znga-8k_20200205.htm
false 0001439404 0001439404 2020-02-05 2020-02-05

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 5, 2020

 

ZYNGA INC.

(Exact name of Registrant as Specified in Its Charter)

 

 

Delaware

001-35375

42-1733483

(State or Other Jurisdiction

of Incorporation)

(Commission

File Number)

(IRS Employer

Identification No.)

 

 

 

699 Eighth Street

San Francisco, CA 94103

 

94103

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (855) 449-9642

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2. below):

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock

ZNGA

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

 

 


 

Item 2.02Results of Operations and Financial Condition.

On February 5, 2020, Zynga Inc. (“Zynga”) issued its Q4 2019 Quarterly Earnings Letter announcing its financial results for the quarter and year ended December 31, 2019. A copy of the quarterly earnings letter is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference.

The information furnished in Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 attached hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any other filing under the Securities Act of 1933, as amended or the Exchange Act, except as expressly set forth by specific reference in such a filing.

Item 7.01Regulation FD Disclosure.

On February 5, 2020, Zynga issued a press release relating to its announcement of its financial results for the quarter and year ended December 31, 2019.  A copy of the press release is furnished as Exhibit 99.2 to this Current Report on Form 8-K and is incorporated herein by reference.

The information furnished in Item 7.01 of this Current Report on Form 8-K, including Exhibit 99.2 attached hereto, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any other filing under the Securities Act of 1933, as amended or the Exchange Act, except as expressly set forth by specific reference in such a filing.

Item 9.01Financial Statements and Exhibits.

(d) Exhibits.

 

Exhibit

Number

 

Description

99.1*+

 

Quarterly Earnings Letter

99.2*+

 

Press Release

104__

 

Cover Page Interactive Data File (the cover page XBRL tags are embedded within the inline XBRL document)

 

*

Filed herewith.

+

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any other filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.

 

 


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

ZYNGA INC.

 

 

 

 

Date:  February 5, 2020

 

By:

/s/ Gerard Griffin

 

 

 

Gerard Griffin

 

 

 

Chief Financial Officer

 

 

znga-ex991_26.htm

Exhibit 99.1  

 



 

Dear Shareholders,

 

We look forward to discussing our Q4 2019 results during today’s earnings call at 1:30 p.m. PT. Our quarterly earnings letter below details our Q4 performance, as well as our outlook for Q1 2020 and growth opportunities for 2020 and beyond. Please note that we manage our business based on topline measures including revenue, which is comprised of the change in deferred revenue and bookings. Revenue and the change in deferred revenue are both directly affected by bookings results, and management utilizes bookings as a primary topline measure to help inform its decisions.

 

Executive Summary

 

Our strong Q4 performance capped off an outstanding year as we delivered the highest annual revenue and bookings in Zynga history. We expect to build on this momentum as we continue growing our business in 2020.

 

Our results demonstrate our ability to scale Zynga as we execute our multi-year growth strategy of: (1) growing our live services, (2) creating new forever franchises and (3) investing in new platforms, markets and technologies. We also see opportunities to enhance each of these growth pillars through acquisitions.

 

In Q4, we achieved revenue of $404 million, up 63% year-over-year, and bookings of $433 million, up 62% year-over-year. Our results were well ahead of guidance across all key financial measures driven by strength in live services, coupled with remarkably strong advertising seasonality and yields. In particular, Words With Friends and Empires & Puzzles achieved record revenue and bookings, while Merge Magic! had a successful first full quarter and is on track to become our newest forever franchise.

 

In 2019, we delivered a record topline performance with revenue of $1.32 billion, up 46% year-over-year, and bookings of $1.56 billion, up 61% year-over-year. Our focused execution generated our best cash flow from operations since 2011 of $263 million, up 56% year-over-year, and helped us end the year with $1.54 billion of cash and investments.

 

Live services were the primary driver of our 2019 results and are the foundation of our multi-year growth strategy. By consistently delivering innovative bold beats, we generated strong, recurring growth from our portfolio, led by our forever franchises. Layering on top of our live services foundation, we launched two new games – Game of ThronesTM Slots Casino and Merge Magic! – that are off to great starts and will be meaningful contributors over the coming years.

 

In 2020, we expect to deliver revenue of $1.6 billion, up 21% year-over-year, and bookings of $1.75 billion, up 12% year-over-year. Our live services, anchored by our forever franchises – CSR Racing, Empires & Puzzles, Merge Dragons!, Words With Friends and Zynga Poker – as well as Merge Magic!, will drive the vast majority of our performance. We are also targeting the launch of new titles in the second half of the year. Puzzle Combat and FarmVille 3 are progressing well in test markets and our Harry PotterTM title is on track to enter soft launch later in Q1. In addition, we see opportunities to acquire talented teams and franchises around the world to accelerate our growth further.

 

As a leading mobile-first, free-to-play, live services company, Zynga is well positioned to capitalize on the dynamic growth and innovation ahead for the largest and fastest-growing games platform - mobile.

 

 

1

 


Q4 Highlights

 

 

Highest quarterly revenue and bookings performances in Zynga history.

