Zynga Disappoints Again - Analyst Blog

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Zynga Inc ( ZNGA ) 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.

Quarter Details

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.

Outlook

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 compensation).

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.

Our Take

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. ( EA ) , 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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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.



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