net basis as opposed to gross. We report of gross. So when we can generate $1 from our players on a user pay basis you see $1 in our reported bookings you see a $0.30 in our cost of sales in the 70% gross margin in simple terms. So that's what we mean. So on a net basis we're trending quite nicely we're heading toward 30%. On a gross basis we're trending toward obviously -- this year we're coming close in somewhere around 19% 20%.
Ryan Gee -- Bank of America -- Analyst
Okay. So your basis there is that some of those companies I mentioned are reporting on a net basis so the 40% EBITDA margin is probably 30% and you guys are tracking toward 30%?
Gerard Griffin -- Chief Financial Officer
Yes. We'd have to go literally company by company but if you look at the way they disclose their rev rec you should be able to figure out. A lot of them have a lot of this information in there GAAP to non-GAAP reconciliations. The other thing I would note and it's just a function of portfolio. When you look at our live business our live business is generating north of 20% on a gross basis in terms of flow through. But obviously we're investing in the future and so we're looking to create additional forever franchises that we can scale into our live service business over time. And as those games are being built there are call centers so they obviously are a drag. So as we get those games into market our Casino game or our Merge Magic! game they became contributors to the overall live service business. So it's a balancing act there but we're very happy with the scale of our live service business. We're very happy with the portfolio of games we've got in development to launch over the next two three four years. But yes as we launch those games if you go back in history and you look at somebody like King when you have one game that gets to the kind of scale that Candy Crush got to that's how you get to 40% fairly easy. It wasn't easy for them but they got there where we have obviously got a portfolio of performing titles. And if we can scale those titles especially when they're live that's a meaningful way of getting there. If we can add additional forever franchises into the mix that's how you get there. And having any title scale over and above where it is right now is a meaningful improvement to our margins.
Operator
Thank you. [Operator Instructions] Our next question comes from Ray Stochel with Consumer Edge Research. Your line is open.
Ray Stochel -- Consumer Edge Research -- Analyst
Great, thanks for taking my question. To what extent does Merge Magic! currently have -- Merge Dragons! bold beats embedded within the game? And for what's not really in there for Merge Magic! is the road map of bold beats going to look pretty similar here? Just trying to get a sense of how confident we can be in this becoming a growth game?
Frank Gibeau -- Director and Chief Executive Officer
Yes. There's a lot of knowns in bold games as it relates to how the Merge mechanic actually works how the camp the collection the different puzzles and events harnesses works. so We operate off of what we believe are a series of key components that we believe will generate success with players and help us grow the game to a forever franchise some day. But we also are purposefully teasing the games apart and making them differentiated. So in terms of the types of creatures that you can collect the way things play the elder games will be different. So we're actually looking to make them very complementary and they're almost siblings as opposed to a replacement cannibalization strategy. So very early on we're starting to as you can see in Merge Dragons! put the Dragon Den and really invest in social features that are tied to that. We're not doing as much of that right now in Merge Magic! and we'll take a different approach to solving for Social and collaboration. So I would not necessarily think about them as a one-for-one replacement. It is absolutely living alongside and growing together.
Ray Stochel -- Consumer Edge Research -- Analyst
Got it. And then when you make the decision about your -- across your portfolio as to whether or not to ramp content for some of your live games we know that some games you can sort of get caught in a content ramp cycle where players continue to expect more and more content it gets harder and harder to deliver and more costly. How do you think you are on that continuum? And broadly speaking can you add a developer talent to grow content in some of your games? Is there sort of room to do that in your portfolio? Hope that make sense.
Frank Gibeau -- Director and Chief Executive Officer
It does. The first thing we look at is the difference between is it an event bold beat or is it a game -- a new game feature an all-new way to play the game. Those tend to operate differently and the consumption of event-driven content is very high. It goes faster usually than you think and it's something that players get used to. But when you introduce an all-new way to play like what we saw with boost in Words With Friends you can fundamentally change the way the engagement with the game occurs. So as we look at our bold beat road maps we differentiate between is this a Pagani event where we're releasing a new car that people can experience for a period of time or are we adding an all-new way to play like Showdown which is a new way to play PDP and CSR which we think has a longer-term impact on engagement and retention? So we deploy a lot of product management data science and studio teams time and energy against looking at these road maps. And sometimes you are in a place where you can scale up the content that you put in your road map by using contracted services or internal teams to ramp more content for events or to double down on a particular feature. So if we see the opportunity we do it. But in general we feel like we have the right cadence of bold beats across these games. Now it is entertainment. So not all bold beats are created equal. Some outperform others and sometimes things level out a little bit and you got to come back at it but -- so it's definitely an art form in terms of how you keep a player community engaged over the very long term. But it's something that we work very hard at Zynga making a competitive advantage and it is the engine for why we grow.
Operator
Thank you. Our final question comes from Mike Hickey with Benchmark. Your line is open.
