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Zynga Inc  (NASDAQ:ZNGA)
Q1 2019 Earnings Call
May. 01, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Zynga First Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Rebecca Lau, Vice President Investor Relations and Corporate Finance. Ma'am you may begin.

Rebecca Lau -- Vice President Investor Relations and Corporate Finance

Thank you, and welcome to Zynga's First Quarter 2019 Earnings Call. On the call with me today are Frank Gibeau, our Chief Executive Officer; and Gerard Griffin our Chief Financial Officer. Shortly, we will open up the call for live questions. During the course of today's call, we will make forward-looking statements related to our business plan and strategy as well as expectations for our future performance. Actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed Form 10-K as well as elsewhere in our SEC filings for further clarification.

In addition, we will also discuss non-GAAP financial measures. Our earnings letter, earnings slides and when filed our 10-Q will include reconciliations of our GAAP and non-GAAP financial measures. Please be sure to look at these reconciliations as the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. This conference call is being webcasted and will be available for audio replay on our Investor Relations website in a few hours.

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

Frank Gibeau -- Chief Executive Officer

Thanks, Rebecca. Good afternoon and thank you for joining our Q1 earnings call. We begin 2019 with tremendous momentum. Our live services portfolio anchored by our five forever franchises produced outstanding Q1 results. Today we are raising our full-year 2019 guidance which Gerard will discuss in more detail shortly. In Q1 we generated revenue of $265 million, up 27% year-over-year and bookings of $359 million, up 64% year-over-year. We delivered our highest mobile revenue and bookings quarter ever with mobile revenue up 35% year-over-year and mobile bookings up 77% year-over-year. Mobile now accounts for 93% of total revenue and 95% of total bookings.

Our Q1 performance is driven by our live services portfolio in particular by strong revenue and record bookings from Empires & Puzzles, Merge Dragons! and CSR2. Words With Friends also delivered its best Q1 revenue and bookings performance in franchise history. While Zynga Poker and our Social Slots portfolio contributed meaningfully. It's an incredibly exciting time for Zynga. Our multiyear growth strategy is working as we grow our live services, create and acquire new forever franchises and invest in emerging markets, technologies and platforms.

First, we have a highly diversified live services portfolio anchored by our five forever franchises: CSR Racing, Empires & Puzzles, Merge Dragons! Words With Friends and Zynga Poker. We will grow this live services portfolio by delivering innovative bold beats, new content and gameplay modes designed to attract new audiences, engage current players more and bring back lapsed players. In any given year, we expect strong predictable growth from this portfolio and for live services to account for the vast majority of our total revenue and bookings.

Second, our goal is to create and acquire new forever franchises to add to our live services foundation. We have an exciting new game pipeline that includes titles based on existing and new intellectual properties such as Farmville, CityVille, Puzzle Combat and Merge!, as well as strategic licenses such as Game of Thrones, Harry Potter and Star Wars.

These new titles are built within our global studio organization by teams that have been together for years and have a proven track record for developing successful games. We maintain a rigorous approach to engineering hits and recently soft launch two titles: Game of Thrones Slots Casino and Puzzle Combat. Over the coming quarters, we will soft launch additional titles and based on player feedback and long-term engagement metrics, we expect to release new games worldwide in the second half of 2019.

Third, we are investing in emerging markets, technologies and platforms to accelerate future growth. As mobile devices continue to proliferate globally, more people will be playing games than ever before. We're pursuing this opportunity by expanding our Android audience and building games that appeal to players worldwide.

In Q1 we've grown our Android revenue by 43% year-over-year and doubled our Android bookings. In addition the arrival of 5G and streaming technologies will enable higher performance games, more streamlined player experiences and innovative new forms of distribution. New platforms and categories such as chat and hyper casual, as well as the emergence of cross-platform play will also expand the overall accessibility of games and therefore Zynga's total addressable market.

With that, I will now turn the call over to Gerard to discuss our Q1 results in further detail, as well as our raised outlook for the future.

James Griffin -- Chief Financial Officer

Thank you, Frank. With the phenomenal start to 2019 with Q1 finishing well ahead of our expectations on strong live services momentum and better than expected operating leverage. Given this live services momentum, we are raising our full-year outlook for revenue and bookings. But first let's discuss Q1. Revenue was $265 million comprised of bookings of $359 million offset by a net increase in deferred revenue of $94 million. Revenue was $25 million ahead of our guidance on a bookings speed of $34 million partially offset by a higher increase in deferred revenue of $9 million.

Our better-than-expected top line performance was driven by outstanding performances from Merge Dragons! and the recently acquired Empires & Puzzles as well as strong contributions from CSR2, Words With Friends and Hit It Rich! Slots. Revenue was up $57 million or 27% year-over-year driven by strong bookings growth of $140 million or 64% year-over-year partially offset by a significant growth in deferred revenue, which was up $83 million or 737% year-over-year.

Our year-over-year bookings growth was driven by our live services portfolio, including full quarter contributions from Merge Dragons! and Empires & Puzzles both of which performed well ahead of our expectations. The growth in our forever franchises more than offset continued declines in our legacy mobile and web games. The significant increase in deferred revenue was primarily a function of the deferral of the majority of bookings on Empires & Puzzles, which was added to our portfolio this quarter as well as continued bookings growth in Merge Dragons!

