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Zynga Inc (ZNGA) Q4 2018 Earnings Conference Call Transcript

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ZNGA earnings call for the period ending December 31, 2018.

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Zynga Inc  (ZNGA)
Q4 2018 Earnings Conference Call
Feb. 06, 2019, 5:00 p.m. ET


Prepared Remarks:


Good day, ladies and gentlemen, and welcome to 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 call 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 -- Vice President of Investor Relations and Corporate Finance

Thank you and welcome 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'll make forward-looking statements related to our business plan and strategy, as well as expectations for our future performance. Actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed Form 10-K, as well as elsewhere in our SEC filings for further clarification.

In addition, we will also discuss non-GAAP financial measures. Our earnings letter, earnings slides, and when filed, our 10-K 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 over to Frank, for his opening remarks.

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

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

In Q4, we generated revenue of $249 million, up 7% year-over-year and bookings of $267 million, up 19% year-over-year.

We achieved record mobile revenue and 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 generated $90 million of operating cash flow, up 241% year-over-year, our best since Q4 2011.

For the full year 2018, revenue was $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 -- Small Giant Games effective of January 1st, 2019. These acquisitions added teams -- while talented teams while expanding our live 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 while -- which includes growing our live services portfolio, successfully launching new titles and exploring emerging platforms and technologies.

We will also pursue opportunities to add talent and new franchises through acquisitions. Beginning with live services, we have grown our portfolio forever franchises from three to five, Words with Friends, Empires &Puzzles, Zynga Poker, Merge Dragons and CSR Racing. We will grow our live services portfolio by introducing innovative 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 and Empires & Puzzles are in high-growth mode and we're recently in the top 20 grossing US games charts on the Google Play Store.

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 toward achieving margins more in line 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 -- Chief Financial Officer

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 of 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, up $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 represented evolve unless relevant to total Company performance.

Specifically, we are evaluating our unique audience metrics, which include audiences with -- excuse me, which excludes audiences from our recent acquisition and chat games given the inability to identify or de-duplicate users across data systems. And secondly, web audience metrics, which accounts 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 in 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. A $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 a $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 their 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 in deferred revenue. Our performance in 2019, will primarily be driven by strong growth in our live service portfolio, anchored by the combined growth of our five forever franchises and the launch of a number of new games in the second half of the year.

We expect this top line performance delivered 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 the -- 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 live services. In the second half of the year, we expect to layer in 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 pay versus advertising, as well as an increase in royalties and licensed IP.

In addition, we will also ramp development spend on our new game pipeline and invest 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 drove 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 and bookings growth. With greater operating leverage as our live service growth in 2020 is further enhanced by a 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 live services anchored by our five forever franchises, including a full year -- excuse me, a full-quarter contribution from Merge Dragons and Empires & 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 factors 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 a 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 '19, as well as the comparability of financial metrics. Our stock -- 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 '19, 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 '19, 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 live services anchored by our five forever franchises. We expect that -- excuse me, 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 to 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 '19, will further reduced 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 '19, 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 they ramp in development investments against our new game pipeline.

With 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 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 through increase sequentially, primarily due to the ramp in investment, in development costs against our new game pipeline as well as the Q1 seasonal lift in payroll 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 -- Chief Executive Officer and Member of Zynga's Board of Directors

Thanks Gerard. Before we open the call for live Q&A, I wanted 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 live 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 live 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 topline 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.

Questions and Answers:


Thank you. (Operator Instruction) Our first question comes from Eric Sheridan with UBS. Your line is now open.

Eric J. Sheridan -- UBS Securities -- Analyst

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 DAU, an engagement with franchise broadly across the Company? Thanks everyone.

Gerard Griffin -- Chief Financial Officer

Eric, this is Gerard. I'll take that. And Frank may come in as well. As we look -- as we look at our marketing, we're obviously looking at our existing live services portfolio. Some of those titles are more mature and they're doing some very nice metrics in terms of engagement and monetization. Overall what we look at is, we look at the -- the lifetime profitability against each of the franchises and they're obviously in different parts of their life cycle. So as I mentioned earlier, you've got titles like Merge Dragons, Empires & Puzzles are fairly early in their life cycle that are spending significantly higher percentage of bookings on marketing.

