Zynga Inc (
plunged 38.56% to $3.12 in after hours trading, after the social
game maker reported a dismal second quarter of 2012. Zynga earned a
penny in the reported quarter compared with a nickel in the
However, accounting for stock based compensation expense of
$95.5 million, net one time charges and gains of $36.3 million and
tax effect of $4.2 million on these items, Zynga lost 8 cents per
share, much wider than the Zacks Consensus Estimate of a loss of 4
The downside in the quarterly result was attributed to product
mix shift from web based to mobile games (which are low in
monetization), delay in the launch of "The Ville" game (Zynga's new
Ville style game in eight months), sluggish performance from Draw
Something, significant changes in
) platform and higher product development costs.
Revenue increased 19.1% year over year to $332.5 million, but
was below the Zacks Consensus Estimate of $343.0 million. The
year-over-year growth was primarily driven by strong advertising
Advertising (12.3% of the total revenue) soared 169.9% year over
year to $41.0 million. Online game revenue (87.7% of the total
revenue) was up by a modest 10.4% year over year to $291.5 million.
Zynga launched 6 games (3 web based and 3 mobile) during the second
quarter. As of June 30, 2012, Zynga had the seven most played games
Bookings increased 9.8% year over year to $301.6 million in the
reported quarter. Daily Active Users (DAU) jumped 23.0% year over
year to 72 million, with mobile DAUs of 33 million at the end of
second quarter. Monthly Active Users (MAU) climbed 34.0% year over
year to 306 million.
However, this healthy revenue growth was fully offset by a steep
increase in operating costs & expenses, which spiked 39.4% year
over year to $371.0 million. Zynga continues to invest heavily in
product development, which is reflected in a 79.0% increase in
research & development expense in the quarter.
Sales & marketing expense climbed 47.1% year over year to
$56.1 million in the quarter. However, general & administrative
expense declined 10.0% year over year to $48.7 million, partially
offsetting the ramp up in expenses.
Adjusted EBITDA remained flat on a year-over-year basis to $65.3
million in the quarter. However, Zynga reported a net loss of $63.3
million in the quarter compared with net income of $3.1 million a
At the end of June 30, 2012, Zynga had cash and cash equivalents
(including marketable securities) of $1.22 billion compared with
$1.06 billion in the prior quarter. Zynga generated cash flow from
operating activities of $67.0 million versus $78.8 million in the
prior quarter. Fee cash outflow was $204.4 million as against
inflow of $43.8 million in the prior quarter.
Based on the dismal second quarter results, Zynga lowered its
expectations for the full year. The company now expects earnings in
the range of 4 cents to 9 cents (prior guidance was 23 cents to 29
cents) per share. Stock-based compensation expense is projected in
the range of $410 million to $430 million for the year.
Bookings are projected in the range of $1.15 billion to $1.225
billion (prior guidance was $1.425 billion to $1.5 billion).
Adjusted EBITDA is estimated in the range of $180.0 million to
$250.0 million (earlier guidance was $400.0 million to $450.0
million) for the full year. Capital expenditures are anticipated in
the range of $370.0 million to $380.0 million (down from $390
million to $410 million) for fiscal 2012.
Despite reporting a dismal quarter, we believe that Zynga is
well positioned to grow in the near term based on its solid
bookings, innovative product pipeline and its dominant position in
the social and mobile gaming sector. Moreover, Zynga's new network
"Zynga with Friends", is expected reduce its reliance on Facebook
over the long term.
However, higher spending on research & development,
technology and game development are expected to hurt profitability
going forward. Further, Zynga's low paid user base, over dependence
on Facebook and significant cannibalization effect on its earlier
games, as users quickly move on to the latest title in the "Ville"
series, may hurt its growth going forward. We also note that
barriers to entry are low in the social gaming market, and this
will attract new entrants, thereby further increasing competition
for Zynga over the long term.
Thus, we remain Neutral over the long term (6-12 months).
Currently, Zynga has a Zacks #3 Rank, which implies a Hold rating
over the short term (1-3 months).
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