 

Revenue of $404 million, up 63% year-over-year, and bookings of $433 million, up 62% year-over-year.

 

Record online game – or user pay – revenue of $325 million, up 84% year-over-year, and user pay bookings of $354 million, up 80% year-over-year.

 

Record advertising revenue and bookings of $80 million, up 11% and 12% year-over-year, respectively.

 

Words With Friends and Empires & Puzzles both achieved record revenue and bookings quarters.

 

Merge Magic! is off to a great start in its first full quarter post launch.

 

Gram Games and Small Giant Games are collectively performing ahead of our expectations, resulting in contingent consideration expense of $31 million in the quarter.

 

Operating cash flow of $94 million, up 5% year-over-year.

 

2019 Highlights

 

 

Best annual revenue and bookings performances in Zynga history.

 

Revenue of $1.32 billion, up 46% year-over-year, and bookings of $1.56 billion, up 61% year-over-year.

 

Online game – or user pay – revenue of $1.05 billion, up 56% year-over-year, and user pay bookings of $1.29 billion, up 76% year-over-year.

 

Record advertising year with advertising revenue and bookings of $274 million, up 17% year-over-year.

 

International revenue and bookings grew 58% and 85% year-over-year, respectively, and now represent 37% of total revenue and 40% of total bookings versus 35% of total revenue and bookings in 2018.

 

Launched two new titles – Game of ThronesTM Slots Casino and Merge Magic!.

 

Acquired Small Giant Games – adding Empires & Puzzles as a new forever franchise to our live services portfolio.

 

Self-published Empires & Puzzles in Asia, which is yielding positive results.

 

Continued to experiment with new platforms and game modes, including the launch of Tiny Royale on Snapchat’s Snap Games platform.

 

Completed the sale-leaseback of our San Francisco headquarters building on July 1, generating net proceeds of approximately $580 million after taxes and fees.

 

Issued $690 million of convertible notes, providing net cash proceeds of approximately $600 million.

 

Delivered net income of $42 million, up 171% year-over-year.

 

Generated operating cash flow of $263 million, up 56% year-over-year and our strongest performance since 2011.

 

Finished the year with cash and investments of $1.54 billion.

 

 

 

 


2

 


Financials

 

In Q4, we delivered record revenue of $404 million, above our guidance by $39 million and up $156 million or 63% year-over-year, and our highest ever bookings of $433 million, beating our guidance by $18 million and up $166 million or 62% year-over-year. Our better than expected topline results were driven by Words With Friends, a tremendous holiday season for Empires & Puzzles and a meaningful contribution from Merge Magic! in its first full quarter post launch.

 

We generated user pay revenue of $325 million, up 84% year-over-year, and user pay bookings of $354 million, up 80% year-over-year. We delivered record advertising revenue and bookings of $80 million, up 11% and 12% year-over-year, respectively. Our outsized advertising performance was driven by remarkably strong seasonality that kicked in earlier in Q4 and resulted in higher than expected advertising yields. This was further amplified by strong player engagement throughout the holiday season, as well as one-time benefits from advertising network deals.

 

Our net increase in deferred revenue was $29 million versus our guidance of a net increase of $50 million and a net increase of $19 million in Q4 2018. The primary drivers of the net increase in deferred revenue were bookings from Empires & Puzzles and Merge Magic!. While the release of this GAAP deferral will have a positive impact on revenue and profitability in future periods, it represented a $29 million reduction in revenue, net income and Adjusted EBITDA in Q4. We ended the year with a deferred revenue balance of $434 million versus $193 million a year ago.

 

($ in millions) Q4’19 Actuals Q4’18 Actuals Variance $ (Y/Y) Variance % (Y/Y) Q4’19 Guidance Variance $ (Guidance) Variance % (Guidance) Revenue Net income (loss) Bookings Adjusted EBITDA (1) Net release of (increase in) deferred revenue (2) $404 $249 $156 63% $365 $39 11% ($4) $1 ($4) NM ($44) $41 (92%) $433 $267 $166 62% $415 $18 4% $75 $37 $38 103% $25 $50 201% ($29) ($19) ($10) 56% ($50) $21 (42%)

Note: Certain measures as presented differ due to the impact of rounding. NM - not meaningful.

(1)

Adjusted EBITDA includes the net release of (increase in) deferred revenue.

(2)

For clarity, a net release of deferred revenue results in revenue being higher than bookings and is a positive impact to Adjusted EBITDA as reported; a net increase in deferred revenue results in revenue being lower than bookings and is a negative impact to Adjusted EBITDA as reported.

GAAP gross margins decreased to 65% of revenue from 67% in Q4 2018 driven by a higher user pay bookings mix as well as increased amortization of acquired intangible assets.

 

GAAP operating expenses declined to 64% of revenue from 66% of revenue in Q4 2018 and on a non-GAAP basis, operating expenses decreased to 48% of bookings, down from 53% of bookings in the prior year period. Our strong topline performance resulted in improved R&D and G&A leverage.

 

We had a net loss of $4 million, $41 million better than guidance, driven by our strong operating performance and lower than expected deferred revenue, partially offset by the increased contingent consideration expense as our acquisitions collectively performed ahead of expectations. Adjusted EBITDA was $75 million, above our guidance by $50 million, also driven by our strong operating performance and lower than expected deferred revenue. Exceptionally strong advertising revenue and lower marketing spend were the primary drivers of our better than expected operating performance.

