ZYNGA INC. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Special Note Regarding Forward-Looking Statements" and "Risk Factors." The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof.
COVID-19 Update
The human costs of the COVID-19 pandemic have been extraordinary, straining global capabilities and forcing massive societal change. We remain focused on monitoring and assessing the COVID-19 pandemic including prioritizing the interests of our employees and players. The impact of the COVID-19 pandemic on our operations began to materialize towards the end of the first quarter of 2020. Specifically, beginning in late March, as more individuals throughout the world sheltered-in-place, we began experiencing higher levels of player engagement in our games from current, lapsed and new players, as well as a decline in advertising prices across the industry. As shelter-in-place restrictions began softening in certain areas around the world in late May and June, our Mobile DAUs started to return to levels consistent with the first quarter of 2020. Additionally, in mid-March, our global workforce transitioned to remote working as we closed our offices, without any material disruption to our day-to-day operations. Currently, our global offices remain closed and our global studios are operating remotely, while we continue to assess the impact of the pandemic on the health and safety of our employees. While we believe that we have been able to observe certain trends, we may not be able to determine the quantifiable impact specifically attributable to the COVID-19 pandemic on our results of operations and financial performance as of and three and six months endedJune 30, 2020 and for future periods. See further discussion below in "Key metrics", "Results of Operations" and Part II, Item 1A. "Risk Factors" included in this Quarterly Report on Form 10-Q of the possible impact of the COVID-19 pandemic on our business.
Overview
We are a leading provider of social game services with approximately 70 million
average mobile monthly active users ("MAUs") in the second quarter of 2020. We
develop, market and operate social games as live services played on mobile
platforms, such as Apple's iOS and Google's Android, and social networking
platforms, such as Facebook and Snapchat . Generally, all of our games are free
to play, and we generate substantially all of our revenue through the sale of
in-game virtual items ("online game revenue") and advertising services
("advertising revenue").
We are a pioneer and innovator of social games and a leader in making "play" a core activity primarily on mobile devices and social networking sites. Our objective is to become the worldwide leader in play by connecting the world through games.
Consistent with our free-to-play business model, a small portion of our players
have historically been payers. For example, in the second quarter of 2020, our
average mobile monthly unique payers ("MUPs") represented approximately 3.1% of
our average mobile monthly unique users ("MUUs") - for more information about
the uses, estimates and limitations of these and other operating metrics, please
see "Key Operating Metrics" below. Because the opportunity for social
interactions increases as the number of players increases, we believe that
maintaining and growing our overall number of players, including the number of
players who may not purchase virtual items, is important to the success of our
business. As a result, we believe that the number of players who choose to
purchase virtual items will continue to constitute a small portion of our
overall players.
Our top three online game revenue-generating games historically have contributed
to a significant portion of our revenue, though the games that represent our top
three online game revenue-generating games vary over time. Our top three online
game revenue-generating games accounted for 48%, 45% and 45% of our online game
revenue in 2019, 2018 and 2017, respectively. With respect to advertising and
other revenue, our Words With Friends games generated a substantial portion of
our advertising and other revenue in 2019, 2018 and 2017.
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Peak Acquisition
OnMay 31, 2020 , the Company executed a Share Sale and Purchase Agreement (the "Peak Agreement") with the shareholders of Peak Oyun YazIlIm ve Pazarlama Anonim ?irketi ("Peak"), aTurkey joint stock company, pursuant to which, effectiveJuly 1, 2020 (the "Closing Date"), Zynga acquired 100% of all issued and outstanding share capital (including all rights to acquire share capital) of Peak in exchange for consideration of (a)$832.4 million in cash (the "Cash Consideration"), (b)$120.0 million of cash that was deposited into an escrow account for a period of 18 months as security for general representations and warranties and (c) 116,564,861 shares of Zynga Class A common stock valued at$1.1 billion on the Closing Date based on the closing price of Zynga's Class A common stock of$9.76 per share. Pursuant to the Peak Agreement,$30.9 million of the Cash Consideration was retained by the Company for a period of 66 months following the Closing Date as security for tax-related indemnification obligations of the prior owners of Peak. On the Closing Date, Peak became a direct, wholly-owned subsidiary of Zynga, and our interest in Peak will be included in our financial information beginning in the third quarter of 2020. As discussed below under "Management's Discussion and Analysis of Financial Condition and Results of Operations- Factors Affecting Our Performance" and detailed further in our "Critical Accounting Policies-Revenue Recognition" which is incorporated by reference to our previously-filed Annual Report on Form 10-K for the year endedDecember 31, 2019 , mobile online game revenue is recognized ratably over the estimated average playing period of payers while platform fees and player acquisition costs are expensed as incurred. Accordingly, bookings from Peak's Toon Blast and Toy Blast will initially be deferred and recognized into revenue ratably over the estimated average playing period of payers - which we expect will result in a significant increase in deferred revenue in the second half of 2020.