In assessing year-over-year variances, please note that the year-over-year increase in the change in deferred revenue represents an $83 million negative component of the year-over-year variance in revenue net income and adjusted EBITDA. We delivered our best mobile top line performance in Zynga's history with mobile now representing 93% and 95% of total revenue and bookings respectively. Mobile revenue was $246 million, up 35% year-over-year and mobile bookings were $341 million, up 77% year-over-year.

Turning to Q1 operating expenses, our GAAP operating expenses were $285 million, up $150 million or 112% year-over-year, representing a 108% of revenue, up from 65% of revenue in the prior year. There are a number of items in Q1 2019 GAAP expenses I would like to call out when comparing our GAAP expenses year-over-year.

As previously noted Merge Dragons! and Empires & Puzzles are performing well ahead of our expectations. Based on our latest assessments of these deals, we've raised our lifetime value estimates for Gram Games and Small Giant Games, as well as their respective acquisition earn outs. Accordingly this quarter, we booked additional contingent consideration of $86 million to GAAP R&D $76 million ahead of our guidance. Included in GAAP G&A expenses are $7 million of one-time expenses related to the acquisition of Small Giant Games and we also have a onetime credit of $10 million related to the net proceeds received from the settlement of the derivative lawsuit. Our non-GAAP operating expenses were $183 million, up $63 million or 52% year-over-year representing 51% of bookings, down from 55% of bookings in the prior year.

The year-over-year increase in non-GAAP operating expenses is primarily due to a full quarter contribution from Gram Games and Small Giant Games. We reported a net loss of $129 million, $70 million below our guidance and a decline of $134 million in net income year-over-year. The variance to guidance was driven primarily by the higher contingent consideration accrual, as well as higher deferred revenue partially offset by better-than-expected operating performance and profitability. The variance to the prior year was heavily influenced by the significant increase in deferred revenue versus prior year, as well as the contingent consideration accrual and acquisition-related expenses we booked in Q1 2019.

Our adjusted EBITDA was a loss of $19 million better than our guidance by $10 million and better-than-expected operating leverage and a decrease of $45 million year-over-year due to the significant increase in deferred revenue, which more than offset the strong year-over-year improvement in operating performance. We closed the quarter with $252 million of cash and cash equivalents and we had $100 million of debt outstanding in our $200 million revolving credit facility. We continue to actively assess a number of actions to increase our cash reserves to further fund through acquisition, as well as other actions to enhance long-term shareholder value. These include the potential sale leaseback of our San Francisco building, as well as raising additional funds through debt financing alternatives.

Turning to expectations for 2019 and beyond, given the strong momentum in our live services, we are raising our full-year 2019 guidance to $1.2 billion in revenue, up 32% year-over-year and an increase of $50 million versus our prior guidance. We are also raising our bookings guidance to $1.45 billion, up 50% year-over-year and an increase of $100 million versus our prior guidance. We expect a net increase in deferred revenue of $250 million, up 301% year-over-year and an increase of $50 million versus our prior guidance.

This puts us on track to deliver the strongest annual revenue since 2012 and the highest bookings in Zynga history. Our performance in 2019 will be primarily driven by our live service portfolio anchored by growth collectively in our five forever franchises. We have an exciting pipeline of new games under development and expect to launch a number of games in the second half of 2019, which will further enhance our growth in 2020 and beyond.

We anticipate that our bookings growth in 2019 will outpace revenue as we defer bookings primarily from the recently acquired title Empires & Puzzles, as well as growth in Merge Dragons! and bookings from new game launches. We expect this to result in a $250 million net increase in deferred revenue, which represents our largest build in this GAAP financial metric. While the release of this GAAP deferral will have a positive impact on revenue and profitability in future years, it represents a $250 million reduction in revenue net income and adjusted EBITDA in 2019.

In 2019, we continue to anticipate pressure on gross margins due to higher user pay mix and an increase in royalties on licensed intellectual properties. In addition, we are increasing our development spend on our new game pipeline and expect to invest and launch marketing on titles releasing in 2019.

These investments will modestly weigh on our overall operating margins in 2019, but are expected to deliver returns in future years. Continued execution against our 2019 plan should position Zynga for further growth in 2020. We expect low double-digit revenue and bookings growth with greater operating leverage as our live service growth in 2020 is further enhanced by full contribution from our 2019 new game launches.

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. As for Q2 guidance for the quarter is as follows: Revenue of $280 million and net increase in deferred revenue of $80 million, bookings of $360 million and net loss of $70 million, adjusted EBITDA loss of $18 million.

There's some factors I'd like you to consider when assessing our Q2 guidance. Q2 2019 will benefit from a full quarter contribution from Gram Games and Small Giant Games. In Q2 we expect $280 million in revenue, up $63 million or 29% year-over-year with bookings of $360 million, up $126 million or 54% year-over-year. Our Q2 bookings performance will be driven by our mobile live services anchored by our five forever franchises. We expect the year-over-year growth in bookings to be primarily driven by full quarter contributions from Gram Games and Small Giant Games in addition to strengthen Words With Friends and CSR2. We expect this growth will be partially offset by declines in Web and other mobile games, as well as year-over-year softness in Zynga Poker.