 

We generated operating cash flow of $94 million, up 5% year-over-year, bringing our cash and investments balance to approximately $1.54 billion as of December 31, 2019.

 

Turning to user metrics, our average mobile daily active users (DAUs) were 20 million, down 2% year-over-year. The addition of Empires & Puzzles and Merge Magic! as well as audience growth in Merge Dragons! were more than offset by decreases in older mobile titles, Zynga Poker, chat games and Words With Friends. Our average mobile monthly active users (MAUs) were 66 million, down 13% year-over-year, primarily due to declines in Zynga Poker, chat games and older mobile titles, partially offset by the additions of Empires & Puzzles, Merge Magic! and Merge Dragons!. Average mobile daily bookings per average mobile DAU (ABPU) grew 72% year-over-year to $0.223.

3

 


Product

 

Our live services portfolio, anchored by our forever franchises, was the primary driver of our excellent Q4 results. In addition, Merge Magic! had a successful first full quarter and is on track to become our newest forever franchise.

 

We are driving strong, recurring growth across our live services through the steady release of innovative bold beats – new content and game play modes designed to engage and attract current, lapsed and new audiences.

 

CSR2 completed a solid quarter by releasing the exclusive new Lamborghini Sian and launching a six-event ‘Best of British’ collection series that featured prominent British hypercars such as the special McLaren Speedtail. In honor of Bugatti’s 110th anniversary, CSR2 also began a special event series that highlighted 24 different Bugatti cars including CSR2 exclusives La Voiture Noire and the Chiron Super Sport 300+. In Q1, we expect to introduce Elite Customs, a new feature providing players with deeper customization and upgrade options for more of their favorite cars.

 

Empires & Puzzles once again delivered its best revenue and bookings quarter driven by a strong event cadence that included holiday-themed challenges featuring seasonal characters such as Santa Claus and Mother North. Our strategy to self-publish Empires & Puzzles in Asia is also yielding positive results – the title continues to perform well in South Korea and Japan and is off to a great start in Taiwan. In Q1, Empires & Puzzles expects to introduce a number of new bold beats including an updated Costumes Wardrobe feature, Valor Pass – a brand-new battle pass system offering a seasonal subscription – as well as the long-awaited Season 3.

 

Merge Dragons! was a strong contributor in Q4 as players enjoyed Halloween, Pets and Thanksgiving themed events that featured unique items and special dragons. The title also introduced its first branded event in collaboration with Emmy Award-winning TV series Rick and Morty™. Over the coming quarters, Merge Dragons! will continue to enhance its Dragon Dens social feature and introduce more seasonal and fun-themed events.

 

Merge Magic! continued to build momentum in its first full quarter post-launch. Players are enjoying the wide variety of whimsical characters available to collect in the mysterious world of Mythia in addition to special events that featured new creatures such as Batcat, Sorcerer Raven, Wizool, Pacatour and Armomare. As we enter 2020, Merge Magic! is on track to become our newest forever franchise and we expect the title to steadily scale over the coming quarters.

 

Our Social Slots portfolio had another great quarter as Game of ThronesTM Slots Casino saw positive player reception to the introduction of a new exclusive high limit area, The Highgarden Club, in addition to social features that continue to drive player interaction. Hit It Rich! Slots and Wizard of Oz Slots also performed well in the quarter driven by a holiday themed ‘Quest for the Chest’ event and a new Journeys bold beat, respectively. Looking ahead, we expect to introduce innovative features across the portfolio to surprise and delight our Social Slots players.

 

Words With Friends achieved its best revenue and bookings quarter driven by strong player engagement and an exceptional advertising performance. In particular, existing features such as Solo Challenge coupled with the introduction of new features including Daily Word Play and Duels drove an increase in words played per DAU. At the beginning of Q4, we also featured a new month-long #WordsWithHope social campaign in support of Breast Cancer Awareness Month. Looking forward, we will continue to enhance favorite in-game features and add exciting new ways to play and progress.

 

Zynga Poker was a solid contributor in Q4. During the quarter, we updated a key component within the game – Event Challenges – and results from the first three events – King of Diamonds, Winter and New Years – have increased player engagement and monetization. Moving into 2020, we will continue to introduce more events and new features that provide players with additional ways to compete and celebrate wins within the game.

  


4

 


Multi-Year Growth Strategy

 

We are scaling Zynga through our multi-year growth strategy of: (1) growing our live services, (2) creating new forever franchises and (3) investing in new platforms, markets, and technology that have the ability to further accelerate our growth. We also see opportunities to enhance each of these efforts through acquisitions.

 

First, our strength in live services is the foundation of our multi-year growth strategy. As we enter 2020, we have a highly diversified live services portfolio anchored by our forever franchises – CSR Racing, Empires & Puzzles, Merge Dragons!, Words With Friends and Zynga Poker – as well as Merge Magic!. In addition, our Social Slots and Casual Cards games are ongoing key contributors to our overall portfolio. Our ambition is to drive strong, recurring growth from our live services through a steady cadence of innovative bold beats – new content and game play modes – that engage and attract current, lapsed and new audiences. All of this is fueled by our proven and scalable live services capabilities comprised of best-in-class product management, data science, user acquisition, advertising and platform relationships.