Mike Hickey -- Benchmark -- Analyst
Frank Ger congrats on the quarter guys. Just a couple of quick questions from me. Words With Friends I know that you'd recently made some adjustments to the model there in terms of monetization sort of enabling MTX microtransactions to maybe offset some of the -- give yourself a new opportunity outside advertising. Just curious if you still see that as an opportunity and if that can track to something meaningful over time? And then I guess just looking at sort of your soft launch Public Combat FarmVille 3. I know you've got Star Wars Harry Potter you've got CityVille a bunch of games sort of thinking about launching in '19 '20. Just sort of curious if you could sort of rank your excitement in terms of potential impact on bookings or the most meaningful impact on bookings top three or so selling your pipeline would be helpful.
Frank Gibeau -- Director and Chief Executive Officer
On the first question Mike the boost economy and the way to play Words With Friends with consumables has -- is really taken a hold. It's something that the fans really like. In fact we're looking at additional boost that we can add to the game. We want to do it in a way that it really doesn't disrupt the traditional Words With Friends dynamic and the way that community likes to play the game but it's definitely been a net positive and we believe that it still has room to grow. At the same time we've been innovating and adding new ad products to the game that allows fans to engage with the advertising in a way that extends the experience. And so I think there is interesting opportunities to grow Words With Friends in the future because of this new base of boost features and the economy you see there.
In terms of the new product pipeline look I think we've got an extremely exciting product pipeline coming between FarmVille and CityVille Harry Potter couple of Star Wars games in addition to what Gram and Small Giant are working on. I think we never -- we love all of our children equally. So we never try and pick favorites here but I think all of them are going to have a profound impact on the company in a positive way over the long term and it's really great to be in a position where we don't have to rush the game development. We can really look at what's best for our players what's the highest quality experience we can configure and design and then bring them out in a way that leads to long-term success as opposed to -- is driven by some quarterly pressure or not.
Mike Hickey -- Benchmark -- Analyst
Alright, thanks, guys.
Operator
Thank you. Our last question will now come from Mario Lu with Barclays. your line is open.
Mario Lu -- Barclays -- Analyst
Hey, guys, thanks for squeezing, A couple of questions on Empires & Puzzles. So you've done really well driving up the ARPU with the introduction of new heroes and costumes any color you can provide on how much runway for ARPU growth that you think is left? What -- and then would you say you're in? And secondly I understand there is a VIP pass in the game that costs $5 for 30 days but have you thought about or test to implementing a better pass mechanism as well? Other mobile titles have implemented to a great success. So just wondering if you think that's an option to drive ARPU further or do you think it's better fitted for titles at the later stage of its monetization cycle?
Frank Gibeau -- Director and Chief Executive Officer
Yes. I think as we look at Empires & Puzzles we think that there is more value to create for players and game which will lead to the change in that dynamic in terms of the ARPU. We look at the increasing opportunity with PDP base building the ability to go deeper in your alliance. So the guys in Helsinki have a tremendously a vibrant road map ahead of us on Empires & Puzzles. And so we're very excited about putting more content more features more ways for the players to engage inside the product. So it's definitely -- it just had its best quarter ever and we said that last quarter and we said it the quarter before. So we're on a pretty good tear here and we like to see it keep going. In terms of battle pass mechanics it's certainly something that we're definitely analyzing. I don't think battle pass is necessarily are tied to a life cycle stage. I think it's absolutely that the price value proposition that the player goes through in terms of how they're thinking about engaging with the products. So you can introduce them very early on I believe. And in the case of the game from Helsinki and in Empires & Puzzles the VIP pass is something that we're analyzing and looking at. The folks that use it really like it. And when we're looking at ways that that could potentially play a role in the future growth of the game.
Operator
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Rebecca Lau for any further remarks.
Rebecca Lau -- Vice President of Investor Relations and Corporate Finance
Thank you Joelle. We want to thank everyone for joining our earnings call today. We look forward to connecting with you more over the coming weeks.
Operator
[Operator Closing Remarks]
Duration: 54 minutes
Call participants:
Rebecca Lau -- Vice President of Investor Relations and Corporate Finance
Frank Gibeau -- Director and Chief Executive Officer
Gerard Griffin -- Chief Financial Officer
Michael Ng -- Goldman Sachs -- Analyst
Alex Giaimo -- Jefferies -- Analyst
Drew Crum -- Stifel -- Analyst
David Karnovski -- JPMorgan -- Analyst
Matt -- Morgan Stanley -- Analyst
Eric Sheridan -- UBS -- Analyst
Doug Creutz -- Cowen -- Analyst
Ryan Gee -- Bank of America -- Analyst
Ray Stochel -- Consumer Edge Research -- Analyst
Mike Hickey -- Benchmark -- Analyst
Mario Lu -- Barclays -- Analyst