Our bookings growth in Q2 will outpace revenue driven primarily by the continued deferral of bookings on Empires & Puzzles and Merge Dragons!. This will account for the majority of the $80 million net increase in deferred revenue, up $63 million or 374% year-over-year. While the release of this deferral will have a positive effect on revenue and profitability in future quarters, it represents an $80 million reduction in revenue net income and adjusted EBITDA in Q2 2019.

We expect the higher build in deferred revenue and an increase in amortization of intangible assets from acquisitions to result in gross margins to planning meaningfully year-over-year, plus increasing sequentially. Excluding these factors, we expect our gross margins to be comparable year-over-year. We expect our GAAP operating expenses as a percentage of revenue to increase significantly year-over-year, but to be down on a sequential basis.

The year-over-year increase as a percentage will be driven by the higher build in deferred revenue and an increase in contingent consideration expense in Q2 2019 as compared to Q2 2018. The sequential decline will be primarily due to a reduced acquisition expenses and contingent consideration expense in Q2 2019 as compared to Q1 2019. We expect our non-GAAP operating expenses as a percentage of bookings to be broadly in line with the prior year quarter. Similar to Q1 2019, we expect the mix to be more heavily weighted to sales and marketing offset by lower R&D and G&A expenses on a percentage to bookings basis.

We expect our non-GAAP operating expenses as a percentage to bookings to increase sequentially primarily due to higher marketing investment to further enhance our live services momentum, as well as initial prelaunch marketing on our next new game launch. We also expect to see a slight ramp in R&D expenses as we continue to invest in our new game pipeline. In summary we are very pleased with our Q1 execution and the positive momentum we are seeing in our business.

With that I would like to turn it back to Frank.

Frank Gibeau -- Chief Executive Officer

Thanks, Gerrard. Before we open the call for live Q&A, I want to take a moment to highlight how Zynga is uniquely positioned within the videogame industry. First mobile is the most ubiquitous gaming platform in the world. It has the ability to reach anyone anytime and anywhere. As a result, it is no surprise that mobile is the largest and fastest-growing game platform expected to reach 2.8 billion active mobile gamers and generate $95 billion of revenue by 2022.

A key point to understand about mobile is that the platform evolves continuously. There are new devices, technologies and markets appearing regularly. This rapidly evolving environment creates tremendous opportunities for nimble mobile-first companies like Zynga. We are well positioned to capitalize on these growth opportunities given our live services foundation is predictable, recurring and growing. The sustainable profitability generated by our live services gives us the flexibility to invest in new game development and emerging opportunities. Another way to think about this is any success we generate from new games, emerging platforms or additional M&A layers on top of our existing live services foundation.

In summary Zynga is a leading mobile-first free-to-play live services company on the largest fastest growing gaming platform. In 2019 we will be one of the fastest-growing public game companies with live services driving the vast majority of our growth. Over the long term we are well positioned to capitalize on the rapidly evolving gaming landscape at a time when demand for interactive entertainment is reaching new highs.

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

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Tim O'Shea with Jefferies. Your line is open.

Tim O'Shea -- Jefferies -- Analyst

Yes, hi. So thank you for taking my question. Given you're raising the bookings guidance by $100 million. I'm curious how that impacts your thinking around full-year EBITDA margin for 2019? And I know you guys aren't providing explicit EBITDA outlook, but generally speaking if a game like Empires & Puzzles is outperforming, would you allow that outperformance to flow down to the EBITDA line? Or might you find a way to invest that outperformance and I know Ger mentioned some increasing investment in certain areas like R&D. Thank you.

Frank Gibeau -- Chief Executive Officer

Yeah, the way we're thinking Tim -- the way we're thinking about it right now is obviously we completed a very strong Q1 and we're looking at a very nice Q2 driven by our live business. As we get into the second half of the year, you will see us obviously spend money against our new game launches. And right now I'm holding to the basic thesis that there will be some dilution based on royalties against intellectual properties and investing against that growth.

But obviously given the strong performance in our live business there is a potential that -- that could be offset. But right now we're too early in the year to be calling ultimately how the profitability will flow for the rest of the year, but there is the potential.

Tim O'Shea -- Jefferies -- Analyst

Thanks and congrats on the quarter

Frank Gibeau -- Chief Executive Officer

Thank you, sir.

James Griffin -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Mike Ng with Goldman Sachs. Your line is open.

Mike Ng -- Goldman Sachs -- Analyst

Great, thanks so much for the question. Ger, I was just hoping if you could unpack the $1.45 billion of bookings guidance for the year. How much of that is live versus new, versus the contribution from SEG now? I believe the previous expectation was two 50? And anything else? Thank you very much.

James Griffin -- Chief Financial Officer

In terms of the guide predominantly most of the $1.45 billion is being driven by our live services and the beat that you're seeing is a reflection of the momentum we're seeing in the live business. Obviously both Merge Dragons! and Empires & Puzzles are driving a significant amount of that given that the buildup in contingent consideration and just the momentum we're seeing in those games. We're also seeing obviously strong contributions from Words With Friends, CSR. In terms of new -- the way I would characterize this new outlook versus the outlook we had last time around is there's less attach to new.

