Zynga (ZNGA) Down 2.9% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Zynga (ZNGA). Shares have lost about 2.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Zynga due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Zynga Incurs Loss in Q1 Despite Y/Y Top-Line Growth

Zynga reported a loss of 2 cents per share in first-quarter 2021 which was narrower than loss of 11 cents reported in the year-ago quarter.

Revenues surged 68.5% year over year to $680.3 million on broad-based strength in live services with stronger-than-anticipated performances by Rollic’s hyper-casual portfolio, Toon Blast, Harry Potter: Puzzles & Spells and Toy Blast.

The Zacks Consensus Estimate for earnings and revenues was pegged at 9 cents per share and $686 million, respectively.

Total bookings came in at $720 million, up 69.4% year on year on strong mobile bookings. The consensus mark for bookings was pegged at $687 million.

Quarter Details

Zynga’s online game or user pay revenues (81.9% of total revenues) jumped 61.7% year over year to $557 million.

In addition, Advertising revenues (18.1% of total revenues) and advertisement bookings (17.1% of total bookings) climbed 107.8% year over year to $123.2 million, each. This upswing in advertising revenues was driven by the year-over-year addition of Rollic’s hyper-casual portfolio as well as strong advertising yields in the period.

Mobile revenues (97.1% of total revenues) and mobile bookings increased 11% and 71.3% year over year to $660.7 million and $699.6 million, respectively. These increases were driven by robust live services performance.

On a geographic basis, revenues from the United States (60.6% of total revenues) grew 69.5% year over year to $412 million.

Also, International revenues (39.4% of total revenues) surged 66.5% to $268 million on impressive growth in Asia.

User Base Details

In the first quarter, user pay bookings were $596 million, up 63% year over year.

Zynga’s average mobile daily active users (DAUs) surged 85% year over year to 38 million.

Further, average mobile monthly active users (MAUs) soared 139% year over year to 164 million in the reported quarter.

The solid uptick in user count was primarily driven by contributions from Toon Blast, Toy Blast and Rollic’s hyper-casual game portfolio.

Average mobile daily bookings per average mobile DAU (ABPU) declined 6% year over year to 20 cents.

Operating Details

GAAP gross margin, as a percentage of revenues, declined to 62% from the year-ago quarter’s 64% on higher net increase in deferred revenues and amortization of acquired intangible assets.

Non-GAAP operating expenses (52% of total revenues) flared up 69.7% year over year to $353.6 million in the reported quarter, chiefly on higher marketing investments.

Non-GAAP research & development (R&D), general & administrative (G&A) and sales & marketing (S&M) expenses shot up 23.9%, 23.8% and 104.2%, year over year, to $83 million, $26 million and $245 million, respectively.

Adjusted EBITDA came in at $123.1 million compared with the year-earlier quarter’s $68.5 million.

Balance Sheet

As of Mar 31, 2021, Zynga had cash, cash equivalents & short-term investments of $1.36 billion compared with $1.57 billion as of Dec 31, 2020.

Cash flow used by operating activities in first-quarter 2021 was $163.7 million compared with $205.9 million provided in fourth-quarter 2020. Free cash flow was ($165.4) million in the first quarter compared with the previous quarter’s $203.2 million.

Guidance

For second-quarter 2021, Zynga expects revenues of $675 million and bookings of $710 million, up 49% and 37% year over year, respectively. Adjusted EBITDA is projected at $115 million, while loss is expected to be 3 cents per share.

For 2021, the company expects to deliver revenues of $2.7 billion, indicating growth of 37% year over year. Bookings are expected at $2.9 billion, indicating growth of 28% year over year.

Adjusted EBITDA is estimated at $450 million and loss is predicted to be 12 cents per share.

The company expects continued momentum in the live services portfolio along with contributions from game launches will be a major growth driver. Also, steady demand for Harry Potter: Puzzles & Spells as well as Rollic’s hyper-casual games is anticipated to boost player engagement for Zynga’s live services platform.

However, per the company, declines in older mobile and web game users might partially offset revenue growth in 2021.

Note: The EPS data mentioned in the text of this section differs from the rest of report due to the difference in calculation or consideration of one-time items.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted -19.87% due to these changes.

VGM Scores

Currently, Zynga has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Zynga has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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