Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Zynga Inc (NASDAQ:ZNGA)
Q2 2019 Earnings Call
Jul 31, 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 Second Quarter 2019 Result Earnings Conference Call. [Operator Instructions]

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

Rebecca Lau -- Director of IR & Corporate Finance

Thank you, Joel, and welcome to Zynga's Second 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-Q as well as elsewhere in our SEC filings for further clarification.

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

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

Frank D. Gibeau -- Chief Executive Officer & Director

Thanks, Rebecca. Good afternoon everyone and thank you for joining our Q2 earnings call. We delivered great Q2 results ahead of our guidance and finished the first half of 2019 with strong momentum in our live services. In the quarter, revenue grew 40% year-over-year to $306 million and bookings increased by 61% year-over-year to $376 million. Q2 was our best mobile revenue and bookings quarter in Zynga history with mobile revenue up 49% year-over-year and mobile bookings up 69% year-over-year.

Operating cash flow was $99 million, our best performance since Q4 2011 and up 140% year-over-year. Given the strength of our live services, we are raising our full year 2019 guidance which Gerard will discuss in more detail later on the call. We are on track to deliver our best annual revenues since 2012 and the highest bookings in Zynga history. Looking back over the first half of the year, I would like to highlight some of the key drivers of our strong performance.

Starting with live services, our focus on driving recurring growth through steady release of innovative bold beats is working. Empires & Puzzles and Merge Dragons! both delivered record top line performances in the quarter as Empires & Puzzles repeatedly broke into the Top 5 U.S. Gross Gaming charts on Android and iOS. While Merge Dragons! entered the Top 10 on Android in the Top 20 on iOS. Words With Friends achieved its best Q2 mobile revenue and bookings in franchise history, contributing to our highest Q2 advertising results ever. Celebrating its third anniversary CSR2 was a strong contributor in the quarter, driven by a series of Fast & Furious events.

Zynga Poker performed ahead of our expectations, as a new boost feature resulted in mobile revenue being flat sequentially and mobile bookings returning to sequential growth. Finally, from our Social Slots portfolio, Hit It Rich! Slots had a great quarter, delivering its best mobile revenue and bookings in over three years.

Next, we have successfully integrated our recent acquisitions into Zynga and they are now contributing meaningfully to our live services performance and new game pipeline. Both acquisitions are performing ahead of our initial expectations as Gram Games recently completed its first full year at Zynga and Small Giant Games finished its first six months. Our integration approach is designed to enable teams to do what they love most -- create great games -- while growing faster together. This is working well as these talented development studios maintain their unique creative cultures while leveraging Zynga's live services platform to enhance their growth.

Another key driver is we are making significant progress on our exciting pipeline of new games. On May 30, we released Game of Thrones Slots Casino worldwide. Through its first two months the title was off to a great start with strong player engagement and monetization metrics. We expect this game will steadily scale over the coming quarters as we continue to invest in its growth. In July, we also introduced two new games into soft launch FarmVille 3, an innovative mobile experience built from the ground up around this iconic brand and Merge Magic! a new title from Gram Games that combines whimsical, magical themes with Merge and build game elements.

These titles joined Puzzle Combat in soft launched, a new title from Small Giant Games the combines modern combat with role-playing systems and accessible puzzle mechanics. We are also expanding our reach into new markets and platforms to accelerate future growth. Specifically in Q2, we self-published Empires & Puzzles in South Korea and Japan. We are encouraged by the game's early engagement results and expect to invest in digital marketing on this title in Asia over the coming quarters.

We are also experimenting with the distribution of our games on new platforms. In June, we launched Tiny Royale, a team-based battle royale experience and one of the first games on Snapchat's Snap Games platform. We are excited to partner with Snap to introduce our games to a new audience and platform. Finally, we executed our objective to increase our cash reserves. First, given favorable market conditions, we issued convertible notes that were well received by investors. We also completed a successful sale leaseback of our San Francisco headquarters in a strong real estate market. Given these transactions and our positive operating cash flow, we are entering the second half of the year with approximately $1.4 billion of cash and investments, which we plan to use primarily for future acquisitions to further accelerate our growth.

With that I will now turn the call over to Gerard to discuss our Q2 results in further detail as well as our raised outlook for the year.

Gerard Griffin -- Chief Financial Officer

Thank you, Frank. We closed our great first half performance with Q2 finishing ahead of our expectations on strong mobile live service momentum and better-than-expected operating leverage. Given the strength of our mobile live services, we are raising our full-year outlook for revenue and bookings. But first, let's discuss Q2. Revenue was $306 million comprised of bookings of $376 million, offset by a net increase in deferred revenue of $70 million. Revenue was $26 million ahead of our guidance, driven by $16 million bookings speed and a lower increase in deferred revenue of $10 million. Our topline beat was driven by strong mobile live service performance in particular outstanding performances from Merge Dragons! and Empires & Puzzles as well as initial contributions from Game of Thrones Slots Casino which released on May 30.