That's not to say that there won't be a contribution for new games, but as we're thinking about the momentum we're seeing in live and how this year could unfold. We felt it was relevant to upgrade based on our live performance, but we didn't really delve too deep into new right now. It truly will depend on as the games come out how they kick in from a monetization point of view. So what I would say is the majority what you're looking at is similar to the 13 50 is of live.

Mike Ng -- Goldman Sachs -- Analyst

Great, thanks. And just as a follow-up, are you able to just let us know or minus what new games you're expecting for the back half of the year? I think Puzzle Combat was one that was not expected by me. Thanks.

Frank Gibeau -- Chief Executive Officer

Yeah, we're not going to go into detail. We have a variety of games in development as we've said before, you know, we've got two games, we've got a CityVille and a Farmville game, we've got a number of games in development. Under our licensed type P Harry Potter. We mentioned Game of Thrones that's in soft launch.

The Puzzle Combat game was one that was in concept when we acquired Small Giant and that they've obviously brought that one out on a technical soft launch, whether it turns up this year or next year TBD as we said in our letter. So for now I would say we expect to launch a number of games in the second quarter, but we're not going to specifically say which ones. As Frank has said in the past when they're ready we'll let them out.

Mike Ng -- Goldman Sachs -- Analyst

Great, thank you very much.

Operator

Our next question comes from Eric Sheridan with UBS. Your line is open.

Eric Sheridan -- UBS -- Analyst

Thanks for taking the question. Maybe two if I can. Of the acquired IP that you sort of put in the market and now supportive of, but let's get a little bit of additional color on what's driving the strength there? Is it marketing dollars? Is it the approach to the marketplace? Is it things you're learning from the live services platform as you transform the business over the last couple of years? Any additional color there would be really helpful on what you brought to the table in terms of pushing that IP along.

And as we look to the back part of the year, could we expect a different approach on licensed IP in terms of go to market given the fact that a lot of that IP is fairly well known by consumers that could have a different approach even between acquisition or how you think about marketing channels in terms of position again in the marketplace? Thanks guys?

Frank Gibeau -- Chief Executive Officer

Thanks, Eric. So starting with your first question, if you look at how Merge Dragons! has evolved since the middle of last year, it really has been a steady cadence of new bold beat features coupled with marketing support and expansion of support from the platform partners. So the game is really added a lot of new features with regards to puzzles and how you unlock more characters, how you socialize in the game and at the same time we've expanded the footprint of Merge Dragons! into new markets.

Our partners at Google and Apple have really helped get behind the title. So it really has been bringing Gram's franchise into the Zynga publishing platform using the data science, the advertising, the product management, the go-to market teams, it's really amplified and multiply the overall impact, but it really does start with a really high-quality game team building creating bold beats on the player engagement and high-quality products.

It's very much the same story for Empires & Puzzles. That is a an extremely high-quality team in Helsinki that really has blended a very accessible gameplay mechanic in Match-3 with really proven PDP and RPG systems that has proven to be very retentive, very engaging and from a standpoint of player engagement we're seeing incredible results.

We've also expanded our support for the title. It is actively being marketed against in multiple territories worldwide. We're seeing very good returns on those investments and our partners at Google especially have gotten behind the title. It is now broken into the Top 5. It was the #1 game on the Android just not too long ago. So we're seeing it compound in terms of its strength and its momentum, but it's really the combination of exceptionally strong game teams with great cultures building high-quality products plugging into the Zynga publishing platform.

In terms of the second question that you raised with regards to the strategic licenses of Harry Potter, Star Wars and Game of Thrones, one of the reasons that we sought to partner with those companies and those brands was because they will give us advantages in terms of how we go to market and acquiring audience.

Obviously Game of Thrones is at a very high-pitched right now in terms of its fandom and the ability to launch a product into that halo is a fantastic opportunity for us and will create marketing platforms, new channels and new ways to market the games that you don't traditionally find with some other go-to market strategies on the games that are wholly owned IP. So as we look at Star Wars, Game of Thrones and Harry Potter, our goal is to maximize the fandom and the audiences for those and also launch very efficient global campaigns that build new forever franchises.

Operator

Our next question comes from Mike Olson with Piper Jaffray. Your line is open.

Mike Olson -- Piper Jaffray. -- Analyst

Hey, good afternoon. I just have one question. You mentioned 5G and I was just curious does that change anything in any material way for kind of how you'll have to look at game development and even potentially which genres you want to focus on going forward. I guess in other words, does 5G kind of better optimize certain types of titles or raise the bar for what kind of development can be done in mobile that have been -- may be result in some changes like various players to the space that really position themselves for that? Thanks.

Frank Gibeau -- Chief Executive Officer

This is Frank. I'll take the question. The capabilities and potential of 5G we think can be profound for growth inside the mobile because we believe that it will enable higher performance games. Games that will have much larger worlds will be possible, more massively multiplayer experience is always connected, always on, will be something that will be really exciting. It will also enable new distribution opportunities. For example you'll be able to seamlessly go from an advertisement straight into a game when it's coupled with streaming.

So I see 5G and streaming being a combination of two technologies that work hand in hand that we believe will really drive greater efficiency in the player acquisition funnel, will enable higher performance games and it will also be very customer friendly in terms of how they manage the memory on their devices, they won't have to store large client games on their devices, they'll be able to stream in the content much more efficiently and effectively in this environment that's coming.

