Zynga Posts Disappointing Quarterly Results And Future Guidance

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Zynga’s (NASDAQ:ZNGA) top-line grew by 9% year over year to $192.5 million in the fourth quarter of 2014. However, it came in below market expectations due to the delayed launch of certain new games and continued problems in the Zynga Poker franchise. Moreover, the company gave a soft outlook for the first half of 2015, as it prepares for new game launches later this year.  This caused a sharp drop in the company’s stock price post the earnings release. Notwithstanding the company’s plans to launch around 6-10 new games in highly popular game categories during the year, we think the company must come with more unique games that are based on original content to reinvigorate its growth. While the growing mobile franchise will continue to bolster Zynga’s business during the coming future, the decline in the traditional web business could slow down later this year.

The bottom-line results also  disappointed as the net loss was seen at $45 million in Q4 2014, against a net loss of $25 million in a similar period a year ago. We believe the losses will widen in the coming quarters, as the company continues to search for its next blockbuster game. Zynga’s decision to foray into new gaming segments such as match-three puzzles and action-strategy will most-likely weigh on R&D and sales and marketing expenses in the future.

We are in the process of revising our $2.83 price estimate for Zynga’s stock.

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See our complete analysis for Zynga

Mobile Platform Continues To Show Robust Growth; PC Decline Could Slow Down Later In 2015

Even though Zynga’s PC business is stumbling, owing to its changing relationship with Facebook, its mobile business is picking up. Mobile bookings rose by 120% annually and 14% sequentially during the fourth quarter, to comprise 60% of the total bookings. In comparison, web bookings dropped by 26% year over year and 8% quarter over quarter. While mobile monthly active users (MAUs) rose by 8% sequentially, web MAU’s fell by 26% during the quarter. The successful launch of games including New Words With Friends and Looney Tunes Dash! helped drive the strong performance on mobile platform.

A number of PC-based games were retired during 2014, and 10 additional Facebook-based web games are expected to be phased out soon. [1] While this development will cause revenue headwinds in the near-term, we think the decline in the web business could slow down later in the year due to the renewed focus on remaining games. Additionally, management is also considering bringing some of its mobile-based games onto the PC platform, a move we think could improve the outlook in the web business.

Zynga also plans to shut down its China operations in the coming future. Though this restructuring will result in annualized savings of about $7 million, it will also weaken Zynga’s long-term outlook, in our view. This is because China’s online gaming market is huge and is expected to surpass the U.S. market in the coming years. [2]

Zynga Plans To Expand In Highly-Popular Gaming Categories To Bolster Its Business

Zynga aims to launch 6-10 new games in evergreen gaming categories, to bolster its business through the year. A number of new titles such as FarmVille Harvest Swap and Empires & Allies are currently being tested in certain markets, and will be launched globally during the second half of 2015. In addition, NaturalMotion’s new game Dawn of Titans will also be released later this year. Management aims to avoid the mistakes it made with Zynga Poker and NFL Showdown, which were launched under accelerated timelines.  Hence, management plans to test the new games thoroughly before launching them across global markets. As a result, Zynga’s outlook is expected to remain weak during the first half of 2015 and improve in the second half.

We think the strategy of rolling out new games under well-known categories may not be enough.  The company must come up with more innovative and unique pipeline to differentiate itself in a highly competitive mobile gaming market.

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Notes:
  1. Zynga’s (ZNGA) CEO Don Mattrick on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2015 []
  2. China to become world’s largest online gaming market by 2016, Telecompaper, January 2015 []