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 said our budget for the full year and we've said it against our titles and the UA teams are continually looking at how bold beats are inflecting 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 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 through a bold beat like Legends within CSR2 to bring lapsed and new players into the game is suppose to spending paid acquisition. So we continually evaluating that as well.

Eric J. Sheridan -- UBS Securities -- Analyst

Perfect, thank you.


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

Timothy O'Shea -- Jefferies -- Analyst

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 often 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, I 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 arriving 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 toward 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 optics (ph) right, but when we're thinking about building up our models if there any way to help us quantify the overall impact from all these trends. Thank you.

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

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 is been a good part of that business in addition to the mobile offerings. So 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 term and structures have unfolded and so we are in a place where when you have live services their point in 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 live issues inside the game.

You cleanup interfaces, you go back and reacquire players through paid acquisition, in 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. Poker has been managing its 2017 performance, which was quite good, but it isn't growing to the level that we wanted 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 continue to prosper.

Words With Friends seeing some of the best numbers it'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 live services by having a resilient, diversified portfolio that allows us to adjust. It made changes, to Poker that are in the best interest of our players in growth, while at the same time continuing to be able to grow the Company going forward.

Gerard Griffin -- Chief Financial Officer

Tim. In terms of thinking about the full year. Yes, simplistically I spend a lot of time talking about deferred revenue purely because it is a material GAAP metric and it's important to understand that, 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, were 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 -- the dilution that we refer to for '19. I would think about it in terms of broadly speaking, what I said last time around somewhere in the range of two points, one point coming from gross margin, where there will be some pressure just purely because we'll be driving stronger user pay growth as opposed to the growth we'll see in advertising.

And secondly, there is an element of royalties that will come in with some of the licensed IP games. And secondly, as you think about the other point its coming primarily from OpEx, which is a mix of our ramp in new game development. In addition, to obviously the investment in new game launches from a marketing perspective. And as you think about the year and you think what could inflect either, are you -- you could see -- you could see that becoming 1 point or 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 growth in our live services and bringing new games to market. We will see that margin dip returned in terms, we'll see it dissipate into 2020, where we expect our margins to grow back into the 20% plus range.


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

Brian Nowak -- Morgan Stanley & Co. -- Analyst

Thanks, taking my questions. I have two. Just the first one, really appreciate the commentary about '19 and '20. I was wondering if you can just sort of help investors understand the types of analysis as you perform? You thought about sizing the new IP, how material are those titles to the forward commentary? How do we think about the puts and takes there? How you thought about the new IPS potential? And then could you just start (ph) us little bit about Merge Dragons in Asia or in China, where are you in that potential opportunity at this point?

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

Hi, 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 franchises games that can last for five years or more, that can deliver net worth of $100 million when they're at run rate per year.

And so when we started a new game like a Harry Potter game, or Game of Thrones, Games of Star Wars or CityVille, Farmville -- those are kind of the initial criteria that we look at and we go through a fairly rigorous market sizing exercise. We take a lot of internal views on, with potential CPIs with the retention and engagement rates are.

So from that standpoint, when we bet and we started the production, we have 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 tour 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. And the contribution therefore to the topline bookings guide of $1.35 billion is relatively small. We're really looking at growing our five forever franchises. It's going to be high, very high growth year for Merge Dragons for Empires & Puzzles in good growth for our existing three CSR, Poker and Words With Friends and then you'll start to see the new games and start to contribute in the second half of the year. They really payback in 2020 and that's where they start to stack. And if they're successful in their market introductions, then we're going be talking about more from franchises in the portfolio. And then you'll see a new slate of games coming in 2020 and we'll 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 year is progressing off, of the core live 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 our go-to-market plans to bring those two 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 are taking 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 -- Morgan Stanley & Co. -- Analyst

Great, thanks guys. Thanks, Frank.