There's still a lot of ground to cover before 5G and streaming get here and impact the entire mobile ecosystem, but it's one of the things that we try to highlight in our remarks in our letters is that there's numerous platform innovations coming to mobile over the next few years that will act as tailwinds for growth in companies like ourselves.

Mike Olson -- Piper Jaffray. -- Analyst

Thank you.

Operator

Our next question comes from Justin Post with Merrill Lynch. Your line is open.

Justin Post -- Merrill Lynch -- Analyst

Great, thank you. I just like to ask about Empires & Puzzles, obviously doing quite well in the charts. Can you tell us anything about how that revenue compares to Merge Dragons!, which appreciate the disclosure there and how that revenue is trending and what do you see the opportunity relative to so your other large games? Thanks.

James Griffin -- Chief Financial Officer

Just in terms of -- in absolute terms obviously Empires & Puzzles is a bigger game. But both games have our -- are showing even pre-acquisition post-acquisition, Empires & Puzzles is on a very nice growth trajectory as is Merge Dragons!. So from a growth perspective, we see both of them as titles that we are investing significantly again. As I mentioned on our last call, the overall shape of our P&L has changed given that the profile of our forever franchises. We have growth in CSR and Words With Friends, but the growth we're seeing in Empires & Puzzles and Merge Dragons! is being driven.

As Frank said by the quality of the game and the sort of long-term engagement and monetization, but it's also being fueled by significantly higher marketing than the company average. And I will say that both those games are generating margins that are significantly above the near term margin goals of the company. So it's all good. The shape of P&L is that way mainly because it's a smaller development investment against those games. So net the trajectory and growth in both games is comparable, but from a size perspective Empires & Puzzles is obviously larger.

Justin Post -- Merrill Lynch -- Analyst

Got it. Maybe one follow-up, if it is larger maybe you can help us understand why it's not in the online bookings disclosure when you disclosed your Top 10 games I just I didn't see it in there. I was wondering about that.

James Griffin -- Chief Financial Officer

It's not greater than 10% of revenue as we mentioned. One of the bankruptcies, one of the technicalities of accounting is when you bring in a game into your portfolio and new games that already has meaningful bookings, the majority of those bookings gets merge. So if you look at that game at a revenue perspective it's one of the smaller games, but from a bookings perspective it's obviously one of our larger games.

Over time that will take care of itself but similar to like Gram, sorry, Merge Dragons! even though Merge Dragons! has not been well over a year, it continues to grow and we'll continue to defer a portion of its bookings. With Empires & Puzzles for the next two quarters, on average you amortize over nine months, so as you can imagine there's a book that needs to get filled before you truly see the bookings and the revenue come more in line. That's still a few quarters out.

Thank you.

Operator

Our next question comes from Brian Nowak with Morgan Stanley. Your line is open.

Brian Nowak -- Morgan Stanley -- Analyst

Thanks for taking the question. Great quarter, guys. I only have one. So the question is Frank, so you guys have done a heck of a job at turning around the platform, integrating the couple acquisitions and really driving outsize growth. As you sort of sit there and look at the portfolio, could you give us one or two areas where you still say here's areas where we could improve this franchise, improve this target and this user base or really improve this mechanism in the game or a genre to really drive even longer sustained growth across the current portfolio? Thanks.

James Griffin -- Chief Financial Officer

Thanks Brian. You're talking kind of about -- it's kind of a day job at the company. We were running live services and they spend lots of different categories from brain puzzle to PDP Match-3 to driving games and we learned something in each category that the game teams pick up on. So we have a very flat organization. The game teams see a lot of each other's data, cohort analysis, and we share that learning across all of the games. So it's kind of a continuous improvement process where if we learn something and Words With Friends or learn something in Empires & Puzzles, we quickly ripple that learning through the rest of the organization and the game teams can learn from it and that includes not only the live games but that games that are coming out and in development now.

They will pick up on innovations or they will see features that are generating big list and engagement for example or have stronger conversion rates and we'll start to learn from those systems and apply that learning to the development process. I think the big areas that we're really excited about gaining more traction is what we've done with Android over the last year. So as you know one of the key objectives for us was to expand our international footprint away from being heavily weighted to North America and Western Europe. And we've started to do that. The Android is key to doing that in a lot of the emerging markets and that's why we're pleased with the big lift that weve seen, but we think there is still more growth there.

In addition Asia is a very large portion of the mobile market as you know. We're starting to look at how we go to market there with partners and other ways with the existing line-up, but also the games under development. So we'll continue to internalize and operationalize the learning from one franchise to the others. We'll look to continue to expand on Android and we're excited to start -- begin the journey in Asia for Zynga as we look forward over the next couple of years.

Operator

Thank you. Our next question comes from Doug Creutz with Cowen. Your line is open.

Doug Creutz -- Cowen -- Analyst

Hey, thanks. Last-month Apple or I guess two months ago now, Apple announced Apple Arcade, and I'm just curious what your guys take was on it. Is it a threat? Is it an opportunity? Is it neither? I'm just curious to hear your thoughts on that.

Frank Gibeau -- Chief Executive Officer

Look, I think Apple is our largest platform partner. We have a really good relationship with them. We are a free-to-play oriented company. And so if you look at our Apple Arcade design, its really a premiums games subscription service. So the part that we're not participating in is we don't really build premium games. However if they do evolve it to include freemium, it would be something that we would absolutely talk to them about. I think one of the things that is topical right now is a lot of these streaming services that has subscriptions tied to them. I think one thing to clarify is that Zynga is very bullish on streaming, but linking it to a subscription isn't necessarily what you have to do.

So from my perspective subscriptions will be a very viable business model in a lot of the games that we make over the long-term, in the near term we see opportunities and several of our franchises for that. But I think streaming is going to be a really key component to us in terms of how we look at distribution and how it unfolds in mobile on a global basis.

Doug Creutz -- Cowen -- Analyst

Great, thanks.

Operator

Our next question comes from Drew Crum with Stifel. Your line is open.

Drew Crum -- Stifel -- Analyst

Thanks. Good afternoon, guys. Frank can you remind us what your exposure is to loot boxes and given what seems to be increased scrutiny on those? Is that in any way change how you design of the in-game spending mechanics for titles going forward? Thanks.

Frank Gibeau -- Chief Executive Officer

Sure. The majority of our revenue comes from things other than loot boxes. So I'll start there. We do see it as a very viable part of freemium design. Again our games are free-to-play. You don't start with the premium purchase and then get to loot boxes, so the way that we designed the loot boxes is very much part of that player journey. There is a lot of fun in the light that people get from him. It's like buying baseball cards back in the day, who did you get in the pack? We're trying to be as pro-consumers as possible in disclosing the odds on the individual loot boxes.

So if you go in our games and you click on the little eye icon, you'll actually go in and see the percentages for what different items are in the loot boxes, so players can make the best decisions possible if they want to engage in the loot boxes. We definitely are not a pay-to-win type of company. We like to have very level playing field for how people compete. So we really try and use loot boxes as a really special award for behavior inside the game that fans really love to engage in, but it's not a gate to being able to play the game at a high-level.

Operator

Our next question comes from Ben Schachter with Macquarie. Your line is open.

Ben Schachter -- Macquarie -- Analyst

A few if I could. Frank you discussed a bit about Android. So what are you actually seeing there that's giving significant, what's different there and do you see any different economics of there on Android versus iOS? And separately can you give us a high-level view of what you're seeing in Social Casino broadly, how you think about the genre going forward? And then I have one quick follow-up.

Frank Gibeau -- Chief Executive Officer

So I'll start with the Android and the economics are roughly the same as Apple. So there's no real differences there. There are markets in the world that are more heavily weighted to Android than they are to iOS. So we've looked at some of those markets in terms of how we've optimized our go-to-market plans. In addition to that there's more platform differences in Android than there are in iOS based on the open standard in a lot of different manufacturers, so we definitely work hard on getting to more performing games work across more device configuration, and also that ties obviously back to the geo component.

We also have been optimizing our games in terms of client size, user flows and some of the things that Android, there's little differences that between Android and iOS that make a lot of difference in terms of how the player experience feels. So there's a lot of nuance and some other basic kind of geographical and technical performance and metrics that we look at. In terms of the second question overall in Social Casino, look it's a very vibrant category for us between the Casual Cards group with Poker, in addition to what we've been building with our Slots businesses. We see a very good return from our investments that we have highly engage players.

We see some growth on the horizon. It's probably more fighting over market share among competitors than it is just pure platform growth because the demographic is a little bit more limited than some of the other categories, for example Social Casino is more weighted or it's North America and Europe than rest of the world. And in addition to that, we do you have games that we are actively investing in, our Hit It Rich! product is doing very well for us right now. It's going from strength to strength. The team is really invested heavily in Elder game features and more social features and obviously we have a Game of Thrones, Social Casino project in soft launch currently that we are excited to finish up test marketing and take out into the global marketplace.

Ben Schachter -- Macquarie -- Analyst

And then just quickly if you could organic bookings growth, what would that look like if you strip out of the acquisitions? Thanks.

Frank Gibeau -- Chief Executive Officer

Thanks for the question. Looking at that overall, I mean, a lot of the organic bookings that we are seeing is tied to the existing live services franchise that we have like Words With Friends, CSR, Poker, so there's a lot of puts and takes. My overall all view is that we're seeing no really -- there's no it's on the way up in single digits, but it's not really something you can look at from a -- we pull the acquisitions out because we're making decisions against that the comingle with the new title. So it's not a totally fair analysis of the segment that way, but if you segmented it its up, it's doing OK, there is puts and takes.

James Griffin -- Chief Financial Officer

Overall the -- if you take out the Merge Dragons! and Empires & Puzzles if you look at Q1 even Q2 you would see that there are core mobile and I'm talking about Poker, CSR2, Words With Friends and our Social Casino that collective is growing and that's offsetting some of the older web and legacy mobile. So the core portfolio is still healthy and growing. But as I said in our -- as we said in our remarks obviously the layers on top was -- like it was very strong growth in the quarter.

Ben Schachter -- Macquarie -- Analyst

Great. Thanks.

Operator

Our next question comes from Ryan Gee with Barclays. Your line is open.

