Zynga Posts A Loss In Third Quarter, But Results Slightly Better Than Expected

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Zynga (NASDAQ:ZNGA) posted revenue of $177 million in the third quarter, which represented an annual decline of 13% and a sequential increase of 15%. The revenue came in slightly above market expectations, with notable strength in both bookings and mobile usage, leading to around 10% rise in its stock price in after-hours trading. Zynga’s stock has fallen by around 40% during the year due to ongoing challenges in its business.

Profitability continued to slip as the company is making investments for bolstering its mobile offerings and launching new games in the market. Adjusted EBITDA (a non-GAAP measure) fell to $2 million, as compared to $14 million in the previous quarter, and $7 million in the same period a year ago. We expect margin-related pressures to persist in the coming quarters as well, due to high marketing and R&D expenses. Active user base also dropped during the quarter, with the new games failing to spur user engagement.

We expect the percentage of mobile devices in Zynga’s business to further increase in the future, since the web business is declining. The company is making efforts to reinvigorate growth by enhancing its core franchises and partnering with leading brands for new game launches and marketing. However, we believe the company must do more to revive investor faith. It must launch unique and exciting new games, that leverage original content to fuel long-term demand.

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We are in the process of revising our $3.21 price estimate for Zynga’s stock.

See our complete analysis for Zynga

New Games Fail To Pick Up

In September, Zynga introduced several games including NFL Showdown and a new version of the Zynga Poker. It recently also launched New Words With Friends and Looney Tunes Dash in selected markets and will release them more widely in the near-future. In addition, the company has updated a series of its existing games. However, the new Poker game hit a road-bump as some users missed the design of the older version, and the new game failed to run properly on some older devices.

These new games failed to create an uptick in user engagement. Monthly active users (MAUs) declined by 16% annually and 14% sequentially to 112 million in Q3 2014. Similarly, monthly unique users (MUUs) also fell by 21% year over year and 13% quarter over quarter to 77 million. We believe Zynga will continue to see lower user engagement levels until its new games start to gain traction in the highly competitive mobile gaming market.

Mobile Business Is Strengthening

The bright spot in the earnings report was impressive performance on the mobile platform, where bookings rose by 111% annually and 10% sequentially, to account for 55% of the total bookings. The share of mobile usage in overall bookings stood at 36% and 50% in Q1 and Q2 respectively. Success on this platform is key for Zynga’s long-term growth, as players are increasingly shifting to mobile gaming, causing the traditional web business to decline. Even though overall MAUs fell during the quarter, mobile MAUs grew by 45% annually. Solid mobile growth also resulted in both sequential and annual improvement in monetization (average bookings per user). We expect Zynga’s mobile business to see continued growth in the coming quarters, as the company is making huge investments to improve its mobile offerings.

The core franchises – CasinoWords With Friends and FarmVille showed annual bookings growth of 30% in Q3, causing overall booking to rise by 15% annually. A new marketing deal with the TV franchise ‘Real Housewives’ was also announced for its popular game Hit It Rich. This casino game comprised for 12% of Zynga’s online gaming revenue in Q3 2014. In the long-run, we think the company has to do more than just license well-known brands and differentiate itself by launching more exciting and unique original content to fuel its growth outlook.

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