Revised Zynga Estimates To $3.20 After Earnings

by Trefis Team
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Zynga (NASDAQ:ZNGA) announced its Q3 2012 results on October 24 and also announced restructuring efforts the previous day. In a bid to promote its successful games while staying profitable and cutting costs, the social gaming giant announced that it will shut down its Boston office with plans to close its Japan and UK studios. The company also laid off 2/3 of its Austin office including the teams running The Ville and Bingo games. Revenue for Q3 was $317 million, up 3% y-o-y, while bookings fell 11% y-o-y to $256 million. EPS was $-0.07, down from flat in the same quarter last year. Non-GAAP EPS was flat, down from $0.04 last year. [1]

Zynga is still the largest social gaming company in the world with over 30o million monthly active users and generates most of its revenue from in-game virtual goods sales and advertising on multiple platforms like Facebook, Google+, iOS, Android and others. Zynga competes primarily with Electronic Arts (NASDAQ:EA), Playdom which was recently acquired by Disney (NYSE:DIS) and other independent social gaming studios.

Below we highlight some of the key developments in the previous quarter and what to expect from the company in the near future.

Check out our complete analysis of Zynga

Zynga’s New Games Managed To Increase User Engagement

Despite a challenging quarter, the company managed to release two successful games: FarmVille 2 and ChefVille which became the biggest drivers for its user base. Daily active users (DAUs) increased 10% y-o-y, from 54 million to 60 million users while monthly active users (MAUs) increased 37% y-o-y, from 227 million to 311 million. It is managing to attract new users and monthly unique users (MUUs) increased 17% y-o-y, from 152 million to 177 million.

Zynga Losing Paying Users

As the social gaming arena gets crowded, a drop in pricing power is expected and this is already happening as evidenced by the drop in bookings and the number of payers. Average daily bookings per average DAU (ABPU) decreased from $0.058 to $0.047 y-o-y, which is a drop of 19%, while Monthly Unique Payers (MUPs) decreased from 4.1 million to 3.0 million, which is a drop of 28% q-o-q, largely driven by Draw Something. These results reflect the weakness of certain games and include an estimated impairment charge between $85 million and $95 million related to intangible assets acquired in connection with the purchase of game maker OMGPOP.

Cost Reduction, Restructuring And Share Repurchase

The company expects to reduce costs by phasing out older games and trimming the work force. This will generate pre-tax savings in Q4 in the range of $15 to $20 million, excluding an estimated $8 to $12 million pre-tax restructuring charge in the same period. The plan will involve a reduction in workforce of approximately 150 employees or approximately 5% of its current workforce. It will also implement additional cost reduction measures, including steps to rationalize its product pipeline, reduce marketing and technology expenditures and consolidate offices. Its Board of Directors has also authorized a share repurchase program, and the company is now authorized to repurchase up to $200 million of its outstanding Class A common stock.

Outlook For The Rest Of 2012

Raising its lower end of the estimates, Zynga guided that bookings will be in the range of $1.09 billion to $1.1 billion while adjusted EBITDA will be in the range of $152 million to $162 million for 2012. Full year non-GAAP EPS is expected to be in the range of $0.02 to $0.03, based on a full year share count of approximately 830 million shares. We expect that reducing costs and concentrating on its top games will help its results in the next few quarters.

We have a $ 3.19 Trefis price estimate for Zynga, which stands significantly 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.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Zynga SEC Filings, www.sec.gov, 24 Oct 2012 []
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