Zynga Pre-Earnings: Trends We Are Watching

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Zynga (NASDAQ:ZNGA) is scheduled to report its fourth quarter earnings for 2014 on Thursday, February 12. Its stock tumbled by around 30% in 2014, due to a decline in its user base, a surge in losses, and a lack of new major game launches. During the third quarter, Zynga posted annual revenue decline of 13%, along with 16% decline in monthly active user base. Notwithstanding the challenges being faced by the company, its mobile franchise and bookings are showing promising growth. Together with success of New Words With Friends game, we expect these drivers to spur the company’s business going forward.

We expect Zynga to face profitability pressure in the fourth quarter, as development of new mobile offerings and launch of new games will lead to a surge in marketing and R&D expenses. The company aims to reinvigorate its growth by improving its core franchises and partnering with leading brands for new game launches and marketing.. We will be looking for more details around these strategies during the earnings call to understand how 2015 could shape up for the company.

Our $2.83 price estimate for Zynga’s stock, is marginally above the market price.

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See our complete analysis for Zynga

Strengthening Mobile Business Is A Key Positive

Even though Facebook’s share in Zynga’s business has come down significantly from 65% in Q3 2013 to 41% in Q3 2014 in terms of bookings, Zynga’s growing mobile franchise is showing some promise in reviving the company. Mobile bookings increased by 111% year over year and 10% quarter over quarter, to account for 55% of the total bookings during Q3 2014; its share was lower at 36% and 50% share during Q1 and Q2, respectively. As a result, the overall bookings surged by 15% annually and 0.2% sequentially in Q3 2014, representing a year-over-year increase in bookings for the first time in nine quarters.

While the overall user metrics saw a disappointing decline during the third quarter, mobile MAUs rose by 45% annually. We expect mobile platform development to be critical for Zynga’s long-term growth, considering its traditional web business is facing a steady drop in usage, as gamers are increasingly shifting to mobile devices. Zynga’s mobile revenues could continue to show healthy growth during the coming quarters, as the company is making huge investments to bolster this business.

While Zynga’s core games, including Farmville 2, Zynga Poker and Hit It Rich, are losing interest among gamers, the company aims to regain its lost glory with a pipeline of games that leverage partnerships with famous franchises such as NFL, Tiger Woods and Warner Brothers’ Looney Toon. In addition, the company will introduce ‘Real Housewives & Bridesmaids’ inspired version of Hit It Rich along with a number of titles from NaturalMotion in 2015.

User Metrics Will Be Keenly Tracked During Fourth Quarter

Zynga’s user metrics have consistently fallen during 2014 — in Q3, its monthly active users (MAUs) fell by 16% annually and 14% sequentially to 112 million. Additionally, monthly unique users (MUUs) dropped by 21% year-over-year and 13% quarter-over-quarter to 77 million. It will be interesting to see how these metrics trend during the fourth quarter, considering thatnew games were launched during this period. In October 2014, Zynga launched New Words With Friends globally. According to App Annie, a firm that specializes in compiling app data for iPhone and iPad users, this new game was among the top ten downloaded games on iPhones in the U.S. for most weeks since its launch in October. Additionally, the company launched its Looney Tunes Dash game globally in December.

The company recently expanded its words game franchise with a new Words On Tour game, and announced plans to launch games in the ‘Action Strategy Genre’ of the mobile gaming market. [1] [2] Since this category is popular among gamers, we will be interested to learn the timelines regarding new game launches in this segment during the earnings call.

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Notes:
  1. Zynga Inc Launches Scrabble-like Words On Tour, ValueWalk, January 16, 2015 []
  2. Zynga will launch Empires & Allies mobile version with realistic art, Venture Beat, December 16, 2014 []