Zynga Earnings Preview: Mobile Performance Will Be In Focus
Social gaming company Zynga (NASDAQ:ZNGA) has been struggling for the past one-and-half years, and given that the stock has fallen again in the last few weeks, its Q1 2014 results will be critical. The company will announce its first quarter earnings on April 23. While we expect revenues, bookings and monthly active users to continue to decline (excluding the impact of acquisition), margins may sustain or improve as a result of cost-cutting measures. The trend in mobile operating metrics will be of great interest given the company’s renewed focus in this area and sheer importance of mobile for the future of social gaming.
Our current price estimate for Zynga stands at $3.33, implying a discount of less than 25% to the market price.
See our complete analysis for Zynga
Update On Mobile Performance
We keenly look forward to Zynga’s progress on mobile platform. The company has previously acknowledged its weakness in this area, and has since been trying to curb it. It recently launched a new version of Farmville for iPhone, iPad and Google Play, which clearly showcases its gradual efforts to revive its mobile gaming business. Internet companies with high market valuation have all figured out the recipe for conducting their business successfully on mobile, and Zynga shouldn’t fall behind. It was only after Facebook started ramping up its mobile ad business that its market price shot up significantly before correcting to current levels. The same thing happened for Internet radio company Pandora Media (NYSE:P), which was struggling until it started selling its mobile ad inventory by growing its sales force and targeting local radio markets.
The mobile platform accounted for only 38% of Zynga’s monthly active users in Q4 2013, and only 35% of total bookings. That’s in stark contrast with the performance of competitors such as King. Candy Crush is currently the most popular mobile game with more than 400 million monthly active users, and almost 70% of the bookings that King generates through this game come from mobile platform.
Zynga’s recent acquisition of NaturalMotion has rekindled some hope among the investor community, and is expected to fuel Zynga’s growth on mobile. However, we believe that 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 struggling 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. We are eager to see the impact of the acquisition on Zynga’s financials and operating metrics. We expect a stronger balance sheet and small incremental impact on earnings.
Cost Control May Be Visible
Zynga announced more job cuts during its Q4 2013 earnings announcement to improve its bottom line. It is expected to eliminate about 15% of its current workforce. The impact of downsizing will be visible in the form of improved margins. There is a chance that the company can turn around its business over the next few quarters. 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. [1] The overall non-GAAP earnings per share is expected to be positive, thus fueling the speculation that the worst is over for the company.
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Notes:
- Zynga’s Q4 2013 Earnings Transcript [↩]