Ryan Gee -- Barclays -- Analyst

Yes, hi, good afternoon. Thanks for taking the question. So Frank I believe earlier you mentioned, the $75 billion, I mean, the $95 billion mobile market TAM. I believe roughly 50% or more than half of that is Asia and a good chunk of that is China. So can you guys just remind us of your business exposure in Asia specifically in China for your forever franchises? And then Merge! and Empires & Puzzles are those already launched in China or how much is expansion for those two titles in that specific geo and opportunity for you guys in 2019 or 2020?

Frank Gibeau -- Chief Executive Officer

Yeah, I think we're just getting started in Asia. So there's no at scale business right now for us in China or Korea or Japan, we're just starting getting started especially with Empires & Puzzles and Merge Dragons! that's just recently gone into the geos. So were looking out that as a long-term opportunity for us. We do like territories like Japan and Korea, South East Asia. We tend to prioritize those slightly higher in China right now, but we do look at China as a key opportunity for us certainly to grow audience and to expand our footprint. So our exposure to Asia is actually we think of it more as an opportunity because we've been so weighted traditionally to Western Europe and North America.

Operator

Thank you. 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. Could you talk about the incremental marketing investments that you're making? Can you give us a sense of maybe 1Q '19 versus 1Q '18 in terms of acquired versus non-acquired from UA perspective? And could you give us a sense of whether or not you've increased marketing spend for Empires & Puzzles in 1Q '19 versus 4Q '18?

James Griffin -- Chief Financial Officer

Yeah, I'll deal with it probably a little higher level, but if you think about marketing overall, the sales and marketing within our business on a percentage basis has historically been in the low 20s. It's now in the high 20s and that's fundamentally a function of when you look at Empires & Puzzles and Merge Dragons! those titles are investing in new way closer to 40% of their bookings as opposed to the company average. And so when you look at it that's fairly significant, but you also have to think about it in terms of where those games are in their life cycle.'

And when we look at return on investment, we're still seeing a very strong operating contribution in the quarter and obviously we see a strong operating contribution on those cohorts over lifetime. So when you think about in terms of Q4 to Q1 and even into Q2 of this year, yes, we did increase the marketing, but we also saw significant growth in the bookings, so on a percentage basis it wasn't an increase but we are definitely fueling the tank as we see growth in those titles. And it's a question we've been asked in the past where we said, are we being overly conservative in terms of our investment? Frank and I had said in the past when we see opportunities to invest against growth we will. What we're very conscious of we're not just going to pump money and just to try and force it.

And as it relates to those titles, I would say that CSR and Words or others we're not investing at those kinds of levels, but as you think about this quarter and if you think about my guide for Q2, we are upping the investment a little on those two growth tittles in Q2, which means that the actual margin contribution is still north of our near-term goals but it's lower than we would have seen in Q1. As we go through the quarter, we make -- we may manage that in terms of once we see what the returns are, but that's why as we said in the past marketing in our business is a very fluid event.

Every day the teams look at their returns, they look at their lifetime values and their royals and if they can find channels that are giving good returns they'll invest and if they can find channels that are not giving good returns they will pull back. We saw a little bit of that in Q1 actually. So when I guided to the quarter I did not expect to deliver another quarter north of our near-term goals, but part of that is because of the strong return we saw on our marketing investment where we're able to pull back a little bit and hold that powder for Q2.

Ray Stochel -- Consumer Edge Research -- Analyst

Got it. That's great. And then a follow-up would be if you could -- again on acquisitions, if you can break down the advertising bookings between organic or versus inorganic? And that would be it for me. Thanks.

James Griffin -- Chief Financial Officer

The majority is organic. If you look at those business -- I think all the business are roughly in sort of 80-20 mix broadly speaking.

Ray Stochel -- Consumer Edge Research -- Analyst

Got it. Thanks.

Operator

(Operator Instructions) Our next question comes from Evan Wingren from KeyBanc Capital Markets. Your line is open.

Evan Wingren -- KeyBanc Capital Markets -- Analyst

Thanks. Just wondering on the success of the integrations that you've had how that's impacting conversations that you're having in the marketplace with other potential acquisitions or relationships and just to the extent that -that is playing out? How you think about that?

Frank Gibeau -- Chief Executive Officer

This is Frank. As we look at how we're going to grow the company it all starts with growing live services. It then moves into building a pipeline in new games looking at new platforms, new markets as we said on the call. And M&A for us is a way to do all three of those things. If there's opportunities to find a live service that we can bring in an scale or if there's a new franchise or game team out there that could join the company or if there's a new market or category that's interesting, we'll use our M&A to go after that. What underlies all that though ultimately is the connection between the companies, and is there a culture fit? Do the leadership teams have a similar worldview and are you able to create a business arrangement, so that both teams win and have alignment of goals. And so we typically try and approach it very simply from that perspective and the good news is we've had a series of investments here starting back with Peak and RAM and now with Small Giant where we've seen some very good success on the thesis of what Zynga is all about and how bringing additional developers into the company can possibly result in better outsized returns. So they -- that word-of-mouth and that reputational support is now there. So we like that.