 

Second, our goal is to create new forever franchises that add to our live services portfolio. We have an exciting pipeline of new games in various stages of development. Currently, Puzzle Combat and FarmVille 3 are progressing well in test markets and our Harry PotterTM mobile title is on track to enter soft launch later this quarter. These new titles are built within our global studio organization by teams that have been together for years and have a proven track record of developing successful games. We maintain a rigorous approach to engineering hits, which includes careful testing in soft launch and relentless iteration with the goal of delivering long-term player engagement.

 

Third, we are growing our international revenue and bookings while also innovating and experimenting with new game genres and platforms. Specifically, our decision to self-publish Empires & Puzzles in Asia is driving positive results and we successfully launched Tiny Royale on Snapchat’s Snap Games platform. While our investments in these and other initiatives are still in early stages, we believe that they have the potential to increase our growth over the long term.

 

Lastly, we see opportunities to acquire talented teams and franchises to further accelerate our growth. Our proven integration approach enables teams to maintain their unique development cultures while leveraging Zynga’s highly scalable studio operations and publishing platform to grow faster together.

 

2020 Guidance

 

 

Revenue of $1.6 billion

 

Net increase in deferred revenue of $150 million

 

Bookings of $1.75 billion

 

Net loss of $130 million

 

Adjusted EBITDA of $200 million

 

In 2020, we expect to deliver $1.6 billion in revenue, up $278 million or 21% year-over-year, comprised of bookings of $1.75 billion, up $186 million or 12% year-over-year, and a net increase in deferred revenue of $150 million, down $92 million or 38% year-over-year.

 

Our guidance assumes that live services will drive the vast majority of our topline performance. We expect our forever franchises to collectively scale throughout 2020 and anticipate initial contributions from new games that are targeted to launch in the second half of the year.

 

In 2020, operating leverage will ultimately be a function of our live services performance, user pay versus advertising mix, the timing of new game launches and the level of marketing investment applied to scale our live services and new titles.

 

For the full year, we anticipate slight pressure on our gross margins due to a higher mix of user pay versus advertising. We expect to see modest improvement in operating leverage from R&D and G&A, which should be more than offset by increased marketing investments on both our live services and new game launches. Our guidance assumes that we will see higher operating margins in the second half of the year as greater topline scale provides stronger leverage from R&D and G&A, partially offset by launch marketing for new game launches.

5

 


Q1 Guidance

 

 

Revenue of $385 million

 

Net increase in deferred revenue of $15 million

 

Bookings of $400 million

 

Net loss of $26 million

 

Adjusted EBITDA of $57 million

 

In Q1, we expect $385 million in revenue, up $120 million or 45% year-over-year, with bookings of $400 million, up $41 million or 11% year-over-year. Our topline performance will be driven by our live services, which includes the year-over-year additions of Merge Magic! and Game of ThronesTM Slots Casino, as well as growth in Empires & Puzzles and Merge Dragons!. These gains will be partially offset by declines in older mobile and web titles, as well as year-over-year pressure on advertising as we lap prior advertising network optimizations.

 

We expect a net increase in deferred revenue of $15 million in Q1 2020 versus a net increase of $94 million in Q1 2019. The year-over-year change in this GAAP deferral represents a $79 million year-over-year increase in revenue, gross profit, net income and Adjusted EBITDA.

 

We expect gross margins to be up year-over-year primarily due to a lower net increase in deferred revenue in Q1 2020 versus Q1 2019, partially offset by the dilutive impact of a stronger user pay mix in Q1 2020 versus Q1 2019.

 

We expect our GAAP operating expenses as a percentage of revenue to decrease significantly year-over-year primarily due to a lower net increase in deferred revenue and contingent consideration expense in Q1 2020 versus Q1 2019.

 

Outside of these factors, we also expect modest improvements in year-over-year operating leverage in R&D and G&A, which should be more than offset by higher sales & marketing. In Q1 2020, we plan to ramp our marketing against our live services to maintain momentum over the coming quarters. In particular, we anticipate increased marketing expenses primarily for the year-over-year additions of Merge Magic! and Game of ThronesTM Slots Casino, as well as continued investment in high growth titles such as Empires & Puzzles and Merge Dragons!. In addition, while we are not anticipating the worldwide release of any new games in Q1 2020, we expect to spend modest test marketing on our titles in soft launch.

 

Closing

 

Mobile is the largest and fastest growing games platform and is constantly evolving with new devices, technologies and distribution that will expand the overall accessibility of games. As a leading mobile-first, free-to-play, live services company, Zynga is well positioned to capitalize on this opportunity through our highly diversified games portfolio and proven live services capabilities.

 

Our strong 2019 performance highlights our ability to scale Zynga through our multi-year growth strategy. We expect to build upon this momentum for continued growth in 2020 and are confident in our ability to generate more value for players and shareholders.