Agreement to Acquire Rollic
OnAugust 4, 2020 , the Company executed a Share Sale and Purchase Agreement (the "Rollic Agreement") with the shareholders of Rollic Games Oyun YazIlIm ve Pazarlama Anonim ?irketi ("Rollic"), aTurkey joint stock company, pursuant to which the Company would acquire (i) at closing, 80% of all issued and outstanding share capital of Rollic in exchange for consideration of$168.0 million in cash, subject to closing adjustments and certain transaction expenses as set forth within the Rollic Agreement, and (ii) the remaining 20% of all issued and outstanding share capital of Rollic ratably for additional consideration during each of the three years following the closing (the "Step-In Period") payable annually based upon the achievement of specified bookings and profitability metrics by Rollic, with no maximum limit as to the cash consideration achievable, as set forth within the Rollic Agreement. Following the end of the three year Step-In Period, Rollic will be a direct, wholly-owned subsidiary of the Company. The closing is expected to occur onOctober 1, 2020 , subject to satisfaction or waiver of specified conditions. Rollic's portfolio of games are generally included in a genre of mobile games referred to as 'hyper-casual'. Hyper-casual games are generally typified by highly accessible game play mechanics with appeal to broad audiences globally. These games often generate substantially all of their revenue through advertising. We believe that Zynga's acquisition of Rollic will increase our portfolio of hyper-casual games and expand and diversify our advertising business. As detailed further in our "Critical Accounting Policies-Revenue Recognition" which is incorporated by reference to our previously-filed Annual Report on Form 10-K for the year endedDecember 31, 2019 , advertising revenue is generally recognized as advertisements are delivered to customers. Accordingly, bookings from Rollic's portfolio of games would predominantly be recognized as revenue during the period in which the advertising units are delivered.
How We Generate Revenue
We operate our social games as live services that allow players to play for
free. We generate revenue primarily from the sale of in-game virtual items and
advertising services. Revenue growth will continue to depend largely on our
ability to attract and retain players and more effectively monetize our player
base through the sale of in-game virtual items and advertising. We intend to do
this through the launch of new games, enhancements to current games and
expansion into new markets and distribution platforms.
Online game. We provide our players with the opportunity to purchase virtual
items that enhance their game-playing experience. We believe players choose to
pay for virtual items for the same reasons they are willing to pay for other
forms of entertainment - they enjoy the additional playing time or added
convenience, the ability to personalize their own game boards, the satisfaction
of leveling up and the opportunity for sharing creative expressions. We believe
players are more likely to purchase virtual items when they are connected to and
playing with their friends, whether those friends play for free or also purchase
virtual items.
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-------------------------------------------------------------------------------- In 2020, our business continued generating a significant percentage of revenue and bookings through mobile platforms. In the six months endedJune 30, 2020 , we estimate that 48% and 46% of our revenue and 48% and 47% of our bookings were generated on Apple and
We regularly review a number of metrics, including the following key financial and operating metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.
Key Financial Metrics
Revenue and Bookings. Bookings is a non-GAAP financial measure that is equal to revenue recognized plus or minus the change in deferred revenue during the period. We record the sale of virtual items as deferred revenue and then recognize that revenue over the estimated average playing period of payers or as the virtual items are consumed. Advertising sales consisting of certain branded virtual items and sponsorships are also initially recorded to deferred revenue and then recognized ratably over the estimated life of the branded virtual item, similar to online game revenue, or over the term of the advertising arrangement, depending on the nature of the agreement. Bookings is a fundamental top-line metric we use to manage our business, as we believe it is a useful indicator of the sales activity in a given period. Over the long-term, the factors impacting our revenue and bookings are the same. However, in the short term, there are factors that may cause revenue to exceed or be less than bookings in any period. We use revenue and bookings to evaluate the results of our operations, generate future operating plans and assess the performance of our company. While we believe that bookings are useful in evaluating our business, this information should be considered as supplemental in nature and is not intended to be considered in isolation of, as a substitute for, or as superior to, revenue recognized in accordance withU.S. GAAP. In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces its usefulness as a comparative measure.