Revenue was up $89 million or 41% year-over-year, driven by bookings growth of $142 million or 61% year-over-year, partially offset by the significant growth in deferred revenue, up $53 million. The strength of our portfolio drove our best mobile revenue and bookings performance in Zynga history. Mobile revenue was $287 million, up 49% year-over-year and mobile bookings were up $358 million, up 69% year-over-year. Our year-over-year bookings growth was driven by our mobile live services including full quarter contributions for Merge Dragons! and Empires & Puzzles. The growth collectively in our forever franchises more than offset the continued declines in our legacy mobile and web games. The increase in deferred revenue was driven by Empires & Puzzles, continued bookings growth for Merge Dragons! in addition to initial bookings from Game of Thrones Slots Casino. In assessing year-over-year variances please note that the increase in deferred revenue represents a $53 million negative component to the year-over-year variance in revenue, net income and adjusted EBITDA.

Turning to Q2 operating expenses. GAAP operating expenses were $241 million, up $95 million or 65% year-over-year. This was primarily due to a fourth quarter contribution from Gram Games and Small Giant Games as well as higher contingent consideration expense versus the prior year. The contingent consideration expense was driven by our recent acquisitions, which continue to perform ahead of our initial expectations. This resulted in an expense of $24 million, up $22 million year-over-year and $9 million ahead of our guidance. Year-over-year GAAP operating expenses increased from 67% to 79% of revenue. This was driven by the significant increases in deferred revenue and contingent consideration expense partially offset by improved operating leverage in SPC and other R&D and G&A expense line. Non-GAAP operating expenses were $197 million, up $71 million or 57% year-over-year. This is primarily due to the quarter contributions from Gram Games and Small Giant Games. Year-over-year non-GAAP operating expenses decreased from 54% to 52% of bookings. This was due to improved operating leverage in R&D and G&A expense line items, which more than offset the higher sales and marketing as a percentage of bookings.

We reported a net loss of $56 million, $14 million better than our guidance and an increase of $55 million versus a net loss of $1 million a year ago. The variance to guidance was primarily driven by better than expected operational performance with the lower build in deferred revenue more than offsetting the higher contingent consideration expense. The variance to prior year was heavily influenced by the significant increase in deferred revenue and contingent consideration expense versus prior year. Our adjusted EBITDA was $3 million, $21 million better than our guidance, and a decrease of $24 million year-over-year. The variance to guidance was driven by better than expected operational performance, as well as a lower build in deferred revenue. The variance to prior year was heavily influenced by the significant increase in deferred revenue, which more than offset the strong year-over-year improvement in operating performance.

In Q2, we generated operating cash flow of $99 million, our best performance since Q4 2011 and up $57 million or 140% year-over-year. In addition, given the favorable market conditions, we executed on our objective of increasing our cash reserves through two transactions, a convertible debt offering and the sale leaseback of our San Francisco headquarters. In mid-June, we issued $690 million five-year convertible senior notes with a coupon of 0.25%. The initial conversion price on the notes is approximately $8.31 per share. In conjunction with the offering, we entered into capped call transactions designed to effectively eliminate the potential dilution impact on conversion until our stock reaches a stock price of $12.54 per share. Net proceeds from the offering were approximately $600 million after the cost of the capped call transactions and associated issuance fees. This quarter we also paid down $100 million outstanding on our revolving credit facility and ended the quarter with $831 million in cash and investments. In addition, given the strong San Francisco real estate market, on July 1 we completed the sale leaseback of our San Francisco building, which provided net proceeds of approximately $580 million after taxes and fees. As of July 1, we have approximately $1.4 billion of cash and investments, which we anticipate we will use primarily to fund future acquisitions to further accelerate our growth.

Turning to guidance. Guidance for Q3 is as follows. Revenue of $325 million, a net increase in deferred revenue of $55 million, bookings of $380 million, net income of $250 million, which includes at $305 million one-time gain on the sale of our San Francisco building, and adjusted EBITDA of $7 million. Some factors to consider in assessing our Q3 guidance are as follows. Our Q3 topline performance will be driven by our live services, in particular, we expect a moderate sequential growth collectively across our five forever franchises. We also anticipate that the incremental topline contribution from Game of Thrones Slots Casino will be more than offset by declines in web and older mobile games. We expect our gross margins to be pressured sequentially by a higher mix of user pay versus advertising and an increase in royalties on licensed IPs, with this negative impact more than offset by the revenue increase in the quarter.

