Dismal 2Q for Zynga, Shares Tumble - Analyst Blog

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Shares of Zynga Inc ( ZNGA ) 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 year-ago period.

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 cents.

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 Facebook ( FB ) platform and higher product development costs.

Quarter Details

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 revenue.

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 on Facebook.

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 year ago.

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.

Outlook

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.

Our Take

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: FB , ZNGA

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