The following table presents a reconciliation of total revenue to total bookings for each of the periods presented (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Reconciliation of Revenue to Bookings:
Revenue $ 451,688 $ 306,500 $ 855,455 $ 571,903
Change in deferred revenue 66,445 69,873 87,553 163,955
Bookings $ 518,133 $ 376,373 $ 943,008 $ 735,858 The following table presents a reconciliation of mobile revenue to mobile bookings for each of the periods presented (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Reconciliation of Mobile Revenue to
Mobile
Bookings:
Mobile revenue$ 432,634 $ 287,442 $ 819,623 $ 533,535 Change in mobile deferred revenue 65,646 70,855 87,156 166,160 Mobile bookings$ 498,280 $ 358,297 $ 906,779 $ 699,695 26
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Limitations of Bookings
Key limitations of bookings are:
• bookings do not reflect that we defer and recognize online game revenue and
revenue from certain advertising transactions over the estimated average
playing period of payers, the average life of branded virtual items, the
term of the advertising arrangement or as virtual items are consumed; and
• other companies, including companies in our industry, may calculate
bookings differently or not at all, which reduces their usefulness as a
comparative measure.
Because of these limitations, you should consider bookings along with other
financial performance measures, including revenue, net income (loss) and our
other financial results presented in accordance with
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, "Mobile MUUs," which measure
monthly unique users of our mobile games, "Mobile MUPs," which measure monthly
unique payers in our mobile games, and "Mobile ABPU," which measures our average
daily mobile bookings per average Mobile DAUs, 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. 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.
Mobile DAUs. We define Mobile DAUs as the number of individuals who played one
of our mobile games during a particular day. Under this metric, an individual
who plays two different mobile games on the same day is counted as two Mobile
DAUs. We use information provided by third parties to help us identify
individuals who play the same mobile 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. Average Mobile DAUs for a particular period is the
average of the Mobile DAUs for each day during that period. We use Mobile DAUs
as a measure of mobile 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. 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 mobile 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. Average Mobile MAUs
for a particular period is the average of the Mobile MAUs at each month-end
during that period. We use Mobile MAUs as a measure of total mobile game
audience size.
Mobile MUUs. We define Mobile MUUs as the number of individuals who played one
or more of our mobile games, which we were able to verify were played by the
same individual in the 30-day period ending with the measurement date. An
individual who plays more than one of our mobile games in a given 30-day period
would be counted as a single Mobile MUU to the extent we can verify that the
mobile games were played by the same individual. However, because we do not
always have the third party network login data necessary to link an individual
who has played under multiple user accounts in a given 30-day period, an
individual may be counted as multiple Mobile MUUs. Because many of our players
play more than one mobile game in a given 30-day period, Mobile MUUs are always
equal to or lower than Mobile MAUs in any given time period. Average Mobile MUUs
for a particular period is the average of the Mobile MUUs at each month end
during that period. We use Mobile MUUs as a measure of total audience reach
across our network of mobile games.
Mobile MUPs. We define Mobile MUPs as the number of individuals who made a
payment in a mobile game at least once during the applicable 30-day period
through a payment method for which we can quantify the number of individuals.
Mobile MUPs do not include individuals who use certain payment methods for which
we cannot quantify the number of unique payers. However, because we do not
always have the third party network login data necessary to link an individual
who has paid under multiple user accounts in a 30-day period, a player who has
paid using multiple user accounts may be counted as multiple Mobile MUPs. Mobile
MUPs are presented as an average of the three months in the applicable quarter.
We use Mobile MUPs as a measure of the number of individuals who made payments
across our network of mobile games during a 30-day period.
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Mobile ABPU. We define Mobile ABPU as our total mobile 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 mobile 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,
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 the aforementioned key operating metrics, which we believe collectively best
reflect key audience metrics.
Consistent with our focus on mobile gaming platforms, beginning with the first
quarter of 2019, we now report these audience-related metrics based only on
mobile platforms. We have ceased including our web-based games in these audience
metrics as a result of their decreasing significance as part of our overall
financial and operating results and the technical challenges resulting from
increased volumes of apparent player activity that we are unable to reliably
validate and de-duplicate, as these web-based games are generally more
susceptible than mobile platforms to attempts to replicate legitimate player
activity.