We also expect an increase in our operating expenses sequentially, primarily due to higher marketing investments in the quarter, a slight ramp in R&D in our new game pipeline and rent expense of approximately $3.75 million on our San Francisco headquarters. These increases should be partially offset on a GAAP basis by lower contingent consideration expense. The sequential increase in marketing costs is expected to be driven primarily by the ramp of investment spend on the recently launched Game of Thrones Slots Casino as well as Merge Dragons! and Empires & Puzzles. We have also factored into our guidance the potential for initial marketing investment on some of our titles and soft launch. While these investments will pressure operating margins in Q3, we expect them to support growth in future quarters. In simple terms, we expect the pressure factors noted on gross margins, the ramp up of investment in marketing and new games development as well as the introduction of rent expense on our San Francisco headquarters to a broadly similar impacts on our Q3 operating margin.

Finally on July 1, we completed the sale leaseback of our San Francisco building resulting in a one-time gain of approximately $305 million. While we did incur San Francisco transfer taxes on the sale, we expect minimal federal and state taxes on this gain due to the utilization of net operating loss carry-forwards.

Turning to expectations for 2019 and beyond. Our topline performance for the year will be driven by our mobile live services anchored by growth collectively in our forever franchises. We also continue to make progress on our exciting pipeline of new games under development. In Q2, we launched Game of Thrones Slots Casino and are currently testing three new games in soft launch. We remain on track to deliver our strongest annual revenues since 2012 and the highest bookings in Zynga history. Given the strong momentum in our live services, we are raising our full year 2019 guidance to $1.24 billion in revenue, up 37% year-over-year and an increase of $40 million versus our prior guidance. We are also raising our bookings guidance to $1.5 billion, up $55 million year-over-year, an increase of $50 million versus our prior guidance.

We expect the net increase in deferred revenue of $260 million, up 317% year-over-year and an increase of $10 million versus our prior guidance. While the release of this GAAP deferral will have a positive impact on revenue and profitability in future years, it represents a $260 million reduction in revenue, net income, and adjusted EBITDA in 2019.

In terms of profitability in 2019 we continue to expect pressure on our gross margins due to the higher mix of user pay versus advertising and an increase in royalties on licensed IPs. In addition, we expect to increase our marketing spend year-over-year as we invest in high-growth live service titles such as Empires & Puzzles and Merge Dragons! as well as the launch of new titles. We also anticipate a slight ramp in development spend on our new game pipeline and incremental rent expense related to the sale leaseback of our San Francisco headquarters. These factors will modestly impact our overall operating margins in 2019, but should deliver returns in future years.

Looking forward to 2020 we continue to expect low double-digit revenue and bookings growth with greater operating leverage as our live service growth is enhanced by full-year contributions from our 2019 new game launches as well as initial contributions from games launched in 2020. 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.

In conclusion, we are pleased with our performance through the first half of 2019 and the progress we're making on our multi-year growth strategy.

With that, I will turn the call back to Frank.

Frank D. Gibeau -- Chief Executive Officer & Director

Thanks, Ger. Before we open the call up for live Q&A, I want to take a moment to highlight how Zynga is uniquely positioned within the interactive entertainment industry. Zynga is a leading, mobile-first, free-to-play, live services company with the mission of connecting the world through games. Mobile is the largest and fastest-growing gaming platform in the world, with mobile games expected to reach 2.4 billion people in 2019.

This platform is constantly evolving with new devices, technologies, and distribution innovations that will expand the overall accessibility of games and therefore Zynga's total addressable market.

As a nimble, mobile-first company, we are well-positioned to capitalize on this rapidly evolving gaming landscape at a time when demand for interactive entertainment is reaching new highs. Our great results through the first half of 2019 put us well on track to be one of the fastest growing public game companies this year. We are focused on executing our multi-year growth strategy to further scale our business and generate more value for players and shareholders.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] In the interest of time, we ask that you please limit yourself to one question and one follow-up.

Our first question comes from Colin Sebastian with Baird. Your line is now open.

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

Great, thanks. A great quarter. I have a couple. First, could you talk about the levers driving continued strong growth in Empires & Puzzles including the mix of paid user acquisition versus specific monetizing events or other activities? And then, secondly, raising the full-year bookings guidance by more than the Q2 be, if you could just maybe talk a little bit more specifically about what parts of the business you think you're showing more sustainable, faster growth? Thanks.

Frank D. Gibeau -- Chief Executive Officer & Director

Hey, Colin, this is Frank. I'll start with the Empires & Puzzles question. It's going to be a combination of things we have a fairly aggressive bold beat calendar in front of us for these next couple of quarters where we will be expanding the number of systems that players can engage with. One example is we'll continue to expand the base features that we introduced this quarter including stronghold max levels, new characters and new ways to compete. Also, we are investing more in our operations in Asia against this title. It's out in South Korea and Japan as we mentioned. And we're seeing some very promising early indicators. So expect that we'll also ramp geographic expansion over the coming quarters that should also help drive the growth of that franchise.

