Zynga Pre-Earnings: Trends We Are Watching

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Zynga (NASDAQ:ZNGA) is scheduled to report its third quarterly results after market close on Thursday, November 6. It failed to lift market sentiment in the previous quarter, as its results came in below expectations leading to a drop in its stock price. The company also lowered its guidance for the third quarter to $165 million (at the mid point) owing to delay in new game launches and ongoing decline in its web business.

We expect the company to show slight sequential growth in revenue in the third quarter, driven by success on the mobile platform. The share of mobile in overall bookings could cross 50% in the third quarter. However, Zynga’s profitability could dip during Q3 due to significant rise in marketing and R&D expenses. Over the long-run, we think the company will have to do much more than its recent partnerships with leading brands.  To revive investor faith, it must launch exciting and unique original content.

Our price estimate for Zynga stands at $3.20, implying a near-30% premium to the current market price.

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See our complete analysis for Zynga

Zynga Is Focusing On Mobile Strategy To Improve Monetization

Zynga is making huge investments to bolster its mobile platform. These efforts are paying off as mobile comprised for 50% of its bookings in the second quarter, as compared to 36% in Q1 2014. The company launched several mobile extensions to its existing games during the year. New games including New Words With Friends, Zynga Poker and NFL Showdown were recently launched on iPhone, iPad and Google Play. In Q2, Zynga introduced FarmVille 2: Country Escape and Hit It Rich! slots. The new versions of already successful franchises resulted in sequential improvement in earnings during the second quarter. In addition, it contributed to an increase in monetization (average booking per user) from 6.3 cents in Q1 to 6.7 cents in Q2 2014.

This strategy also led to higher user engagement. Monthly active users increased from 123 million in Q1 to 130 million in Q2, with sequential improvement in both daily active users and monthly unique users as well.

New Licensing Agreements Are Aimed At Fueling Growth

Zynga recently partnered with three major franchise and sports celebrities including including the NFL, Tiger Woods and Warner Brothers’ Looney Toons, to leverage their brands for launching two new categories of games – Sports and Runner. We believe these new partnerships will help Zynga in marketing and will enhance its presence in the under-served sports genre of the mobile gaming market. While sports-related titles accounted for 12% of sales on gaming consoles last year, they comprised for a mere 4% of mobile gaming revenues. [1] We also think that these recent initiatives  cast  doubt over Zynga’s ability to create unique content and IP (intellectual property), which has been an issue that has plagued it in the past.

However These Partnerships May Not Be Enough To Boost Growth

Certain recent reports indicate that Zynga may not be able to attract as many paying users on its new games, despite its partnerships with strong brands. According to App Annie, a web firm that specializes in compiling app data for iPhone and iPad users, Zynga’s new gaming app NFL Showdown has received a lukewarm response from iOS users. In fact, the game has consistently lost its download ranking among mobile games ever since its launch. iOS usage statistics are significant since average revenue per iOS user is much higher than comparable figure for Android users. In addition, the competitive environment for mobile gaming on the Android platform is even worse, as that market is highly fragmented. Hence, any weakness on iOS could spell even more trouble on the Android platform.

We think Zynga’s strategy to license well known brands may not be enough, and the company needs to come up with more innovative and unique games to raise its growth outlook in the long-run.

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Notes:
  1. Zynga’s (ZNGA) CEO Don Mattrick on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, August 7, 2014 []