In order to provide our best estimates of actual player metrics, we continually
evaluate our methodologies including estimating audience metrics by applying
data science techniques to identify suspicious player behavior. While we devote
significant time and effort to developing player metrics, our estimates may not
accurately reflect the actual amount of players in a reported period and our
methodologies do not consistently identify all invalid traffic in prior
reporting periods.
While we are not be able to determine the quantifiable impact specifically
attributable to the COVID-19 pandemic on our audience and monetization metrics,
the collective increases during the three months ended June 30, 2020 generally
aligns with the timing of individuals sheltering-in-place throughout the world.
The table below shows average Mobile DAUs, Mobile MAUs, Mobile MUUs, Mobile MUPs
and Mobile ABPU for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(users and payers in millions)
Average Mobile DAUs(1) 22 21 21 22
Average Mobile MAUs(1) 70 70 69 71
Average Mobile MUUs(2) 47 41 45 42
Average Mobile MUPs(2) 1.5 1.2 1.4 1.3
Mobile ABPU $ 0.248 $ 0.188 $ 0.232 $ 0.179 (1) We do not have the third party network login data to link an individual
who has played under multiple user accounts for our mobile messenger
games, Merge Magic! and games acquired from
accordingly, actual Mobile DAU and Mobile MAU may be lower than reported
due to the potential duplication of these individuals.
(2) Excluded from Mobile MUUs and Mobile MUPs are players of our mobile
messenger games, Merge Magic! and games acquired from
Giant. These games are excluded to avoid potential double counting as our
systems are unable to distinguish whether a player of these games is also
a player of the Company's other games during the applicable time periods.
Average Mobile DAUs increased in the three months endedJune 30, 2020 when compared to the same period of the prior year, primarily driven by contributions from our casual card games, while average Mobile MAUs were flat as audience growth from our casual cards games and Merge Magic! was offset by declines in mobile messenger games and older titles. Average Mobile MUUs increased in the three months endedJune 30, 2020 compared to the same period of the prior year, primarily due to an increase in average Mobile MAUs from our casual card games. Average Mobile MUPs increased primarily due to an increase in payers in our casual card games and Words With Friends. Finally, Mobile ABPU increased due to an increase in mobile bookings. 28
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Other Metrics
Although our management primarily focuses on the operating metrics above, we
also monitor periodic trends in paying players of our games. The table below
shows average monthly unique mobile payer bookings, average Mobile MUPs and
monthly unique mobile payer bookings per Mobile MUP:
Three Months Ended June 30,
2020 2019Average monthly unique mobile payer bookings
(in millions)(1) $ 66 $
46
Average Mobile MUPs (in millions)(2) 1.5
1.2
Monthly unique mobile payer bookings per Mobile
MUP(3) $ 46 $ 38
(1) Average monthly unique mobile payer bookings represent the monthly average
amount of mobile bookings for the applicable quarter that we received
through payment methods for which we can quantify the number of unique
payers and excludes mobile bookings from certain payment methods for which
we cannot quantify the number of unique payers and bookings from
advertising and other. Accordingly, mobile bookings from our mobile
messenger games, Merge Magic! and our games acquired from
Small Giant are excluded.
(2) Excluded from Mobile MUPs are players of our mobile messenger games, Merge
Magic!, and games acquired from
are excluded to avoid potential double counting as our systems are unable
to distinguish whether a player of these games is also a player of the
Company's other games during the applicable time periods.
(3) Monthly unique mobile payer bookings per Mobile MUP is calculated by
dividing average monthly unique mobile payer bookings by average Mobile
MUPs.
When comparing the three months endedJune 30, 2020 to the same period of the prior year, average monthly unique mobile payer bookings increased primarily due to the contribution from Game of Thrones™Slots Casino , which launched in the second quarter of 2019, our casual card games,CSR Racing 2, Wizard of Oz Slots and several other games. Average monthly unique mobile payer bookings per Mobile MUP increased due to a greater increase in average monthly unique mobile payer bookings relative to the increase in average Mobile MUPs. Although we monitor our unique mobile payer metrics, we focus on monetization, including in-game advertising, of all of our players and not just those who are payers. Accordingly, we strive to enhance content and our players' game experience to increase our bookings and ABPU, which is a measure of overall monetization across all of our players through the sale of virtual items and advertising. Future growth in audience and engagement will depend on our ability to retain current players, attract new players, launch new games and expand into new markets and distribution platforms, and the success of our network. Our operating metrics may not correlate directly to quarterly revenue or bookings trends.
Factors Affecting Our Performance
Platform agreements. Our games are primarily distributed, marketed and promoted through third parties, primarilyApple's App Store and theGoogle Play Store . Virtual items for our games are purchased through the payment processing systems of these platform providers. We generate a significant portion of our revenue, bookings and players through the Apple andSlots Casino , Hit It Rich! Slots, Wizard of Oz Slots and Wonka's World of Candy, and we are developing new games using licensed intellectual property for Harry Potter™ and Star Wars™. While overall bookings within these games will benefit our revenue, a shift in the mix of our revenue towards such games using licensed intellectual property could decrease our gross margins. New market development. We are investing in new distribution channels, mobile platforms and international markets to expand our reach and grow our business. For example, we continue to expand our game publishing internationally, including the release of Empires & Puzzles inAsia during 2019. Our ability to be successful will depend on our ability to develop a successful mobile network, obtain new players and retain existing players on new and existing social networks and attract advertisers.
As we expand into new markets and distribution channels, we expect to incur headcount, marketing and other operating costs in advance of the associated revenue and bookings. Our financial performance will be impacted by our investment in these initiatives and their success.
Hiring and retaining key personnel. Our ability to compete depends in large part on our ability to hire and retain key talent and match that key talent to our current business needs. We are continually reviewing our hiring, learning and development and total rewards programs against best practices, with the goal of building and retaining world class teams.
Results of Operations
While we are not able to determine the quantifiable impact strictly attributable to the COVID-19 pandemic on our results of operations, the overall increase in certain aspects of our results during the three and six months endedJune 30, 2020 largely aligns with the timing of individuals sheltering-in-place throughout the world. Specifically, we experienced an increase in our average player monetization and mobile online game revenue, while also realizing lower average advertising prices per unit for advertising inventory within our games. Further, we recognized additional opportunities to invest in marketing across our portfolio of games, given the lower average prices per advertising unit. 30
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Revenue
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
(dollars in thousands) (dollars in thousands)
Online game:
Mobile $ 370,223 $ 223,779 65 % $ 698,894 $ 406,612 72 %
Other(1) 17,958 16,929 6 % 33,647 34,260 (2 )%
Online game total $ 388,181 $ 240,708 61 % $ 732,541 $ 440,872 66 %
Advertising and other:
Mobile $ 62,411 $ 63,663 (2 )% $ 120,729 $ 126,923 (5 )%
Other(1) 1,096 2,129 (49 )% 2,185 4,108 (47 )%
Advertising and other total $ 63,507 $ 65,792 (3 )% $ 122,914 $ 131,031 (6 )%
Total revenue $ 451,688 $ 306,500 47 % $ 855,455 $ 571,903 50 %
(1) Includes web for online game and web advertising revenue and other revenue
for advertising and other.