Gerard Griffin -- Chief Financial Officer

Hey, this is Gerard. In terms of the full-year guide, as we stated, the primary rationale for the increase was how we see our live services progressing over the second half of the year. Obviously, we expect Game of Thrones Social Slots to ramp. It's obviously progressing through this quarter and then through the end of the year. But also, as we look across the rest of the portfolio, we still believe there is room for growth as we assess the various bold beats that it we are going to prosecute both in Q3 and Q4.

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

Okay, thanks.

Operator

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

Mike Ng -- Goldman Sachs -- Anslyst

Hi, thank you very much for the question. I have one for Ger and one for whoever would like to take it. Ger, could you talk a little bit about how much incremental marketing spending you're putting against the three soft launches this year? I'm just trying to better understand the impact to margins on the third quarter and full year and what I would consider growth investments likely won't pay off until 2020. And my second question, and I apologize if I'm being a little bit pedantic, but it seems like your language around using capital allocation to fund acquisition seems a little bit more intentional that in previous quarter. Has your intention increased since your last earnings report? And could you just update us on your progress there? Thank you.

Gerard Griffin -- Chief Financial Officer

Yeah, we don't break out specifically the exact number against what we may apply against the soft launches. It's just as we now have three games in soft launch, they're obviously in different levels of maturity. I did consider that as I was setting guidance. What I will say, if you think about the last quarter from Q2 to Q3, we essentially indicated there's about three points of pressure and I gave a little bit of an outline in my prepared remarks to say that a point is fundamentally coming from the gross margin side of the equation, a point is coming from the rent on the real estate, and then the other point is broadly related to marketing.

So a little element of that relates to what I'm talking about in terms of soft loans, the majority of it, it relates to the ramp of Game of Thrones Social Slots game and obviously continued investment against Empires & Puzzles as it ramps in Asia and Merge Dragons!.

On the, on your second point, from our perspective, I don't think we amplified our intention on acquisitions other than prosecuting our objective to refill our cash reserves, obviously, is indicative that we now have the capital in-house should additional opportunities arise. But it has always been our attention to be prepared if other opportunities similar to a casual cards or Gram Games or Merge Dragons! are on the offing [Phonetic]. And so, from our perspective, there's no rush to do another acquisition, but we feel the sale of the building and the convert gives us the opportunity to execute from a financial perspective if an opportunity arises.

Mike Ng -- Goldman Sachs -- Anslyst

Great, thank you very much for the color. Those are helpful.

Operator

Thank you. And our next question comes from Alex Giaimo with Jefferies. Your line is now open.

Alex Giaimo -- Jefferies -- Internet Equity Research

Thanks for taking the question. I guess, from a high level, it seems as if mobile is quickly becoming the most competitive sub sector within gaming. Could you just talk a bit about how your team is adapting to that competitive environment and if you do feel acquisitions are necessary to maintain growth rates or are you confident that your existing portfolio can drive the low-double digit future growth rate that you referred to? Thank you.

Frank D. Gibeau -- Chief Executive Officer & Director

Yeah. Alex, I think that if you look at mobile overall, it's as competitive as it's always been. I wouldn't subscribe to the point of view that mobile is getting more and more competitive. I think that it is a very dynamic marketplace. It has innovation happening in the hardware handsets, in the distribution channel, in the business model, and it's also expanding into new markets in the emerging world at a very aggressive rate.

So from our perspective, we look at it as, yeah, sure, it's competitive; you need to have, you need to to know what you're doing in this category. It needs to be something that isn't a hobby. It needs to be something that's your primary focus in many ways to really break out. And so we, that's where we keep our management attention very much focused on our live ops. We have a very rigorous process to continually look at our franchises in terms of are we bringing new people into the franchises, are people that are playing the games playing more. Our lapsed players, we have plans to bring them back. And keeping that drumbeat and that discipline is integral to our overall strategy of producing growth inside this overall marketplace.

It's also a marketplace that I would point out is very broad in its demographics. So a lot of the franchises that we have, whether it's Words With Friends, the upcoming FarmVille 3, Merge Dragons!, they're reaching audiences that traditionally a lot of the game companies haven't reached, and that's exciting for us because we're just starting to tap into that and grow it and especially internationally. So from our perspective, we're going to keep our eye focused on the fundamentals and mobile, but we're also going to be aggressive. Our new product pipeline is just starting to show up in terms of the marketplace with Game of Thrones Social Casino and the three titles that we have in soft launch, they're all very big potential titles -- FarmVille 3, Puzzle Combat, Merge Magic!, those titles have real potential, and that doesn't even include the games that we're working on in the future with Star Wars, Harry Potter in the future pipelines that we have coming. So the combination of those two elements, we think, can continue to deliver on our strategy of a strong foundation of growing live services with incremental layering in new titles. And we believe that that execution will continue to deliver the growth rates that we've committed to our shareholders into the marketplace.

