Zynga Inc (
once again delivered disappointing results in the first quarter of
2012. The social gaming company reported a loss of 10 cents per
share (including stock-based compensation expense) in the reported
quarters, which fell considerably short of the Zacks Consensus
earnings estimate of 5 cents.
Earnings (excluding stock-based compensation) declined 45.5%
year over year to 6 cents per share in the reported quarter. The
decline was primarily due to higher operating expenses, which fully
offset a healthy growth in the top line during the quarter.
Revenue increased 32.1% year over year to $321.0 million,
primarily driven by strong growth in advertising and online gaming
revenue. Advertising (8.8% of the total revenue) soared 117% year
over year to $28.2 million, while online game (91.2% of the total
revenue) shot up 27.4% from the year-ago quarter to $292.8 million.
Zynga's reported revenue was slightly ahead of Zacks Consensus
Estimate of $318.0 million.
Bookings increased 15.0% year over year to $329.2 million in the
reported quarter. Daily Active Users (DAU), Monthly Active Users
(MAU) and Average daily bookings per average DAU (ABPU) increased
6.0%, 24.0% and 8.0% respectively on a year-over-year basis. Zynga
launched 6 games during the first quarter. As of March 31, 2012,
Zynga had the eight most played games on Facebook.
However, operating expenses surged 96.7% year over year to
$406.6 million. This was primarily driven by a higher research
& development expense (up 160.4%) and general &
administrative expense (up 168.2%). Adjusted EBITDA decreased 22.7%
year over year to $86.8 million in the quarter, primarily due to
higher operating expense.
Zynga reported an operating loss of $85.6 million versus an
operating income of $36.2 million in the first quarter of 2011. Net
loss was $85.0 million in the quarter compared with net income of
$65.1 million a year ago.
At the end of March 31, 2012, Zynga had cash and cash
equivalents (including marketable securities) of $1.06 billion
compared with $1.92 billion in the prior quarter. Zynga generated
cash flow from operating activities of $78.8 million versus $164.0
million in the prior quarter. Fee cash flow was $43.8 million as
against $53.4 million in the prior quarter. The company's balance
sheet remained debt free at the end of the quarter.
For full year 2012, Zynga expects earnings in the range of 23
cents to 29 cents (prior guidance was 24 cents to 28 cents) per
share. Stock-based compensation expense is projected in the range
of $420 million to $445 million for the year. Currently, the Zacks
Consensus Estimate stands at 27 cents (including stock-based
Bookings are projected in the range of $1.425 billion to $1.5
billion (prior guidance was $1.35 billion to $1.45 billion).
Adjusted EBITDA is estimated in the range of $400.0 million to
$450.0 million (earlier guidance was $390 million to $440 million)
for the full year. Capital expenditures are anticipated in the
range of $390.0 million to $410.0 million (up from $140 million to
$160 million) for fiscal 2012.
Although Zynga reported a dismal first quarter, we believe that
the company 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, the
upcoming IPO of Facebook also bodes well for Zynga. Much of Zynga's
success is attributed to the huge popularity of Facebook, which
contributes a major portion of Zynga's gross revenues.
We believe that the acquisition of OMGPOP (March 2012) will not
only expand Zynga's mobile gaming portfolio, but will also lower
its dependency on Facebook. We also believe that the acquisition
will boost Zynga's competitive edge over
Electronic Arts Inc. (
, its closest rival in the mobile gaming market.
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 newest 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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