Three Months Ended
Total revenue increased$145.2 million in the three months endedJune 30, 2020 as compared to the same period of the prior year, while bookings increased$141.8 million in the three months endedJune 30, 2020 as compared to the same period of the prior year. Mobile online game revenue increased$146.5 million in the three months endedJune 30, 2020 as compared to the same period of the prior year and other online game revenue increased$1.0 million over the same period, resulting in a total online game revenue increase of$147.5 million . The increase in mobile online game revenue of$146.5 million was primarily attributable to increases in mobile revenue from Empires & Puzzles, Merge Dragons!, Wizard of Oz Slots, Zynga Poker and Willy Wonka Slots in the amounts of$63.4 million ,$27.2 million ,$7.1 million ,$5.5 million and$4.6 million , respectively, due overall increases in bookings in these games. These increases were further supplemented by increases in revenue from Merge Magic! and Game of Thrones™Slots Casino in the amounts of$24.0 million and$15.8 million as these games were launched inSeptember 2019 andMay 2019 , respectively. These increases were partially offset by a decrease in mobile online game revenue from Wonka's World of Candy in the amount of$2.6 million due to the overall decrease in bookings and audience metrics in the game. All other mobile games accounted for the remaining net increase of$1.5 million in mobile online game revenue. The increase in other online game revenue of$1.0 million was primarily attributable to increases in web revenue from Game of Thrones™Slots Casino and Hit It Rich! Slots in the amounts of$1.6 million and$0.5 million , respectively, due to the overall increase in bookings in these games. These increases were offset by a decrease in web revenue from FarmVille 2 in the amount of$1.4 million , due to the overall decline in bookings and audience metrics in the game. All other web games accounted for a net increase of$0.3 million . In the three months endedJune 30, 2020 , Empires & Puzzles and Merge Dragons! were our top online revenue-generating games and comprised 25% and 18%, respectively, of our online game revenue for the period. In the three months endedJune 30, 2019 , Merge Dragons!, Empires & Puzzles, Zynga Poker andCSR Racing 2 were our top online revenue-generating games and comprised 18%, 14%, 12% and 11%, respectively, of our online game revenue for the period. No other game generated more than 10% of online game revenue during either of these periods. Durable virtual items accounted for 73% of online game revenue in the three months endedJune 30, 2020 and 72% of online game revenue in the same period of the prior year. Consumable virtual items accounted for 27% of online game revenue in the three months endedJune 30, 2020 and 28% of online game revenue in the same period of the prior year. The estimated weighted average life of durable virtual items was ten months for the three months endedJune 30, 2020 and 2019. Mobile advertising revenue decreased$1.3 million in the three months endedJune 30, 2020 as compared to the same period of the prior year and other advertising and other revenue decreased$1.0 million , resulting in a total advertising and other decrease of$2.3 million . 31 -------------------------------------------------------------------------------- The decrease in mobile advertising revenue of$1.3 million was primarily due to a$1.1 million decrease in mobile in-game display ads, primarily driven by the conclusion of strategic display ads partnerships and a lower average price per advertising unit. The decrease in other advertising and other revenue of$1.0 million was primarily due to a decrease in web advertising revenue of$1.0 million .
International revenue as a percentage of total revenue was 39% and 37% in the
three months ended
Six Months Ended
Total revenue increased$283.6 million in the six months endedJune 30, 2020 as compared to the same period of the prior year, while bookings increased$207.2 million in the six months endedJune 30, 2020 as compared to the same period of the prior year. Mobile online game revenue increased$292.3 million in the six months endedJune 30, 2020 as compared to the same period of the prior year, while other online game revenue decreased$0.6 million over the same period, resulting in a total online game revenue increase of$291.7 million . The increase in mobile online game revenue of$292.3 million was primarily attributable to increases in mobile revenue from Empires & Puzzles, Merge Dragons! and Wizard of Oz Slots in the amounts of$139.7 million ,$73.8 million and$8.7 million , respectively, due to the overall increase in bookings in these games. These increases were further supplemented by increases in revenue from Merge Magic! and Game of Thrones™Slots Casino in the amounts of$38.5 million and$30.4 million as these games were launched inSeptember 2019 andMay 2019 , respectively. All other mobile games accounted for the remaining net increase of$1.2 million in mobile online game revenue. The decrease in other online game revenue of$0.6 million was primarily attributable to a decrease in revenue from FarmVille 2 in the amount of$3.6 million , due to the overall decline in bookings and audience metrics in the game. The decrease was partially offset by an increase in revenue from Game of Thrones™Slots Casino in the amount of$2.8 million as the game launched inMay 2019 . All other web games accounted for the remaining net increase of$0.2 million . In the six months endedJune 30, 2020 , Empires & Puzzles and Merge Dragons! were our top online revenue-generating games and comprised 25% and 20%, respectively, of our online game revenue for the period. In the six months endedJune 30, 2019 , Merge Dragons!, Zynga Poker,CSR Racing 2 and Empires & Puzzles were our top online revenue-generating games and comprised 16%, 13%, 12% and 10%, respectively, of our online game revenue for the period. No other game generated more than 10% of online game revenue during either of these periods. Durable virtual items accounted for 75% of online game revenue in the six months endedJune 30, 2020 and 69% of online game revenue in the same period of the prior year. Consumable virtual items accounted for 25% of online game revenue in the six months endedJune 30, 2020 and 31% of online game revenue in the same period of the prior year. The estimated weighted-average life of durable virtual items was ten months in the six months endedJune 30, 2020 , compared to nine months in the same period of the prior year. Mobile advertising revenue decreased$6.2 million in the six months endedJune 30, 2020 as compared to the same period of the prior year and other advertising and other revenue decreased$1.9 million , resulting in a total advertising and other decrease of$8.1 million . The decrease in mobile advertising revenue of$6.2 million was primarily due to a$9.9 million decrease in mobile in-game display ads, primarily driven by the conclusion of strategic display ads partnerships and a lower average price per advertising unit. The overall decrease in mobile advertising revenue was partially offset by an increase of$3.9 million in mobile in-game offers, engagement ads and other revenue, primarily driven by Merge Magic! and Empires & Puzzles. The decrease in other advertising and other revenue of$1.9 million was primarily due to a decrease in web advertising revenue of$1.9 million .