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

Colin Sebastian -- Robert W. Baird & Co. -- Analyst

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 that 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 live, can you talk a little bit more about that format in terms of some of the traction to other trivia games have had with that format. 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 -- Chief Executive Officer and Member of Zynga's Board of Directors

Thanks Colin. If you look at Words With Friends lessons from bold beats, Words With Friends is actually benefited from lessons from Poker and from CSR2. We actually share a lot of the key learnings that we develop from live services in one game across our total portfolio. So it's really -- it's a great competitive advantage that we can take learnings from one franchise and apply it 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 modes, led to team based plays and we also had some very good market research on those different players 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 our PvP 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 respects, its now has a micro transaction user pay economy, but it's still majority of its revenues generated from advertising as we've learned a lot of ways to utilize advertising products and data science to understand the impacts 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 and what types of products we placed 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 are still shaking it down and getting the user flows and understanding the questions and the cadence and the host. All those things are being fine-tuned and polished for eventual broader roll-out of the feature. But, what we found with the feature is that it generates new audience. It's part of the core game experience since it's trivia 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's still I'd like to say in beta. So we still got some work to do to get it into a position where we would then start to roll it 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 obtained, but we thought that instead of launching a stand-alone game. We have a -- we had better adoption and higher positive impact on engagement by rolling it out as a new mode in Words With Friends.

Colin Sebastian -- Robert W. Baird & Co. -- Analyst



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

Michael Ng -- Goldman Sachs & Co. -- Analyst

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 new mobile game and what you consider as a typical success rate for new gains and also what are you 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 Games 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 merge's as a percentage of Gram, and with merge up 64% sequentially, what's the new quarterly run rate for Gram Games? Thank you.

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

Thanks, Mike. In terms of how we think about the 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 have been around for 8. CSR racing is now in its 5th 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 engineered it at Zynga. And so what we try and do is go into every aspect of 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 (ph) game systems and really apply those learnings 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, the top 50, top 25 and top 10, so forth and so on. We look at iOS, we look at Android, we are only green lighting gains 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 and so we combined those decisions on IP brand, engine, features and then get into the rigorous testing on it.

And it ultimately, we do want to get into the charts and we talked about in the prepared remarks, how Empires & Puzzles reached the top 10 on Android top grossing charts recently. Merged Dragons is in the top 20 on Android. We've seen our other games perform as well. And so those are the different dimensions that we look at. And 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 up the business, but don't have to necessarily 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 an opportunity as well.

Gerard Griffin -- Chief Financial Officer

Mike, 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 in the studio, it's definitely worth of 80%. And when I quoted numbers historically, I said, I think about an existing run rate 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.

During the caveat, it put's -- it's 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 points out of holiday quarter as a run rate.

Michael Ng -- Goldman Sachs & Co. -- Analyst

Okay, great. Thank you both.


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

Drew Crum -- Stifel Nicolaus -- Analyst

Okay, thank you guys. As you think about some of the acquired new games coming on board. Are there any titles that lend themselves to more advertising. I guess to ask differently, is there something aside from Words With Friends that's driving the expectation for continued growth rate bookings in '19. And then separately, can you address the sequential improvement in payer conversion in 4Q and how that might trend with only the additions you've made or, are making to the portfolio this year. Thanks.

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

Hi Drew. This is Frank. I'll start with the first question, we also developed hyper casual games and we had games out on Messenger services in the past that are advertising driven. So you will see in/are -- not included in our, the title plans that we've talked about or a slate of games that are more casual that our light products that you see in the free charge that our ad model driven, we are doing some experiments there to see if there is an ability to grow out that portfolio more. Examples of that type of game, Gram is -- does an incredible job there as a studio with the 10/10 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 -- Chief Financial Officer

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 given players the opportunity to add value to their experience through end game monetization. And as you think about that, that's why we are 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 protect them from being highly active player that isn't spending much to somebody who is actually highly active and monetizing because they see real value and what they're getting from the game.