The M&A is actually a lever on top of that, and we take it in a very considered and thoughtful manner. We don't -- we're not in a rush to do any deals, but if we see something that we can plug into our live services platform and we find a game team and a franchise that we really believe in, we'll go for it. And that would increase the growth rates from what we've already committed to. So we don't really have any assumptions in our projections against further M&A. It's all based on organic growth from existing live services and with a very small assumption against new title releases.

Alex Giaimo -- Jefferies -- Internet Equity Research

Thank you.

Gerard Griffin -- Chief Financial Officer

The only thing I would add to what Frank said is as you think about 2020, and we've talked about this before, as these new games come out that they will start contributing. Games that come out and obviously in 2019 will give us a full-year contribution similar to like a Game of Thrones Social Slots. The, as you get into 2020 then, depending on the timing of the additional games when they turn up, that will ultimately define the level of operating leverage we can command. Obviously, if we get the games out earlier in the year, there'll be contributing more to the year than if they come out later in the year, but that's all a TBD depending on the cadence of our new games.

Alex Giaimo -- Jefferies -- Internet Equity Research

Okay, thank you, guys.

Operator

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

Unidentified Participant

Hi guys. It's Matt on for Brian. Thanks for taking the question. So, can you discuss the puts and takes that you saw in Words With Friends and Zynga Poker in the quarter? Obviously, you grew bookings sequentially in both of the games but cited them as a driver of the slight decrease in users sequentially, and then can you discuss kind of what you're seeing in the chat games and Solitaire as well on that point? Thanks.

Frank D. Gibeau -- Chief Executive Officer & Director

With regards to Poker and Words With Friends, there is a lot to celebrate in terms of the features that were released. In Poker, there was a new boost system that was introduced to the game that fans really, really liked we also made some changes to the infrastructure and the production cycle so we can actually get bold beats out faster, and that was very encouraging to see the return to growth on a sequential basis. As we discussed on prior calls, we felt that that was going to be a second half event so that, the fact that it's a little early is very positive to us. And we anticipate that the velocity of bold beat releases on Poker will increase as we enter into the second half.

In terms of the audience level, there is, there are some puts and takes on Poker in terms of some different markets that we've been active in on UA, some places we pulled back a little bit, some places we leaned in. We wanted to see how the boost were really working before we look at that on a more long-term basis.

In terms of Words With Friends, again, best quarter it's ever had on mobile, big driver of the result on advertising. The new achievements bold beat was very well regarded. We also had a promotion with Garth Brooks, and so we had a really good May and June on that title.

We just released celebration of the 10th year anniversary with Friendaversary [Phonetic] event which is off to a good start. We've got in-game giveaway and exclusive titles coming. So what we're seeing is the existing base of users is playing the game more. We're seeing more moves per player. And as we get Friendaversary out, we're going to look at ways to expand the audience through UA and further investments.

In terms of the legacy titles, there have been some changes in terms of how Facebook has been approaching Messenger and movement of that app from where it was into the new blue app that they have and where it's been surfaced and how discovery works. We have decided to focus our efforts there on Draw Something and Words With Friends, and we've sunsetted the rest of the chat games there. So that was a negative impact on audience as we sunsetted those games and focus more in on the two titles that had substances off audience.

Unidentified Participant

Great, thank you.

Operator

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

Drew Crum -- Stifel Financial Corp. -- Research Analyst

Okay. Thanks. Hey, guys, talk about the CSR2, it sounds like you have a deeper lineup of content bold beats coming in 3Q versus 2Q plus an easier comp, how are you thinking about that franchise in the second half? And then, separately, and I apologize if I missed this, can you comment on your plans for marketing support of new initiatives beyond 3Q aside from the seasonality you see in 4Q, should we expect another step up going from 3Q to 4Q around marketing? Thanks.

Frank D. Gibeau -- Chief Executive Officer & Director

Yeah. Drew on CSR2 we do have an ambitious bold beat roadmap for us starting in Q3. Today you saw the announcement of the Pagani Huayra Roadster that was released exclusively for the first time ever in a game, very well received. We have a new beta testing feature, a PDP feature called Showdown which really is focused on expanding the player versus player modes inside CSR2 that we're very excited about and that should have a long-term impact on the franchise. We'll also have some new Fast & Furious events coming. So we do have a lot of ambition for the game in the second half.

The investment in the PDP feature is substantial, and in terms of the release calendar, you've seen a lighter cadence in this last Q2 and coming off Q1, so we'll start just to ramp CSR2 as we go into the second half.

I'll let Ger talk about the sequencing of marketing from Q3 to Q4.

Gerard Griffin -- Chief Financial Officer

Yeah. Our guidance for Q3 and if you think about my overall color I have given on margins for the full year would indicate a similar sort of pressure on margins for Q4 as we do invest against our current live titles and the potential of investment against new titles.

