much-hyped fourth quarter results (first after the initial public
offering) failed to excite investors as the social gaming company
reported a loss of 56 cents per share (including stock-based
compensation expense), which were miles short of the Zacks
Consensus earnings estimate of 3 cents per share. Shares also
declined 17.8% to close at $11.80 on February 15, 2012.
Earnings (excluding stock-based compensation) declined 44.4%
year over year to 5 cents per share in the reported quarter. The
year-over-year decline was primarily on account of higher operating
expenses, which fully offset a healthy growth in the top line
during the quarter.
Revenue increased 59.0% year over year to $311.2 million,
primarily driven by strong growth in advertising and online gaming
revenue. Advertising (8.8% of the total revenue) surged 229% year
over year to $27.3 million, while online game (91.2% of total
revenue) shot up 51.4% from the year-ago quarter to $283.9 million.
International revenue grew at a faster rate than domestic revenue,
accounting for 37.0% of the total revenue compared with 33.0% in
the year-ago quarter.
Bookings increased 25.9% year over year to $306.5 million in the
reported quarter. Daily Active Users (DAU), Monthly Active Users
(MAU) and Average daily bookings per average DAU (ABPU) increased
13.0%, 38.0% and 11.0% respectively on a year-over-year basis.
Zynga launched 12 games during full year 2011. As of December 31,
2011, Zynga had the five most played games on Facebook.
Operating expenses were $797.7 million as compared with $124.3
million reported in the year-ago quarter. This was attributed to
higher general & administrative expense, research &
development expense and sales & marketing in the reported
quarter. Research & development surged 763.5% year over year to
$444.7 million, while sales & marketing spiked up 193.0% year
over year to $112.2 million in the quarter. Stock based
compensation was $530.0 million as against $10.2 million in the
Adjusted EBITDA decreased 34.0% year over year to $67.8 million
in the quarter. Zynga reported an operating loss of $486.6 million
versus an operating income of $71.5 million in the fourth quarter
of 2010. Net loss was $433.8 million in the quarter compared with
net income of $58.0 million a year ago.
At the end of December 31, 2011, Zynga had cash and cash
equivalents (including marketable securities) of $1.92 billion.
Zynga generated cash flow from operating activities of $164.0
million and free cash flow of $113.6 million in the reported
quarter. The balance sheet remained debt free at the end of
For full year 2012, Zynga expects earnings in the range of 24
cents to 28 cents per share. Stock-based compensation expense is
projected to be in the range of $400 million to $425 million for
the year. Currently, the Zacks Consensus Estimate stands at 22
cents (including stock-based compensation).
Bookings are projected in the range of $1.35 billion to $1.45
billion. Adjusted EBITDA is estimated in the range of $390 million
to $440 million for the full year. Capital expenditures are
projected in the range of $140 million to $160 million for full
We believe that Zynga is well positioned to grow over the long
term due to the staggering growth outlook for the social gaming
sector over the next couple of years. According to market research
firm eMarketer, social gaming is expected to reach approximately 62
million US internet users by the end of this year (one-fourth of
total online users). By 2013, eMarketer predicts this figure to
reach 73 million.
Most of the social games are free to play and generate revenue
primarily through the in-game sale of virtual goods. According to
market intelligence firm In-Stat, the worldwide market for virtual
goods was worth $9.0 billion in 2011 and is expected to reach $15.0
billion by 2014. Zynga is also expected to gain from the strong
outlook for mobile gaming with the number of US mobile gamers set
to rise 43.0% from 74 million in 2011 to 105 million in 2015.
We believe that an increase in the number of social gamers will
further boost spending on virtual goods, lead-generation offerings
and advertising over the long term. These trends will likely boost
Zynga's growth over the long term. 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.
However, higher spending on research and development, technology
and game development are expected to hurt profitability going
forward. Further, Zynga's overexposure to Facebook, low paid user
base 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.
Moreover, Zynga faces signficant competition from other
established players such as
Electronic Arts Inc (
. 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 long term (6-12 months). Despite a
lacklustre fourth quarter and management's cautious tone on a
sequential decline in bookings, we believe that Zynga is poised to
grow due to its strong product pipeline in the near term.
Currently, Zynga has a Zacks #2 Rank, which implies a Buy rating
over the short term (1-3 months).
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