International revenue as a percentage of total revenue was 39% and 36% in the
six months ended
Cost of revenue
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
(dollars in thousands) (dollars in thousands)
Cost of revenue $ 179,208 $ 126,872 41 % $ 325,410 $ 248,515 31 %
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Three Months Ended
Cost of revenue increased$52.3 million in the three months endedJune 30, 2020 compared to the same period of the prior year. The increase was primarily attributable to increases of$42.6 million in payment processing fees from increased bookings generated from mobile payment processors,$8.0 million in royalty expense, which includes$4.2 million of accelerated expense in the second quarter of 2020 due to discontinuation of licensed IP, and$1.5 million in hosting costs.
Six Months Ended
Cost of revenue increased$76.9 million in the six months endedJune 30, 2020 compared to the same period of the prior year. The increase was primarily attributable to increases of$63.9 million in payment processing fees from increased bookings generated from mobile payment processors,$9.9 million in royalty expense, which includes$4.2 million of accelerated expense in the second quarter of 2020 due to discontinuation of licensed IP, and$2.9 million in hosting costs. Research and development Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change (dollars in thousands) (dollars in thousands) Research and development$ 227,952 $ 102,094 123 %$ 425,797 $ 263,974 61 %
Three Months Ended
Research and development expenses increased$125.9 million in the three months endedJune 30, 2020 compared to the same period of the prior year. The increase was primarily attributable to a net increase of$125.0 million in expense related to fair value adjustments associated with our contingent consideration obligations related to our Small Giant andGram Games acquisitions.
Six Months Ended
Research and development expenses increased$161.8 million in the six months endedJune 30, 2020 compared to the same period of the prior year. The increase was primarily attributable to a net increase of$159.5 million in expense related to fair value adjustments associated with our contingent consideration obligations related to our Small Giant andGram Games acquisitions and$2.3 million related to outside services. Sales and marketing Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change (dollars in thousands) (dollars in thousands) Sales and marketing$ 134,652 $ 113,529 19 %$ 257,823 $ 215,540 20 %
Three Months Ended
Sales and marketing expenses increased$21.1 million in the three months endedJune 30, 2020 compared to the same period of the prior year. The increase was primarily attributable to increases of$17.1 million in player acquisition costs, related to Merge Magic! and a net increase across our remaining portfolio of games. This increase was further supplemented by increases of$1.5 million in headcount-related expenses,$1.0 million in stock-based compensation and$0.8 million in overhead costs primarily related to rent expense for ourSan Francisco headquarters.
Six Months Ended
Sales and marketing expenses increased$42.3 million in the six months endedJune 30, 2020 compared to the same period of the prior year. The increase was primarily attributable to increases of$34.3 million in player acquisition costs, primarily related to Merge Magic! and a net increase across our remaining portfolio of games. This increase was further supplemented by increases of$2.9 million in headcount-related expenses,$2.2 million in overhead costs primarily related to rent expense for ourSan Francisco headquarters and$1.6 million in stock-based compensation. 33
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General and administrative
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
(dollars in thousands) (dollars in thousands)
General and administrative $ 39,195 $ 25,239 55 % $ 67,398 $ 46,743 44 %
Three Months Ended
General and administrative expenses increased$14.0 million in the three months endedJune 30, 2020 compared to the same period of the prior year. The increase was primarily attributable to increases of$5.5 million in acquisition related-transaction costs primarily related to the acquisition of Peak,$2.9 million in stock-based compensation,$2.6 million in legal expenses and$2.2 million in charitable donations.