Obviously, the addition of new games. You've got -- when you think about Merge Dragons that's obviously a very strong user pay game, as Empires & Puzzles. And as we go through the year, we added further titles into the mix that will give us more opportunity to obviously grow our audience base and ultimately through deeper engagement retention months as grow the payer conversion.


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

Mike Olson -- Piper Jaffray & Co. -- Analyst

Hi, good afternoon. I'm not sure if you said it, but at this point, are you confirming specific number of new titles in the back half of the year. It sounds like it's going to be three or four, but not sure if you said it specifically. And then related to that, maybe I could have (inaudible) from the guidance you gave, but could you sort of breakdown, what percent of 2019 bookings comes from existing titles versus the titles that will be released in the second half of 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 for the titles that exist in the portfolio today. Thanks.

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

Hi, Mike. Yes, I think it's safe to assume that there's three to four titles available in the second half of '19. In terms of the total, it's really the majority of that 1.35 billion is driven by the big five forever franchises. The contribution of new games in the second half is a very small percentage.

Mike Olson -- Piper Jaffray & Co. -- Analyst

All right. Thank you.


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

Justin Post -- Bank of America Merrill Lynch -- Analyst

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's trending right now? Thank you.

Gerard Griffin -- Chief Financial Officer

In terms of -- as we said when we announced the acquisition of Small Giant, the title -- title itself Empires & Puzzle is doing very well. And it's growing both organically, but also true for the 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, upto 28% in an internal definition. And right now, Small Giant is investing for the future, so it's more on the 20 as suppose to 20 plus. But that could change dramatically depending on how we invest over the coming quarters. But for now, my assumption as we said, our expectations for the rest of the 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 '19 and into '20 and beyond.

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

With regards to Wonka's World of Candy and we're very pleased with how the game is started the quality of the experience is very strong. We've gotten very good data back in terms of the engagement and retention. The monetization rate is actually pretty good. We want to do further tuning on the long-term engagement. And 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 -- Bank of America Merrill Lynch -- Analyst

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 changed all based on what you've seen in January?

Gerard Griffin -- Chief Financial Officer

We didn't -- 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 to 250 range 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 -- Bank of America Merrill Lynch -- Analyst

Thank you.


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

Doug Creutz -- Cowen & Co. -- Analyst

Thanks. Yes, you indicated that you're looking for ways to raise additional capital. Obviously, you got the sale leaseback possibility to do more M&A, you've done three deals in the last 15 months sort of basically increase sizable (inaudible) I think, we are adding roughly 50%. Is it kind of a target that you're looking for in terms of scale that you feel like, OK, will 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 appetite for more comes from? Thanks.

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

Thanks, Doug. The focus for us in M&A starts with talented teams and then 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. A lot of them are International as you cited, we have been acquiring companies and the majority of those have been in Europe and in different places that you wouldn't expect. And so from our perspective, we're looking at teams, the opportunity to create new franchise. It does add to our goal of scale and scaling our business to get to a topline number that's multiple billions, is kind of where we would like to be headed.

In 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 it as a very strong opportunity to create more shareholder value. So we typically look -- and we started on the team and talent franchise level and see where it takes us.

Gerard Griffin -- Chief Financial Officer

I would just add to it -- . I think what we, what we found with the last three acquisitions in particular, the feedback from those studios obviously more recently from Small Giant -- from Gram and from peak back into the marketplace has been very positive toward Zynga. I think they figured out that, 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 is given us -- I would say, a stronger position in the marketplace is -- when we think about Zynga, we're big enough that we have scale, but we're not big enough that you are relevant, if you're a studio with open coming game. And so for Small Giant, for Gram and for our casual parts division at peak, each of those studios is very relevant to us and they're 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 me to it, but the acquisitions to date have been very, very tight from a creative point of view, and they've been very easy for us to integrate back into the overall Zynga ecosystem.

Doug Creutz -- Cowen & Co. -- Analyst

Thank you.


