Zynga Earnings Preview: Expecting Soft Quarterly Results

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Zynga (NASDAQ:ZNGA) is scheduled to announce its first quarter earnings for 2015 on Wednesday, May 6th after market close. Its stock price has fallen by around 30% over the past year, as a result of the decline in its user base, an increase in losses, and a lack of new major game launches. We expect the company’s outlook to remain weak in the near-term owing to the planned shutdown of several web-based games and since only a few games are expected to be launched during the first half of the year. Notwithstanding these challenges, Zynga’s mobile franchise and bookings could show promising growth.

In terms of profitability, we expect Zynga to face margin pressure in the short-term as its ongoing search for new hit games results in the widening of losses. Its entry into newer gaming categories will most likely weigh on R&D and sales and marketing expenses in the coming future.

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See our complete analysis for Zynga

User Metrics Will Be Closely Tracked During The First Quarter

Zynga’s user base has fallen consistently over the past several quarters — in Q4 2014, its monthly active users (MAUs) decreased by 4% annually to 108 million. Additionally, monthly unique users (MUUs) dropped by 11% year over year to 71 million. The reduced popularity of desktop games and problems with its Facebook business caused this decline. It will be interesting to track these figures in the first quarter, as a number of games such as New Words With Friends, Looney Tunes Dash and Words On Tour were launched during the fourth quarter of 2014. We forecast a significant drop in web MAUs during Q1 2015.

While The Mobile Platform Will Continue To See Growth, PC Business Will Show Decline

We expect Zynga’s mobile business to carry earnings during the first quarter. During Q4 2014, mobile bookings increased by 120% year over year and 14% quarter over quarter to comprise 60% of overall bookings. In comparison, web bookings fell by 26% annually and 8% sequentially in Q4. Moreover, while the overall user base came down in Q4, mobile MAU’s rose by 8% sequentially. We expect mobile MAU’s to surpass 85 million in Q1 2015.

Zynga’s PC business could see significant decline in Q1 2015 as a number of PC-based games were retired last year. Additionally, several Facebook-based web games could have also been shut-down during the first quarter. Nonetheless, the outlook in the PC business could improve later this year, owing to increased focus on remaining games, and due to the planned transition of certain successful mobile games onto the PC platform.

Zynga’s business is expected to improve during the second half of the year with the planned launch of 6-10 new games in evergreen gaming categories. There is much to look for in the earnings conference call.  First, we are eager for an update on Empire & Allies, which was launched globally in May.  We also are curious to learn about the timelines associated with other games such as FarmVille Harvest Swap and Natural Motion’s Dawn of Titans. Finally, we are  interested to know more about the expected change in the company’s strategy following the return of Mark Pincus as the CEO.

Our $2.30 price estimate for Zynga, represents near-10% downside to the current market price.

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