 

Sincerely,

 

Frank Gibeau
Chief Executive Officer

Ger Griffin
Chief Financial Officer


6

 


Forward-Looking Statements

 

This letter contains forward-looking statements, including those statements relating to our outlook for the full year and first quarter of 2020, including under the headings “Executive Summary,” “Multi-Year Growth Strategy,” “2020 Guidance” and “Q1 Guidance” and statements relating to, among other things: our operational performance and strategy, including our focus on live services, growth projections relating to our forever franchises, potential to launch new titles in the second half of 2020, potential to accelerate growth through existing efforts and investments in new platforms, markets and technology, and confidence in our ability to grow our business in 2020; our plans to enhance existing games with new features and updates, scale existing games, continue investment in high growth titles, soft launch our Harry PotterTM mobile title, increase marketing expenses and not launch any additional new titles in the first quarter of 2020; our expectation for Merge Magic! becoming a forever franchise; our performance expectations regarding our live services, advertising business, forever franchises and our older mobile and web titles; our opportunities to further scale the business through acquisitions; and our ability to achieve and expectations related to financial projections, including revenue, deferred revenue, bookings, income, adjusted EBITDA, contingent consideration accruals, operating expenses, operating leverage, operating results, operating cash flow and margins.

 

Forward-looking statements often include words such as “outlook,” “projected,” “intend,” “will,” “anticipate,” “believe,” “target,” “expect,” “positioned,” and statements in the future tense are generally forward-looking. The achievement or success of the matters covered by such forward-looking statements involves significant risks, uncertainties, and assumptions. Our actual results could differ materially from those predicted or implied and reported results should not be considered as an indication of our future performance. Undue reliance should not be placed on such forward-looking statements, which are based on information available to us on the date hereof. We assume no obligation to update such statements. More information about factors that could affect our operating results are described in greater detail in our public filings with the Securities and Exchange Commission (the “SEC”), copies of which may be obtained by visiting our Investor Relations web site at http://investor.zynga.com or the SEC's website at www.sec.gov.

 

In addition, the preliminary financial results set forth in this letter are estimates based on information currently available to us. While we believe these estimates are meaningful, they could differ from the actual amounts that we ultimately report in our Annual Report on Form 10-K for the quarter and fiscal year ended December 31, 2019. We assume no obligation and do not intend to update these estimates prior to filing our Annual Report on Form 10-K.


7

 


Key Operating Metrics

 

We manage our business by tracking several operating metrics: “Mobile DAUs,” which measure daily active users of our mobile games, “Mobile MAUs,” which measure monthly active users of our mobile games, and “Mobile ABPU,” which measures our average daily mobile bookings per average Mobile DAU, each of which is recorded and estimated by our internal analytics systems. We determine these operating metrics by using internal company data based on tracking of user account activity. We also use information provided by third parties, including third party network logins provided by platform providers, to help us track whether a player logged in under two or more different user accounts is the same individual. Overall, we believe that the amounts are reasonable estimates of our user base for the applicable period of measurement and that the methodologies we employ and update from time-to-time are reasonably based on our efforts to identify trends in player behavior. However, factors relating to user activity and systems and our ability to identify and detect attempts to replicate legitimate player activity may impact these numbers.

 

Further, in the first quarter of 2019, we updated our methodologies and approaches for identifying automated attempts to replicate legitimate player activity; when comparing year-over-year user metrics, the amounts reported for the three months ended December 31, 2018 have not been adjusted to reflect any subsequent updates to the reporting and estimation methodologies due to the potential variability in player behavior and other factors that can influence the various data sets. Assuming consistency in the player data profiles across periods, we estimate that the impact of new methodologies on the amounts previously reported during 2018 may reduce our average Mobile DAUs and average Mobile MAUs by approximately 5-10%. As a result, these audience metrics may not be comparable to prior periods.

 

Mobile DAUs. We define Mobile DAUs as the number of individuals who played one of our mobile games during a particular day. Average Mobile DAUs for a particular period is the average of the Mobile DAUs for each day during that period. Under this metric, an individual who plays two different mobile games on the same day is counted as two DAUs. We use information provided by third parties to help us identify individuals who play the same game to reduce this duplication. However, because we do not always have the third party network login data to link an individual who has played under multiple user accounts, a player may be counted as multiple Mobile DAUs. Specifically, Mobile DAUs incrementally include Merge Magic! and the games acquired from Gram Games in May 2018 and Small Giant Games in January 2019 and, accordingly, actual Mobile DAU may be lower than reported due to the potential duplication of these individuals. We use Mobile DAUs as a measure of audience engagement.

 

Mobile MAUs. We define Mobile MAUs as the number of individuals who played one of our mobile games in the 30-day period ending with the measurement date. Average Mobile MAUs for a particular period is the average of the Mobile MAUs at each month-end during that period. Under this metric, an individual who plays two different mobile games in the same 30-day period is counted as two Mobile MAUs. We use information provided by third parties to help us identify individuals who play the same game to reduce this duplication. However, because we do not always have the third party network login data to link an individual who has played under multiple user accounts, a player may be counted as multiple Mobile MAUs. Specifically, Mobile MAUs incrementally include Merge Magic! and the games acquired from Gram Games in May 2018 and Small Giant Games in January 2019 and, accordingly, actual Mobile MAU may be lower than reported due to the potential duplication of these individuals. We use Mobile MAUs as a measure of total game audience size.

