Zynga (NASDAQ:ZNGA) recently released its Q4 2013 results and the trends were more or less the same. The revenue and bookings declined compared to Q4 2012, as well as sequentially. The numbers of DAU’s (daily active users) and MAUs (monthly active users) were also down. Zynga continued to attract fewer players to its current games and new launches failed to offset these decreases with additional users. In all fairness, this is a rebuilding phase for Zynga and the outlook matters more as compared to its current performance. Indeed, management discussed a number of positive initiatives and the stock jumped almost 25% following the earnings call. Zynga announced the acquisition of successful mobile gaming company NaturalMotion, to expand its gaming roster to more genres. The company also mentioned that it expects to return to profit in 2014, as it continues to focus on mobile gaming and cuts cost by downsizing.
We are in the process of reviewing our price estimate for Zynga in the light of recent earnings, and will have an update ready soon. Our current price estimate for the company stands at $3.33, implying a discount of about 25% to the market price.
Several Operating Metrics Continued The Unfavorable Trend
Zynga faced a sharp decline in several of its operating metrics in Q4 2013, including the number of monthly active users, the number of daily active users and revenues. This resulted from the reduced popularity of its games, strained ties with Facebook (NASDAQ:FB) and closure of some under-performing titles in the second quarter. Although there were some new launches during recent months, they failed to generate sufficient traffic, and these declining metrics were widely expected.
Revenues were down 43% year over year and 13% sequentially.  This was accompanied by a decline of similar magnitude in web bookings, with monthly active users (MAUs) falling by a massive 62% compared to the fourth quarter of 2012.  The sequential decline in MAUs stood at 16%, which suggests that average revenue per user has gone up slightly. This can be attributed to the strategic shift that involves closure of underperforming games, with an emphasis on promoting best titles. Due to its revamped strategy and slashing of jobs, the company managed to reign in losses, thus beating consensus estimates.
How Does The Outlook For 2014 Look Like?
For 2014, Zynga expects revenue bookings in the range of $760 million to $810 million, and adjusted EBITDA in the range of $65 million to $100 million.  The overall non-GAAP earnings per share is expected to be positive, thus fueling the speculation that the worst is over for the company. The investor community is looking at 2014 as a growth year for Zynga, and its recent announcement concerning the acquisition of NaturalMotion is breathing more life into this perspective.
In our view, the acquisition of the mobile gaming company sends mixed signals. Given that the last acquisition didn’t turn out to be a life saver for Zynga, there is some doubt about the company’s ability to gauge consumer demand and understand what games it should be investing in. The acquisition may also mean that the company is finding hard to innovate and plans to grow inorganically. However, NaturalMotion does complement Zynga’s gaming roster by bringing successful games that appeal to genres of racing and people stimulation, areas where Zynga hasn’t seen much success.
The company also announced more job cuts to improve its bottomline, and close to 15% of its current workforce will be eliminated in the coming months. It appears that Zynga is still trying to find the right organizational strength and structure suited to social gaming industry. The investor community is hopeful that the company can turn around its business over the next few quarters.Notes: