Zynga Inc. (ZNGA) reported third-quarter loss (including stock-based compensation expenses) of 5 cents per share, which was in line with the Zacks Consensus Estimate.
Shares rose 6.78% (16 cents) to close at $2.52 on Nov 6, 2014 after the company reaffirmed its bottom line guidance for 2014.
Revenues
Zynga’s revenues plunged 12.8% from the year-ago quarter to $176.6 million and missed the Zacks Consensus Estimate of $181 million. The year over year decline in revenues was primarily attributable to the absence of new and innovative product pipeline.
The U.S. contributed 62% of the revenues, while the rest came from international markets. Online game revenues (78.9% of revenues) declined 20.1% year over year to $139.4 million. FarmVille 2, Zynga Poker and Hit It Rich accounted for 27%, 22% and 12% of online game revenues in the quarter, respectively. Advertising revenues (21.1% of revenues) increased 32% from the year-ago quarter to $37.2 million.
Zynga’s bookings increased 15.4% from the year-ago quarter to $175.5 million, slightly above the higher end of the guided range of $165–$175 million. Average daily bookings per average DAU (ABPU) increased 32.7% year over year to approximately 7 cents in the reported quarter.
Mobile bookings were up 111% year over year to $96.3 million. Bookings from the company’s core franchises including Casino, Words with Friends, Farmville and Racing grew 7% sequentially in the reported quarter.
Daily Active Users (DAUs) were down to 26 million compared with 30 million in the year-ago quarter. Monthly Active Users (MAUs) were 112 million compared with 133 million in the year-ago quarter.
Web DAUs and mobile DAUs were 8 million and 18 million in the reported quarter, respectively. Web MAUs and mobile MAUs, on the other hand, were 38 million and 78.4 million, respectively.
During the quarter, the company launched a new version of Zynga Poker, which includes a sophisticated design and feature set that inspires more competition, authenticity and social connections between players.
Zynga also launched NFL Showdown at the beginning of the NFL season with the intention of adding new features based on customer feedback and play patterns. The upcoming features will layer in more gameplay functionality that would appeal to a broader segment of players.
Margins
Total cost & expenses increased 14.9% year over year to $235.9 million. Sales & marketing, research & development as well as general & administrative expenses increased 1,440 basis points (bps), 1,670 bps and 500 bps, respectively, in the third quarter.
Adjusted EBITDA was $2 million compared with $6.9 million reported in the year-ago quarter. Operating loss was $59.3 million compared with $2.9 million in the year-ago quarter. Net loss was $44.8 million or 5 cents, flat year over year.
Balance Sheet & Cash Flow
At the end of the third quarter, Zynga had cash and cash equivalents (including marketable securities) of $1.14 billion compared with $1.15 billion in the previous quarter. Cash outflow from operations was $2 million, while free cash outflow was $5 million in the last quarter.
Outlook
For the fourth quarter of 2014, Zynga expects to report a loss of 6 cents to 4 cents per share. Currently, the Zacks Consensus Estimate is pegged at a loss of 4 cents per share. The company expects to generate revenues between $170 and $200 million.
Bookings for the fourth quarter are projected in the range of $183 to $213 million. Moreover, Zynga expects adjusted EBITDA in the range of $9 to $29 million.
For full-year 2014, Zynga forecasts bookings in the range of $695 to $725 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.
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 games on mobile, from which Zynga will benefit in the long run.
Although Zynga has launched a couple of new games in the third quarter like NFL Showdown and Zynga Poker, we believe they are not potent enough to drive significant top-line growth in the near term.
Further, Zynga’s focus on a slowing social gaming market and lack of new franchises pose serious concerns. Additionally, intensifying competition from the likes of King Digital (KING), Activision (ATVI) and Gluu Mobile (GLUU) remains a major headwind.
Currently, Zynga has a Zacks Rank #3 (Hold).
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