Now the good news about the growth strategy we have in place is we don't have to buy anything to grow. So we're going to be very selective in terms of who we're looking for and who we partner with, and it needs to be something that really makes sense for Zynga over the long-term and ultimately it starts with a fit between the leadership teams, the team cultures and then getting to alignment in terms of how the two companies come together and then grow together. So it's a great place to be where you don't have to buy anything to grow. And that allows you to be a lot more selective.

Evan Wingren -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Thank you. And our last question comes from Mike Hickey with The Benchmark Company. Your line is open.

Mike Hickey -- The Benchmark Company -- Analyst

Hey Frank, Ger, congrats on an awesome quarter guys, just to questions I was hoping to remind us, I guess, more specifically your long-term operating margin goal and so do your playbook in terms of how you expect to sort of bridge the GAAP between where you are to next year and where you expect to be on that margin goal. And then I guess on Zynga Poker, it looks like that continues to struggle maybe last and prior quarters. And I think you said you expected to be slow rate second half of '19, I'm just sort of curious your plan on to driving growth in the Poker second half? Thank you.

Frank Gibeau -- Chief Executive Officer

Obviously our medium and long-term margin goals are to get more in line with our peers. If you look at our peers margins, and I'm going to do this excluding deferred revenue just looking at it more at a macro level from an operational point of view, you want to be somewhere in that sort of 25% to 30% range. And that's on a -- how we will report our bookings. And so on the near term we said in the past let's see if we can we break 20? We did that in Q3, Q4 and we actually did that in Q1.

So --and one is the same as 20 and as we indicated on a high-level if we continue on our current course and speed with our live services releasing some games this year and then getting the full contribution of those into 2020 we should be able to get there and then ultimately sustain for fiscal and then growth from there. What gets you to beyond that obviously as Frank had said and I have said continue to focus on what is core to business our live services, those businesses at scale delivers significantly better than that. So if you can get that aggregate to continue to grow that helps, plus layering additional games in 2020 and '21. If you get a breakout that helps a lot, but that's a core organic strategy. Again if we find additional talented teams or IP that can layer into that at the right kind of top line or margin goals that also helps.

In terms of Zynga Poker, you're right. The sequential performance of the game is much better than the year-over-year comps. So we feel like we -- the worst is behind us and now we're starting to get into position for growth in the second half. And I think it really requires us to be able to spend more of our engineering time on bold beats and player facing features than a lot of the things that we've been doing recently related to platforms and also addressing some performance issues inside the service.

So we're excited to get Poker back. The beauty of our business is that Poker is contributing on a profitability and revenue standpoint very meaningfully on the growth of slowdown after very explosive growth in our first few years here. Our goal is to S curve it, and I use this period of time flatness to kind of get it, fit for purpose and return to growth. The good news is the rest of the portfolio is performing very nicely and that gives the diversification of our portfolio is really one of our strengths.

James Griffin -- Chief Financial Officer

I would just like to follow up. If you think about our business it is actually very exciting time as we look at the business not just today but as it's trending over the rest of this year into 2020 and 2021, because when you look at our core forever franchises and our live business as we said that's predominately top-line guide, we are giving you guys for 2019. That business in terms of the live services, the actual games in the market is performing really well and driving what is effectively predictable growth over the coming quarters and into 2020. It's allowing us to invest a significant amount of capital against a very exciting pipeline of new games and obviously invest against momentum when we see it in our core live services, whether we are entering new markets or just growing in the existing markets. I think that's a critical thing if you look at the company today versus two-three years ago.

We have a performed portfolio live franchises, five forever franchise now versus three a few years ago and we have a very defined pipeline of new games that we are going to layer into that equation over the coming quarters and years. And so from our perspective, as Frank said every day we wake up, we worry about the core live services, making sure the bold beats are on track that we're seeing the right level of clear engagement and excitement in our games. In parallel we continue to make progress against our new game development in addition to investing in new areas that Frank outlined in his prepared remarks.

Mike Hickey -- The Benchmark Company -- Analyst

Thanks guys.

Operator

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Rebecca Lau for any closing remarks.

Rebecca Lau -- Vice President Investor Relations and Corporate Finance

Thanks Lauren. We want to thank everyone for joining our earnings call today. We look forward to connecting with you more over the coming weeks.

Operator

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

Duration: 55 minutes

Call participants:

Rebecca Lau -- Vice President Investor Relations and Corporate Finance

Frank Gibeau -- Chief Executive Officer

James Griffin -- Chief Financial Officer

Tim O'Shea -- Jefferies -- Analyst

Mike Ng -- Goldman Sachs -- Analyst

Eric Sheridan -- UBS -- Analyst

Mike Olson -- Piper Jaffray. -- Analyst

Justin Post -- Merrill Lynch -- Analyst

Brian Nowak -- Morgan Stanley -- Analyst

Doug Creutz -- Cowen -- Analyst

Drew Crum -- Stifel -- Analyst

Ben Schachter -- Macquarie -- Analyst

Ryan Gee -- Barclays -- Analyst

Ray Stochel -- Consumer Edge Research -- Analyst

Evan Wingren -- KeyBanc Capital Markets -- Analyst

Mike Hickey -- The Benchmark Company -- Analyst

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Editor's note: This transcript has been corrected, as Chairman of the Board Mark Pincus was not on the call.