So from a quarter on quarter perspective, without putting any major dollars against new games, you should sort of assume that Q3 and Q4 broadly look the same from a topline and a margin profile as of now.

Drew Crum -- Stifel Financial Corp. -- Research Analyst

Okay, helpful. Thanks guys.

Operator

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

Ryan Gee -- Bank of America -- Analyst

Yes, hi, good afternoon. Thanks for taking the question. So the first one is on Puzzle Combat. So we're watching it in soft launch and in our view, it kind of looks like a modern combat versus fantasy reskin of Empires & Puzzles. So we've seen this is your competitor that did a bunch of different themed match three games in the past and sequels weren't really that incremental. So I'm curious how you guys are internally forecasting the contribution of that sequel. Is it just about moving users from one game to the other and then focusing on retention or do you plan to see incremental users and revenue once Puzzle Combat does launch? And then follow up along those lines. You now have three titles in soft launch. So have you guys committed to a specific number of titles for 2019? I think going into the year, you were looking at four possibly five if CityVille makes it. So I'm just curious if that's still the case and if that was a factor in the $50 million bookings guidance raise. Thanks.

Frank D. Gibeau -- Chief Executive Officer & Director

Yeah. Ryan, I'll start with the Puzzle Combat question. It's very early in soft launch. We are looking at all different types of player behaviors, how cohorts come in, what features they like. I think it's -- you haven't seen the full feature set rolled out against the game in soft launch. So I'm not sure I would characterize it as a reskin of Empires & Puzzles. It certainly is embracing a different theme in modern combat which we've seen in testing really does open up incrementally new audiences. So our goal is not to create a cannibalistic sells less than the last game type strategy here. So I think it's a little too early to read too much into what the game eventually is going to look like in soft launch. From a modeling standpoint, we're not doing a lot of deep modeling in terms of the revenue contributions on Puzzle Combat right now. We're looking at, frankly, what's the player behavior in the franchise. All the projections that you've seen from us on the future really are more related to how LiveOps and the titles that we've discussed roll-up.

In terms of the thee titles in soft launch, we committed to having games in soft launch and releasing a few titles. I don't think we ever committed to five games releasing this year. But really the beauty of how we've constructed the company is that we can deliver recurring predictable growth off the live services that are strong. I mean, this quarter is up 61% on a bookings level without major contributions from new titles. We did not want to design a company that was beholden to the risk of new product introductions. And so, from that standpoint, it takes a little bit of pressure off of new product development process if we're not trying to land it in a quarter and we're able to just more focus in on the product quality, the engagement metrics and the lifetime value that we can generate inside the title. So that's why we're not as vocal about, we have to get these games out in this quarter. It's really more about, let's get into soft launch, let's see what we learn. If things look really good, it can go pretty fast. If things need more work and more polish and iteration, fortunately, the way that the live services are performing, we have that flexibility and opportunity to do so.

Operator

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

Doug Creutz -- Cowen. -- Analyst

Thanks. Obviously, FarmVille is an important title for you guys. It's kind of was the face of the company for a long time. You've now got FarmVille 3 in soft launch. Can you talk about what you're doing with that game that's going to kind of update it for what modern audiences are looking for in a top-line [Phonetic] mobile game and what you're doing that you think you can make it successful? Thanks.

Frank D. Gibeau -- Chief Executive Officer & Director

Yes, the game is innovative on a lot of levels and we're encouraged by what we're seeing in terms of research and test in terms of the appeal. It starts by building it from the ground up for modern mobile user experiences, modern mobile technology. It has a lot of new things and it was related to event harnesses so that we can frequently update it in live operations. But it really does start with a new look and feel to the game. It's actually 3D not 2D. It has a really accessible UI and it's focusing in on some key elements on the farm that I think people are really going to gravitate to which is the animals, the ability to interact with farm animals -- horses dogs cats -- and we've added a layer of story in RPG related to farm hands with the different characters who operate on the farm. So it embraces a lot of the tried and true builder mechanics from the original FarmVille and from what's popular in the category, but it adds a few new twists with collection, RPG, depth in terms of how the stories unfold. And we haven't unveiled them yet in soft launch, but there are also elder game features related to social co-op play and other things that we feel can drive the elder game retention that this type of franchise will enable. And so, very early days, it's only been in soft launch a few weeks and we expect that we'll be polishing and testing this game over the next couple of quarters.

Doug Creutz -- Cowen. -- Analyst

Great, thank you.

Operator

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

Ben Schachter -- Macquarie. -- Analyst

Hi, guys. I hopped on late so I apologize if this was already asked, but one, can you update anything on the strategy for Asia, for China specifically, anything new there either near-term or long-term? And then secondly, I don't know if you've seen what's happened with Tinder recently, but it's the first time that I've seen anyone in-app go around the payment systems from Android. And we think that we know how they did it. But the question is can a game company do it as well. And if there's any update in terms of how you're thinking about the ability to go around the 30% tax rate or negotiate that lower? Thanks.

