After the large acquisition of Peak for $1.85 billion a few months ago, Zynga (NASDAQ:ZNGA) has already dipped back into the well to purchase another mobile game company (this one based in Istanbul). Earlier this month, Zynga announced the acquisition of Rollic. This new deal has a much smaller price tag at $168 million in cash, but the small studio brings several benefits to Zynga. 

Similar to the Peak deal, Zynga is significantly expanding its player base and might be getting ready to see its advertising business accelerate thanks to Rollic's expertise in this area. Here are three ways Rollic will help Zynga grow and deliver returns to investors.

Two smartphones with player 1 displayed on one screen and player 2 on the other.

Image source: Getty Images.

1. User growth

Rollic has some popular titles under its wing, with the recent releases of Go Knots 3D and Tangle Master 3D topping the charts of U.S. app stores. Across all its games, Rollic has 5 million daily active users (DAUs) and 65 million monthly active users (MAUs).

Zynga ended the second quarter with 22 million DAUs and 70 million MAUs. The acquisition of Peak just closed after the end of the second quarter, but it will bring another 12 million DAUs from its two popular games Toon Blast and Toy Blast. All in all, Zynga is about to see its player base increase significantly with the additions of Peak and Rollic.

What's more, Rollic will give Zynga a greater presence in the hyper-casual market, one of the fastest-growing categories of mobile games, which has seen a lot of growth during the pandemic. 

2. Adding more advertising capabilities

Another area where Rollic will help Zynga is in-game advertising. Zynga's advertising revenue has been trending down lately as a percentage of total revenue. Over the last two years, it has dropped from 23% of revenue to 12%. This is due to Zynga prioritizing growth in live services, or player spending on in-app content. 

The latest numbers show this strategy working well. In the second quarter, player spending reached a record $455 million for an increase of 47% year over year. User pay bookings comprised 88% of Zynga's business in the second quarter, with advertising making up the balance.

But Rollic's position in the hyper-casual gaming market could boost Zynga's advertising business. During the second-quarter conference call, Zynga CEO Frank Gibeau mentioned that Rollic has a strong ad model and "a very deep bench of advertising executives."

Rollic's team brings a lot of knowledge about how to monetize ad-driven games, which should help Zynga improve in this area, especially with a headwind lurking around the corner.  

Apple recently announced changes coming to the way developers track and show ads to users in apps. With iOS14, iPhone users will now be required to give permission to apps to share their data, and therefore, be shown ads.

While that might look like a roadblock for Zynga's advertising business, Gibeau doesn't see this as a big deal in the long run. Zynga's ad business is still on track to meet management's expectations for the second half of 2020, where guidance calls for ad revenue to be flat to slightly down. 

But Rollic is expected to accelerate Zynga's ad business starting in the fourth quarter, as Gibeau explained. "I think it's really going to start to accelerate when Rollic becomes part of the advertising network in Q4 when we see a sizable increase in MAUs, in addition to a diversification of the demos and also regions that we can advertise into," he said. 

3. Expanding the game pipeline

Management is also excited about how Rollic's unique prototyping process for new games can help improve other releases across the company. "They have an amazing approach to how they prototype games, work with outside developers, and bring them to market," Gibeau said. 

Gibeau mentioned that Rollic's games have performed very well through the pandemic. Rollic was founded in December 2018, but its games have already been downloaded more than 250 million times. 

"We think that there's an opportunity there as well to further enhance and expand our product pipeline, which now encompasses chat, hyper-casual, as well as more traditional mainline mobile games," Gibeau said. 

Adding a valuable piece to the collection

The transaction is expected to close on Oct. 1. Rollic is on track to deliver more than $100 million in revenue and bookings this year. That's less than 5% of Zynga's expected bookings of $2.2 billion for 2020, but given that Rollic was just started less than two years ago, it's off to a fast start in the growing interactive entertainment industry.

Zynga is getting more out of Rollic than more revenue. The wider audience reach and sharing of ideas between the studios will create a larger base to monetize over time, and Rollic's know-how in the advertising department could provide a much-needed spark in Zynga's advertising business.  

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