Zynga (NASDAQ:ZNGA) reported its earnings for Q2 2012 on July 25 with revenue of $332 million, up 19% year-over-year. However, its bookings are down to $302 million, which is nearly 10% lower than its bookings in Q1. It continued to launch new games this quarter, but most of its user growth came from acquisitions like OMGPOP. It reported an average of 306 million monthly active users and 72 million daily active users in Q2 2012, but the bookings per user actually declined 27% year-over-year. The stock price has tanked nearly 40% following its earnings release over concerns related to slowing revenue growth and a larger loss than expected. The company also lowered its outlook for Q3 2012.  
New games continue to be the driving force; focus on mobile
Zynga launched six new games in Q2 – three web-based games and three mobile games – with most of them showing modest success. In the last couple of quarters, Zynga’s older games have continued to lose users at a much higher rate than before, which has made Zynga’s user growth ever more dependent on its new games. Zynga stated that it is due to Facebook‘s (NASDAQ:FB) new changes which favor new games over old games, so this decline will possibly continue, going forward.
As the competition in the space increases, Zynga will be hard pressed to continue to launch new games in order to maintain its revenue growth, and there is a high chance that it will falter along the way.
We currently forecast that Zynga will eventually find its way and will be able to continue adding new users by rolling out new games in coming years. Zynga has a massive scale, which is its largest competitive advantage over others and gives it the capability to quickly market its new games to its existing user base, gaining users faster than any other company.
Zynga with Friends
We expect Zynga to focus on its own platform allowing other game developers to leverage its massive reach as well as cloud platform to run its games and market them to its existing audience, charging a percentage cut of revenues. It also launched the Zynga with Friends network, which aims to provide a unified platform to bring together players from various platforms like Facebook, iOS, Android and others. This could enable Zynga to monetize its massive reach on the web and mobile platforms without needing to continue to launch new games to make money.
While Zynga has grown a lot on mobile, reaching nearly 33 million daily active users across all platforms, mobile is proving hard to monetize. Unless Zynga is able to figure out a way to increase ARPUs from mobile games, it will not be able to boost its revenues much despite impressive user growth.
Real Money Gambling
Zynga recently confirmed its intentions to enter the online gambling space, with plans to leverage its large existing user base for games like Poker, Slots and Bingo to enable real money gambling. In the earnings call, Mark Pincus confirmed that Zynga will launch its online gambling initiatives internationally with real money gambling options in the first half of 2013.
It is apparently looking to partner with casino firms and looking at some possible acquisitions to get its online gambling venture off the ground and get some help with the regulatory hurdles. If it succeeds, which is quite likely, it could become one of Zynga’s most profitable businesses and generate more revenue than all its other games combined.
We have a revised $6 Trefis price estimate for Zynga, which stands well above its market price. We expect Zynga’s new platform and gaming network and online gambling initiatives to account for much of its future earnings potential.Notes:
- Zynga Reports Second Quarter 2012 Financial Results, SEC [↩]
- Zynga Cuts Forecast, Stock Falls 40%, BusinessInsider [↩]