Frank D. Gibeau -- Chief Executive Officer & Director

Yeah, on the first question regarding Asia, our focus was very deliberate and one game at a time and do it in a way that we don't rush in and end up making mistakes in terms of how you enter Asia like a lot of companies have. So, we focused in on Empires & Puzzles which we saw was testing well. We started with the markets that we felt we could self-publish in with Korea and Japan where we could actually get direct feeds on the data. We would control more of our own destiny in terms of how we can invest and change the games and give us much more flexibility for how to bring the games to market and then grow them over time. I'm happy to report that is very encouraging early metrics from both markets, so much so that we will be increasing the marketing expenditures against that title in the coming quarters.

As it relates to China, given a lot of the dynamics related to how games are regulated, how you go into the market, we've decided to focus more in on Korea and Japan on the titles, get to success and scale there. And while we do have games available in China, Merge Dragons!, for example, has a fairly good audience there, that's going to be part of a next wave of efforts as we look at how to expand further into Asia.

As it relates to the app stores and there's a lot of dialog about the distribution channel, the rates, the fees, how to go around it, I can only say this, it's really a dynamic environment. The mobile ecosystem is subject to constant change, and there's a lot of attention and pressure on the current structure of how it's operating. Zynga is a great partner to Apple and Google and our perspective is let's do what we do best which is made games, run live services, and if they're shifts in the channel as it relates to some of these dynamics, those will probably benefit us, but it's not a forecastable event. And as far as going around some of these systems and policies that they have, a dating app where a lot of the activity happens off the application is a little bit different than a game where most of the activity happens inside the application. So I think there is some more fundamental structural issues there that -- to look into that. It doesn't make it a perfect North Star for how to potentially go after that activity. So from our perspective, we love mobile because of the opportunity it presents for growth and change, but at the same time, the current system is benefiting us well.

Operator

Thank you. And our next question comes from Ray Stochel with Consumer Edge. Your line is now open.

Ray Stochel -- Consumer Edge -- Analyst

Great, thanks for the question. So a couple on new platforms. What would be the long-term opportunity for you all with cross-platform play? Historically, you ran your own website and portal historically, but we know that there's pressure of web-based games. Is there a scenario where you have cross-platform play with third-party distribution? As we see there continues to be a growth of third-party distribution on PC. And then secondarily, would be on chat, is there any way that you can quantify the audience impact either for Facebook Instant Games in 2Q and 3Q or Tiny Royale in 2Q and 3Q? Thanks.

Frank D. Gibeau -- Chief Executive Officer & Director

Yeah, so the cross-platform opportunity for us, we think, is profound and it is something that Zynga teams and Zynga intellectual properties, we think they can appeal across platforms. The most adjacent, clear opportunity is on the PC, not just the web but also in a fully downloadable game type environment. Free-to-play is a very proven model on PC. There's a lot of great distribution channels with Steam and Epic and others that you can go direct on, that we think over the long term, as we look at how we grow our forever franchises, there will come a day where Zynga will be able to launch games that have cross-platform play and cross-platform audiences. PC is also very appealing to us because of the presence that it has an Asia and as we grow our global footprint, the ability for mobile players and PC players to co-mingle play against each other is really exciting and something that we're looking at.

The next step out from that with console and streaming systems, I think it's simple to say, we are a platform-agnostic company. We start with the games, the teams, and where can we generate audiences profitably. And if we can figure out PAVs [Phonetic] for franchises in IPs that makes sense, that would be something that we'd evaluate. It's not anything that's eating up R&D right now, but it's certainly something that we think about as we contemplate 2020 and beyond. As it relates to chat, we recently announced or we recently released Tiny Royale in Snap and we've been very pleased with the partnership with Snap. They're a very good company and their approach to gaming we really like. And it's exciting to see the reception that Tiny Royale has received.

So the idea that you can build games on chat platforms in the web I think is still in its very early days. Snap just got in. Facebook is recalibrating in terms of how it wants to approach that. So I think when you look at audience numbers, they're going to jump around a lot. There's a lot -- there are going to be a lot of noise in them. We don't really break them out, so I can't give you a quantitative assessment of how big they are. But from the standpoint of over the long-term, there is audiences there in chat that are -- find Zynga intellectual properties like Words With Friends and Draw Something and Tiny Royale very appealing. And so, it's a place that we'll continue to look to innovate. It's also going to be an ad-driven business, which also works well for us. So there's still a lot of structural things that we like there, but again, the cautionary note that I would say is it's early days, so reading too much into audience or how it unfolds is a do at your own risk.

