Zynga Loss Narrower than Expected, Revenues Miss; Cuts View - Analyst Blog

Zynga Inc. ( ZNGA ) reported second-quarter loss (including stock-based compensation expenses) of 2 cents per share, a penny narrower than the Zacks Consensus Estimate of a loss of 3 cents.

However, share price fell 7.2% to $2.71 in after-hours trading, after management revised down its full-year guidance and postponed the launch of Zynga Poker and the new Words with Friends.


Zynga's revenues plunged 33.6% from the year-ago quarter to $153.2 million. However, revenues missed the Zacks Consensus Estimate of $136.0 million. The U.S. contributed 60% of the revenues, while the rest came from international markets.

Zynga's bookings decreased 6.7% from the year-ago quarter to $175.1 million, in line with the lower end of the guided range of $175-$195 million. Average daily bookings per average Daily active user DAU (ABPU) increased 28% year over year to approximately 7 cents in the reported quarter.

For the first time in Zynga's history, mobile bookings surpassed web bookings. Mobile bookings were up 76% year over year to 88 million. Web bookings were down 37% on a year-over-year basis to 86 million. Facebook ( FB ) related bookings accounted for 45% of the total bookings in the second quarter.

Online game revenues (85.5% of revenues) declined 35.6% year over year to $131 million. FarmVille 2 and Zynga Poker accounted for a respective of 32% and 24% of online game revenues in the quarter.

Advertising revenues (14.5% of revenues) declined 18.8% from the year-ago quarter to $22.3 million. Mobile represented 76% of ad bookings during the quarter. The company renewed and expanded partnerships with NBC, Fox, Progressive, Clorox and others.

Daily Active Users (DAU) was down to 29 million compared with 39 million in the year-ago quarter. Monthly Active Users (MAU) was 130 million compared with 187 million in the year-ago quarter.

Web DAUs and mobile DAUs were 10.2 million and 18.4 million in the reported quarter, respectively. Web MAUs and mobile MAUs, on the other hand, were 53.8 million and 75.8 million, respectively.

During the quarter, the company launched FarmVille 2: Country Escape in 16 languages on Apple's ( AAPL ) iOS and Google's ( GOOGL ) Android platforms. At launch itself, the game received Apple App Store's "Editor Choice" award featuring in 155 different nations and Google Play top-tier featuring in 71 nations.

Zynga also launched Duck Dynasty Slots on iPhone, iPad and Google Play in June. NaturalMotion (acquired by Zynga in the first quarter) expanded CSR Classics and Clumsy Ninja to additional platforms by launching on Google Play. It also released Morpheme 6 and Morpheme 6 with Euphoria as the next generation of its innovative animation system.

Zynga announced that it is entering the Sports category under a new brand called Zynga Sports 365. The company has signed license deals with golf icon Tiger Woods and National Football League. Zynga is developing a mobile football game called NFL Showdown. The company will launch a Tiger Woods golf game in 2015.

Zynga recently entered into multi-year license agreement with Warner Bros. Interactive Entertainment to develop Looney Tunes mobile game, which it expects to release before the holiday season.


Total cost & expenses decreased 16% year over year to $219.4 million. Although sales & marketing increased 33.5% year over year, it was fully offset by 24.6% decline in research & development and 26.3% decrease in general & administrative expense. Headcount and technology spending also declined in the quarter.

Adjusted EBITDA was $14.5 million up from $8.3 million reported in the year-ago quarter. Operating loss was $66.2 million compared with $30.4 million in the year-ago quarter. Net loss was $18.3 million or 2 cents compared with a loss of $31.5 million or 4 cents in the year-ago quarter.

Balance Sheet & Cash Flow

At the end of the second quarter, Zynga had cash and cash equivalents (including marketable securities) of $727.2 million compared with $1.14 billion in the previous quarter. Cash flow from operations was $17.8 million, while free cash flow was $14 million in the last quarter.


For the third quarter of 2014, Zynga expects to report in the range of breakeven to earnings of 1 cent per share. Currently, the Zacks Consensus Estimate is pegged at a loss of 3 cents per share. The company expects to generate revenues between $160 and $170 million.

Bookings for the third quarter are projected in the range of $165 to $175 million. Moreover, Zynga expects adjusted EBITDA in the range of $0 to $5 million.

For full-year 2014, Zynga forecasts bookings in the range of $695 to $725 million (down from $770 to $810 million). Adjusted EBITDA is expected in the range of $40 to $60 million (down from $70.0 to $100.0 million). Non-GAAP earnings are expected in the range of negative 1 cent to breakeven for the full year.

Our Take

We believe that Zynga has significant growth opportunities from mobile gaming, as reflected by its expanding mobile bookings. The company's decision to enter the sports and runner category will expand its user base in the long run.

However, postponement of Zynga Poker and Words with Friends will remain an overhang on the stock price in the near term. Further, enhanced investments will negatively impact profitability in the rest of 2014.

Nevertheless, we believe that Zynga is well positioned to grow in 2015 due its strong product pipeline compared to other mobile game developers like King Digital and Glu Mobile. Zynga's policy of diversifying its product portfolio through NFL Showdown and in-development golf game is positive over the long term.

Zynga's decision to move resources from slow-growing social-games to the popular sports category is prudent. We believe that there is significant pent-up demand for good quality sports game on mobile, from which Zynga will benefit in the long run.

Currently, Zynga sports a Zacks Rank #1 (Strong Buy).

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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 Nasdaq, Inc.

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

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