 

Mobile ABPU. We define Mobile ABPU as our total bookings in a given period, divided by the number of days in that period, divided by, the average Mobile DAUs during the period. We believe that Mobile ABPU provides useful information to investors and others in understanding and evaluating our results in the same manner as management. We use Mobile ABPU as a measure of overall monetization across all of our players through the sale of virtual items and advertising.

 

Our business model around our social games is designed so that, as more players play our games, social interactions increase and the more valuable our games and our business become. All engaged players of our games help drive our bookings and, consequently, both online game revenue and advertising revenue. Virtual items are purchased by players who are socializing with, competing against or collaborating with other players, most of whom do not buy virtual items. Accordingly, we primarily focus on Mobile DAUs, Mobile MAUs and Mobile ABPU, which we believe collectively best reflect key audience metrics.


8

 


Non-GAAP Financial Measures

 

We have provided in this letter certain non-GAAP financial measures to supplement our consolidated financial statements prepared in accordance with U.S. GAAP (our “GAAP financial statements”). Management uses non-GAAP financial measures internally in analyzing our financial results to assess operational performance and liquidity. Our non-GAAP financial measures may be different from non-GAAP financial measures used by other companies.

 

The presentation of our non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, our GAAP financial statements. We believe that both management and investors benefit from referring to our non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. We believe our non-GAAP financial measures are useful to investors because they allow for greater transparency with respect to key financial measures we use in making operating decisions and because our investors and analysts use them to help assess the health of our business.

 

We have provided reconciliations of our non-GAAP financial measures used in this letter to the most directly comparable GAAP financial measures in the following tables. Because of the following limitations of our non-GAAP financial measures, you should consider the non-GAAP financial measures presented in this letter with our GAAP financial statements.

 

Key limitations of our non-GAAP financial measures include:

 

 

Bookings does not reflect that we defer and recognize online game revenue and revenue from certain advertising transactions over the estimated average playing period of payers for durable virtual items or as consumed for consumable virtual items;

 

 

Adjusted EBITDA does not include the impact of stock-based expense, acquisition-related transaction expenses, contingent consideration fair value adjustments, legal settlements and related legal expense, and restructuring expense;

 

 

Adjusted EBITDA does not reflect provisions for or benefits from income taxes and does not include other income (expense) net, which includes foreign exchange and asset disposition gains and losses, interest expense and interest income;

 

 

Adjusted EBITDA excludes depreciation and amortization of tangible and intangible assets. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and

 

 

Free cash flow is derived from net cash provided by operating activities less cash spent on capital expenditures.


9

 


ZYNGA INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

423,323

 

 

$

544,990

 

Short-term investments

 

 

938,173

 

 

 

36,232

 

Accounts receivable, net of allowance of $0 at December 31, 2019 and

      December 31, 2018

 

 

140,078

 

 

 

91,630

 

Restricted cash

 

 

30,006

 

 

 

35,006

 

Prepaid expenses

 

 

27,533

 

 

 

26,914

 

Other current assets

 

 

16,557

 

 

 

12,505

 

Total current assets

 

 

1,575,670

 

 

 

747,277

 

Long-term investments

 

 

175,300

 

 

 

 

Goodwill

 

 

1,460,933

 

 

 

934,187

 

Intangible assets, net

 

 

233,005

 

 

 

118,600

 

Property and equipment, net

 

 

25,826

 

 

 

266,557

 

Right-of-use assets

 

 

136,972

 

 

 

 

Prepaid expenses

 

 

37,815

 

 

 

30,774

 

Other non-current assets

 

 

15,093

 

 

 

49,308

 

Total assets

 

$

3,660,614

 

 

$

2,146,703

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

27,799

 

 

$

26,811

 

Income tax payable

 

 

649

 

 

 

4,895

 

Deferred revenue

 

 

432,962

 

 

 

191,299

 

Operating lease liabilities

 

 

15,753

 

 

 

 

Other current liabilities

 

 

314,805

 

 

 

156,829

 

Total current liabilities

 

 

791,968

 

 

 

479,834

 

Convertible senior notes, net

 

 

570,456

 

 

 

 

Deferred revenue

 

 

567

 

 

 

1,586

 

Deferred tax liabilities, net

 

 

33,479

 

 

 

16,087

 

Non-current operating lease liabilities

 

 

130,301

 

 

 

 

Other non-current liabilities

 

 

158,413

 

 

 

52,586

 

Total liabilities

 

 

1,685,184

 

 

 

550,093

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and additional paid-in capital

 

 

3,898,695

 

 

 

3,504,713

 

Accumulated other comprehensive income (loss)

 

 

(125,935

)

 

 

(118,439

)

Accumulated deficit

 

 

(1,797,330

)

 

 

(1,789,664

)

Total stockholders’ equity

 

 

1,975,430

 

 

 

1,596,610

 

Total liabilities and stockholders’ equity

 

$

3,660,614

 

 

$

2,146,703

 


10

 