Ray Stochel -- Consumer Edge -- Analyst

Great. Thanks again.

Operator

[Operator Instructions] Our next question comes from Mike Hickey with Benchmark. Your line is now open.

Mike Hickey -- Benchmark Company -- Analyst

Hey, Frank, Ger, Rebecca, congrats in the quarter guys. Thanks for taking my questions. I guess, the first one, just looking at your 20 bookings guidance 10% to 15%, obviously, your live service games are cranking here. Just curious how you sort of balance growth in the existing live services versus new games are obviously are inherently more risky into that 10% to 15% guided range, and a follow up.

Gerard Griffin -- Chief Financial Officer

The way we think about planning both current year and future years is we do have, obviously, we've got a perspective on our new game state and potential launch windows. As we thought about giving our guidance for 2020, we said low-double digits. So in that guidance, we implied we would get growth from our core live portfolio, but we do expect that we get some contribution from new games, whether it's a full-year contribution of the game launch in this year or some additional games that we'd launch in 2020. So I think setting that guidance, there is a component that relates to new. And from our perspective, as we look at the portfolio, both our live portfolio and the potential games that could soft launch over the next year or so, we felt low double digits was was a reasonable expectation.

As you think about it from a mix point of view, the majority is still going to be coming from what we would call live games. Live by definition is any games that is in the market prior to the end of 2019.

Mike Hickey -- Benchmark Company -- Analyst

Thank you, Ger.The last question from me, on Small Giant Games, it looks like Empires & Puzzles is north of $80 million bookings for the quarter. I think it's probably a top performing by quite a bit. When you acquired that asset, I think the run rate, forgive me if my math is wrong, but it was around $200 million. So now it looks like you're sort of looking to be well over $300 million. So, one, is that math right? And two, if you can sort of help us bridge [Phonetic] that sales growth from that game like generated [Phonetic].

Gerard Griffin -- Chief Financial Officer

Yes, I think the math is broadly correct. The game has, as we said when we brought Small Giant in the family we were really excited with the performance of the game that was starting, obviously, its journey in terms of ramp. It had a very good Q4, had an excellent Q1 and it continued to grow. So in terms of how much of that was baked into our initial expectations, we obviously took a more conservative view.

Hence, you see the contingent consideration built. But what when -- if we sort of step back in the time machine and look at it versus our case that was -- fits to our Board, it's obviously performing ahead of our expectations. And to a similar extent, we have a similar situation going on with Gram. Those type of -- the core as Frank said in his opening remarks, the core team and their creativity, we haven't matched with that, they're part of the Zynga family but what we've been layering into them is our publishing experience, our studio ops, and our ability to help them scale better and the combination of the two has worked really, really well.

Mike Hickey -- Benchmark Company -- Analyst

Thanks, guys.

Operator

Thank you. And our last question comes from Jeff Cohen of Stephens. Your line is now open.

Jeff Cohen -- Stephens Inc. -- Equity Research Analyst

Hey, guys, thanks for taking my question. So one of your competitors made an acquisition today in the hyper casual space. Could you maybe just talk about that genre and any ambitions you might have to get bigger there?

Frank D. Gibeau -- Chief Executive Officer & Director

Yes, it's a category that is very interesting to us. It's very high DAU, very casual, very easy to get into. It tends to skew a little younger than a lot of the main native apps. It's an ad-driven business right now. It could start to evolve more toward IAP or in-app purchase. So when we look at the overall download charts on the platforms, you do see the charts dominated by these very quick, easy-to-play, easy-to-get-into games.

The challenge is just how do you get to scale, how do you maintain that sustainable, make the DAUs sustainable. You have to have really good systems for cross promotion. You have to have really good advertising systems. We like the category. It remains to be seen how long it will stay at this rapid growth rate. If it's going to start to slow down in the second half or not, but from our perspective we think that hyper casual is a strong sector of growth inside the mobile ecosystem.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Rebecca Lau for closing remarks.

Rebecca Lau -- Director of IR & Corporate Finance

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

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Rebecca Lau -- Director of IR & Corporate Finance

Frank D. Gibeau -- Chief Executive Officer & Director

Gerard Griffin -- Chief Financial Officer

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

Mike Ng -- Goldman Sachs -- Anslyst

Alex Giaimo -- Jefferies -- Internet Equity Research

Unidentified Participant

Drew Crum -- Stifel Financial Corp. -- Research Analyst

Ryan Gee -- Bank of America -- Analyst

Doug Creutz -- Cowen. -- Analyst

Ben Schachter -- Macquarie. -- Analyst

Ray Stochel -- Consumer Edge -- Analyst

Mike Hickey -- Benchmark Company -- Analyst

Jeff Cohen -- Stephens Inc. -- Equity Research Analyst

More ZNGA analysis

All earnings call transcripts

AlphaStreet Logo