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Lower-Than-Expected Loss at Zynga

Zacks Equity Research

Zynga Inc. (ZNGA) reported first quarter loss per share (including stock-based compensation expenses) of 3 cents, which was narrower than the Zacks Consensus Estimate of a loss of 7 cents.

On a non-GAAP basis, the company earned 1 cent compared with 6 cents per share in the year-ago quarter.

Quarter Details

Zynga’s non-GAAP bookings, including deferred revenue of ($33.8) million, was down 30.2% from the previous-year quarter to $229.8 million but comfortably beat the Zacks Consensus Estimate of $221.0 million. Zynga’s total revenue came in at $263.6 million, down 17.9% from the year-ago quarter.

Advertising revenues (13.0% of total revenue) jumped 20.7% year over year to $34.0 million. Companies such as Honda (HMC) and NBC Universal renewed their advertising deals with the social game maker.

Online game revenues plummeted 21.6% year over year to $229.6 million. During the quarter, Zynga launched its real money game in the UK in partnership with bwin.party.

The company’s mobile games performed exceedingly well as mobile bookings grew from 21% from the previous year. Facebook (FB) related bookings comprised 76% of total bookings.

Daily Active Users (“DAU”) were down 21% year over year and 8% sequentially to 52 million. Monthly Active Users (“MAU”) also declined 13% year over year and 15% quarter over quarter to 253 million.

During the quarter, Zynga launched 2 new games (1 each for mobile and web-based platform).

The company undertook several cost-cutting initiatives, which included spending cuts in technology outside services, labor costs, and marketing. These resulted in a 34.0% decrease in costs to $268.5 million.

Adjusted EBITDA was $28.7 million in the quarter, down from $86.8 million reported in the year-ago quarter. Zynga reported non-GAAP profit of $9.1 million in the quarter compared with net income of $47.0 million a year ago. However, including stock-based compensation of $29.9 million, net loss came in at $20.6 million.

At the end of first quarter, Zynga had cash and cash equivalents (including marketable securities) of $1.27 billion compared with $1.28 billion in the previous quarter. Zynga generated cash flow from operating activities of $26.4 million versus $19.8 million in the previous quarter. Free cash flow was $23.0 million.


For the second quarter of 2013, Zynga expects non-GAAP loss per share in the range of 4 cents to 3 cents per share. The company expects to generate revenues between $225 million and $235 million. Bookings for the second quarter are projected in the range of $180 million-$190 million.

Moreover, Zynga expects adjusted EBITDA to be in the range of ($10) million to break even in the second quarter. For fiscal 2013, Zynga expects adjusted EBITDA margin to be between 0% and 10%. Capital expenditure is expected to be $35 million in 2013.

The company expects second quarter bookings to decline due to lower-than-expected demand for the web based games.


We believe that Zynga is well positioned to grow in the near term based on its innovative product pipeline and its dominant position in the social and mobile gaming sector. The company’s expansion in the advertising space is another positive for the company. Zynga’s initiatives to expand in the real money casino and poker games across different platforms should act in its favor. However, we believe that competition from International Game Technology ( '>IGT )  could be a possible headwind.

Moreover, shareholder-friendly initiatives such as share buyback and cost reduction program will drive the stock in the near term.

However, 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.

Currently, Zynga has a Zacks Rank #3 (Hold).

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