ZYNGA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, unaudited)

 

 

Three Months Ended

 

 

Twelve Months Ended

 

 

 

December 31, 2019

 

 

September 30, 2019

 

 

December 31, 2018

 

 

December 31, 2019

 

 

 

 

December 31, 2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Online game

 

$

324,714

 

 

$

281,651

 

 

$

176,928

 

 

$

1,047,237

 

 

 

 

$

670,877

 

Advertising and other

 

 

79,749

 

 

 

63,642

 

 

 

71,760

 

 

 

274,422

 

 

 

 

 

236,331

 

Total revenue

 

 

404,463

 

 

 

345,293

 

 

 

248,688

 

 

 

1,321,659

 

 

 

 

 

907,208

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

141,715

 

 

 

133,859

 

 

 

82,842

 

 

 

524,089

 

 

 

 

 

304,658

 

Research and development

 

 

104,428

 

 

 

137,487

 

 

 

70,983

 

 

 

505,889

 

 

 

 

 

270,323

 

Sales and marketing

 

 

127,715

 

 

 

120,836

 

 

 

67,178

 

 

 

464,091

 

 

 

 

 

226,524

 

General and administrative

 

 

26,273

 

 

 

26,774

 

 

 

26,964

 

 

 

99,790

 

 

 

 

 

98,941

 

Total costs and expenses

 

 

400,131

 

 

 

418,956

 

 

 

247,967

 

 

 

1,593,859

 

 

 

 

 

900,446

 

Income (loss) from operations

 

 

4,332

 

 

 

(73,663

)

 

 

721

 

 

 

(272,200

)

 

 

 

 

6,762

 

Interest income

 

 

6,110

 

 

 

6,597

 

 

 

1,518

 

 

 

14,039

 

 

 

 

 

6,549

 

Interest expense

 

 

(6,813

)

 

 

(6,728

)

 

 

(107

)

 

 

(16,971

)

 

 

 

 

(255

)

Other income (expense), net

 

 

1,458

 

 

 

313,757

 

 

 

3,239

 

 

 

322,467

 

 

 

 

 

13,407

 

Income (loss) before income taxes

 

 

5,087

 

 

 

239,963

 

 

 

5,371

 

 

 

47,335

 

 

 

 

 

26,463

 

Provision for (benefit from) income taxes

 

 

8,587

 

 

 

9,880

 

 

 

4,812

 

 

 

5,410

 

 

 

 

 

11,006

 

Net income (loss)

 

$

(3,500

)

 

$

230,083

 

 

$

559

 

 

$

41,925

 

 

 

 

$

15,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.00

)

 

$

0.24

 

 

$

0.00

 

 

$

0.04

 

 

 

 

$

0.02

 

Diluted

 

$

(0.00

)

 

$

0.24

 

 

$

0.00

 

 

$

0.04

 

 

 

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares used to

   compute net income (loss) per share

   attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

947,633

 

 

 

943,350

 

 

 

860,673

 

 

 

938,709

 

 

 

 

 

862,460

 

Diluted

 

 

947,633

 

 

 

973,830

 

 

 

882,769

 

 

 

974,020

 

 

 

 

 

889,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense included

   in the above line items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

383

 

 

$

407

 

 

$

347

 

 

$

1,471

 

 

 

 

$

1,584

 

Research and development

 

 

11,067

 

 

 

12,029

 

 

 

11,124

 

 

 

47,049

 

 

 

 

 

42,151

 

Sales and marketing

 

 

2,824

 

 

 

3,046

 

 

 

2,213

 

 

 

11,277

 

 

 

 

 

8,495

 

General and administrative

 

 

5,741

 

 

 

5,857

 

 

 

4,319

 

 

 

21,685

 

 

 

 

 

16,009

 

Total stock-based compensation expense

 

$

20,015

 

 

$

21,339

 

 

$

18,003

 

 

$

81,482

 

 

 

 

$

68,239

 

 


11

 


ZYNGA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

 

 

Three Months Ended

 

 

Twelve Months Ended

 

 

 

December 31, 2019

 

 

September 30, 2019

 

 

December 31, 2018

 

 

December 31, 2019

 

 

December 31, 2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(3,500

)

 

$

230,083

 

 

$

559

 

 

$

41,925

 

 

$

15,457

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

19,627

 

 

 

19,069

 

 

 

12,695

 

 

 

79,445

 

 

 

42,057

 

Stock-based compensation expense

 

 

20,015

 

 

 

21,339

 

 

 

18,003

 

 

 

81,482

 

 

 

68,239

 

(Gain) loss from sale of building, investments and other

      assets and foreign currency, net

 

 

(420

)

 

 

(313,708

)

 

 

(234

)

 

 

(314,513

)

 

 

263

 

(Accretion) and amortization on marketable securities

 

 

(2,652

)

 

 

(1,846

)

 

 

(687

)

 

 

(4,883

)

 

 

(2,730

)

Noncash lease expense

 

 

4,394

 

 

 

3,612

 

 

 

 

 

 

11,167

 

 

 

 

Noncash interest expense

 

 

6,147

 

 

 

6,086

 

 

 

 

 

 

13,241

 

 

 

 

Noncash consideration received

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,494

)

Change in deferred income taxes and other

 

 

5,405

 

 

 

11,864

 

 

 

(1,557

)

 

 

(16,762

)

 

 

(3,366

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

9,890

 

 

 

(5,926

)

 

 

15,323

 

 

 

(22,546

)

 

 

22,625

 

Prepaid expenses and other assets

 

 

(18,566

)

 

 

(3,651

)

 

 

(3,584

)

 

 

(15,057

)

 

 

(18,417

)

Accounts payable

 

 

1,834

 

 

 

4,449

 

 

 

17,803

 

 

 

(1,005

)

 

 

(810

)

Deferred revenue

 

 

28,527

 

 

 

50,165

 

 

 

18,580

 

 

 

234,681

 

 

 

62,338

 

Income tax payable

 

 

(5,034

)

 

 

(5,202

)

 

 

3,064

 

 

 

(10,176

)

 

 

(2,116

)

Operating lease and other liabilities

 

 

28,382

 

 

 

52,281

 

 

 

9,965

 

 

 

185,829

 

 

 

(13,806

)

Net cash provided by (used in) operating activities

 

 

94,049

 

 

 

68,615

 

 

 

89,930

 

 

 

262,828

 

 

 

168,240

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(694,592

)

 

 

(749,533

)

 

 

(66,397

)

 

 

(1,568,216

)

 

 

(333,832

)

Maturities of investments

 

 

411,000

 

 

 

24,000

 

 

 

135,500

 

 

 

451,500

 

 

 

519,800

 

Sales of investments

 

 

29,962

 

 

 

9,941

 

 

 

79,169

 

 

 

44,890

 

 

 

89,168

 

Acquisition of property and equipment

 

 

(4,838

)

 

 

(8,841

)

 

 

(3,964

)

 

 

(23,637

)

 

 

(11,469

)

Proceeds from sale of building and other property and equipment, net

 

 

54

 

 

 

580,536

 

 

 

 

 

 

580,679

 

 

 

33

 

Business acquisitions, net of cash acquired and restricted cash held in escrow

 

 

 

 

 

(2,459

)

 

 

(365

)

 

 

(301,816

)

 

 

(222,440

)

Release of restricted cash escrow from business combinations

 

 

(25,000

)

 

 

 

 

 

 

 

 

(35,000

)

 

 

(22,800

)

Other investing activities, net

 

 

(266

)

 

 

 

 

 

146

 

 

 

(265

)

 

 

521

 

Net cash provided by (used in) investing activities

 

 

(283,680

)

 

 

(146,356

)

 

 

144,089

 

 

 

(851,865

)

 

 

18,981

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of debt, net

 

 

 

 

 

(530

)

 

 

99,100

 

 

 

672,152

 

 

 

99,100

 

Purchase of capped calls

 

 

 

 

 

 

 

 

 

 

 

(73,830

)

 

 

 

Repayment of debt

 

 

 

 

 

 

 

 

 

 

 

(101,364

)

 

 

 

Taxes paid related to net share settlement of stockholders' equity awards

 

 

(11,163

)

 

 

(10,808

)

 

 

(6,444

)

 

 

(49,590

)

 

 

(25,807

)

Repurchases of common stock

 

 

4,968

 

 

 

5,490

 

 

 

(17,760

)

 

 

 

 

 

(91,570

)

Proceeds from issuance of common stock

 

 

 

 

 

 

 

 

1,043

 

 

 

17,489

 

 

 

9,969

 

Acquisition-related contingent consideration payment

 

 

 

 

 

(12,900

)

 

 

 

 

 

(12,900

)

 

 

 

Other financing activities, net

 

 

 

 

 

 

 

 

 

 

 

(326

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(6,195

)

 

 

(18,748

)

 

 

75,939

 

 

 

451,631

 

 

 

(8,308

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

4,703

 

 

 

(5,408

)

 

 

(1,415

)

 

 

10,739

 

 

 

(4,594

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

 

(191,123

)

 

 

(101,897

)

 

 

308,543

 

 

 

(126,667

)

 

 

174,319

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

644,452

 

 

 

746,349

 

 

 

271,453

 

 

 

579,996

 

 

 

405,677

 

Cash, cash equivalents and restricted cash, end of period

 

$

453,329

 

 

$

644,452

 

 

$

579,996

 

 

$

453,329

 

 

$

579,996

 

 

12

 


ZYNGA INC.

RECONCILIATION OF GAAP TO NON-GAAP RESULTS

(In thousands, unaudited)

 

 

 

 

Three Months Ended

 

 

Twelve Months Ended

 

 

 

December 31, 2019

 

 

September 30, 2019

 

 

December 31, 2018

 

 

December 31, 2019

 

 

December 31, 2018

 

Reconciliation of Revenue to Bookings: Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

404,463

 

 

$

345,293

 

 

$

248,688

 

 

$

1,321,659

 

 

$

907,208

 

Change in deferred revenue

 

 

28,934

 

 

 

49,513

 

 

 

18,578

 

 

 

242,402

 

 

 

62,334

 

Bookings: Total

 

$

433,397

 

 

$

394,806