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

Ryan Gee -- Barclays Capital, Inc. -- Analyst

Yes. Hi, good afternoon and thanks for taking the question. So really it's on the comments you made in the letter about margin expansion, I believe you said how you guys aim to progress toward the margin is more in line with your peers, it 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 we're 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 bookings. And the last time, you guys are kind of in that same range, you go back to 2011 and your EBITDA margins were around 26% or in that high '20s range. So, is there something different about the business today that you're not already at those margins, just given the higher bookings space and what it going to take for you guys to get there. Just given your comments on progressing toward where your peers are? Thank you.

Gerard Griffin -- Chief Financial Officer

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, we're going off for gross number. So when you think about 20%, is 20% over a 100, as opposed to 20% over 70 as with some of our peers. So and that's from a user payer perspective. So 20% again, that's excluding the impact of deferred revenue. So how we look at it internally, is you're talking to sort of 25% plus, if you were to reverse engineering into what -- EA or an Activision would be looking at.

Mission one for us is to get to 20, we delivered 20 in Q3 and Q4. That was a function of obviously driving our live services continuing to invest in our live services in addition to new games. And as we think about this year '19, we're going to reflect the investment in new games up a little both from an R&D perspective and obviously from a 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 protocol for us will be to get to 25, TBD when we get there. But when you're talking about 25, you're talking more like 30% in companies that report on a net basis.

So that's how we think about it. We've also said, if you want to go further if you want to 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 hit something that scales to a new level. I know what you saw with King when they hit the Mother lord (ph) with a Candy Crush.

And again when you think about some of our games 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 break out to a different scale of bookings on a sustainable basis, that obviously gives you an ability to really inflect into higher flow through.

Ryan Gee -- Barclays Capital, Inc. -- Analyst

That's great feedback.


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

Ben Schachter -- Macquarie -- Analyst

Hi, guys. Can you talk about some of the things that are happening around platform fees and specifically Epic games and how they've talked about that the fees can change there and what they're going to try to do an Android, how you might participate there. And then secondly, just beyond chat what other emerging platforms are you looking at that might be meaningful. Thanks.

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

Thanks, Ben. In terms of the channel and the related fees, there's not really much for me to comment there -- there's a great partnership between our company and Apple and Google. There would -- they help us bring our games to market and reach audiences. There's obviously been some innovation recently on Epic front. But I think it's, it's too early to tell exactly how that's all going to shake out, it's certainly not a forecastable 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 got 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. I mean, in addition to that, there is a category of games out there that a lot of people call hyper casual, that are very snack size kind of quick games that build big audience 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 that's 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 or 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 are not in position to be able to ride the wave. That's not something we want to be at a position on. So it's really looking carefully at those opportunities.


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

Ray Stochel -- Consumer Edge Research -- Analyst

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

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

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 -- Chief Financial Officer

Yeah, I would just add to that, I think similar to our -- our assessment of our own game development and we look at talent, we look at the IP and 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 licensed IP as long as it's a sustainable IP and the economics make sense from a financial point of view will take a look. But to Frank's point -- we're very happy with the portfolio of license IPs, we've built over the last few years and we're looking forward to bringing those games to market over the coming years.


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

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

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


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

Duration: 59 minutes

Call participants:

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

Frank Gibeau -- Chief Executive Officer and Member of Zynga's Board of Directors

Gerard Griffin -- Chief Financial Officer

Eric J. Sheridan -- UBS Securities -- Analyst

Timothy O'Shea -- Jefferies -- Analyst

Brian Nowak -- Morgan Stanley & Co. -- Analyst

Colin Sebastian -- Robert W. Baird & Co. -- Analyst

Michael Ng -- Goldman Sachs & Co. -- Analyst

Drew Crum -- Stifel Nicolaus -- Analyst

Mike Olson -- Piper Jaffray & Co. -- Analyst

Justin Post -- Bank of America Merrill Lynch -- Analyst

Doug Creutz -- Cowen & Co. -- Analyst

Ryan Gee -- Barclays Capital, Inc. -- Analyst

Ben Schachter -- Macquarie -- Analyst

Ray Stochel -- Consumer Edge Research -- Analyst

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