Six Months Ended
General and administrative expenses increased$20.7 million in the six months endedJune 30, 2020 compared to the same period of the prior year. After excluding the one-time benefit from the$9.7 million net settlement of the derivative litigation received and recognized in the first quarter of 2019, general and administrative expenses increased$11.0 million , primarily due to increases of$4.9 million in stock-based compensation,$3.7 million in legal expenses and$2.2 million in charitable donations. Interest income Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change (dollars in thousands) (dollars in thousands) Interest income$ 3,598 $ 889 NM $
9,123$ 1,332 NM
Three Months Ended
Interest income increased
Six Months Ended
Interest income increased
Interest expense
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
(dollars in thousands) (dollars in thousands)
Interest expense $ 6,961 $ 2,167 221 % $ 13,916$ 3,430 NM
Three Months Ended
Interest expense increased$4.8 million in the three months endedJune 30, 2020 compared to the same period of the prior year. The increase was primarily attributable to an increase of$5.6 million in interest expense related to the Notes issued inJune 2019 , partially offset by a decrease of$0.8 million in interest expense related to our revolving credit facility that was repaid in the second quarter of 2019.
Six Months Ended
Interest expense increased$10.5 million in the six months endedJune 30, 2020 compared to the same period of the prior year. The increase was primarily attributable to an increase of$12.2 million in interest expense related to the Notes, partially offset by a decrease of$1.7 million in interest expense related to our revolving credit facility that was repaid in the second quarter of 2019. 34
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Other income (expense), net
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
(dollars in thousands) (dollars in thousands)
Other income (expense), net $ 571 $ 3,877 (85 )% $ (1,759 ) $ 7,252 NM
Three Months Ended
Other income (expense), net decreased$3.3 million in the three months endedJune 30, 2020 compared to the same period of the prior year. The decrease was primarily attributable to the elimination of$3.9 million of net rental income as a result of theBuilding Sale in the third quarter of 2019.
Six Months Ended
Other income (expense), net decreased$9.0 million in the six months endedJune 30, 2020 compared to the same period of the prior year. The decrease was primarily attributable to the elimination of$6.9 million of net rental income as a result of theBuilding Sale in the third quarter of 2019, as well as$1.2 million of foreign exchange transaction losses, primarily due to appreciation of theU.S. Dollar against the British Pound and Euro and a$0.7 million decrease in the fair value of our equity investments.
Provision for (benefit from) income taxes
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
(dollars in thousands) (dollars in thousands)
Provision for (benefit from)
income taxes $ 18,189 $ (2,805 ) NM $ 26,700 $ (13,057 ) NM
OnJune 7, 2019 , theU.S. Court of Appeals for the Ninth Circuit ("Ninth Circuit") issued an opinion inAltera Corp v. Commissioner (the "Altera matter"), reversing a prior2015 U.S. Tax Court decision. Specifically, the Ninth Circuit ruled in favor of the Commissioner, validatingU.S. Treasury regulations that require parties to a qualified cost-sharing arrangement to include stock-based compensation in the cost pool. OnJune 22, 2020 , theU.S. Supreme Court denied hearing a petition to review the Ninth Circuit's ruling. The Company is not a named party in the Altera matter, but as a result of the ruling, Zynga's prior tax position of not including stock-based compensation expenses in its cost share with its affiliates was revised. This resulted in additional current federal and state tax expense of$9.4 million recognized as a provision for income taxes during the three and six months endedJune 30, 2020 . The full tax liability associated with the Altera matter was partially offset by the use of deferred tax credit carryforward assets, which equally reduced the Company's valuation allowance against its deferred tax assets.
Three Months Ended
The provision for (benefit from) income taxes had a net change of$21.0 million , primarily attributable to a net increase in income tax expense from post-acquisition statutory operating profits from Small Giant andGram Games , as well as an increase in income tax expense related to the Altera matter. The net increase was partially offset by a decrease in tax expense associated with the Base Erosion and Anti-Abuse Tax provisions of theDecember 2017 enacted Tax Cuts and Jobs Act (the "2017 Tax Act").
Six Months Ended
The provision for (benefit from) income taxes had a net change of$39.8 million . The net change was primarily attributable to a net increase in income tax expense from post-acquisition statutory operating profits from Small Giant andGram Games , as well as an increase in income tax expense related to the Altera matter. The net increase was partially offset by a decrease in tax expense associated with the Base Erosion and Anti-Abuse Tax provisions of the 2017 Tax Act. 35
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