Zynga Earnings Preview: Trends We Are Watching

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Zynga (NASDAQ:ZNGA) is scheduled to release its financial results for the second quarter of 2015, on Thursday, August 6th. [1] We expect the company’s results in Q2 were driven by strong growth in bookings on the mobile platform. In comparison, its web-gaming business could likely saw continued challenges, as a result of the planned shut-down of several PC-based games. In terms of profitability, we believe that Zynga faced pressure as its ongoing search for the next hit game most likely boosted both R&D and sales and marketing expenses. Over the long-term, we expect Zynga’s outlook to improve with the launch of new games, the execution of cost-cutting and efficiency improvements, as well as the increased focus on mobile gaming.

See our complete analysis for Zynga

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Impact Of New Games On Earnings And User Growth Will Be The Key Focus Of The Earnings Release

Zynga’s stock has fallen dramatically over the past few years, owing to its poor financial performance, which in turn has resulted from the lack of new major game launches and the disruption in its web-gaming business. As a result, the company’s user base has declined over the past few quarters — during Q1 2015, Zynga’s monthly active user (MAU) base fell to 100 million, as compared to 119 million in a similar period a year ago. We expect the same trend to persist in the near-term, due to the shut-down of several Facebook-related web games. However, the user growth on mobile platform could well have risen in both year-over-year and quarter-over-quarter terms during the second quarter. It will be interesting to track the impact on user base metrics of relatively newer games, including New Words With FriendsLooney Tunes Dash, Words On Tour and Empires & Allies.   A healthy recovery in these metrics is critical for Zynga’s future growth.

Additionally, the company expected to launch six to eight games over the course of this year, including Dawn of Titans, CSR2, and FarmVille Harvest Swap.  We are keen to assess their timelines for modeling purposes.

Q2 Results Were Likely Driven By Strong Growth On Mobile Platform

Notwithstanding the various challenges facing Zynga, we expect its mobile-gaming franchise to show strong year-over-year growth during the second quarter. This was likely driven by robust growth across core franchises, such as FarmVille, Zynga Casino and Words With Friends, along with the launch of new games. In contrast, its web-gaming business likely saw a significant decline during Q2, since Zynga has shut-down a large number of its Facebook-based web games in the recent past. It will be interesting to hear management commentary regarding the future outlook in the web-gaming business, as the company earlier planned to enhance its focus on remaining PC games, and also intended to transition certain mobile games onto the PC platform.

Progress Against Cost Cutting Initiatives Will Also Be Tracked

Another update which came from the previous quarterly earnings was the announcement of  new cost cutting measures, which could take until next year to complete and could result in annualized savings of around $100 million (as per management estimates). We are eager to track the current progress against these initiatives as we have forecast Zynga’s EBITDA margins to rise to over 30% in the long-run. In the event, the company moves faster than expected on these planned strategies, then it could lead to improvement in its short-term outlook.

Our $3.04 price estimate for Zynga, represents around-20% premium to the current market price.

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Notes:
  1. Zynga to Announce Second Quarter 2015 Financial Results on August 6, 2015, Zynga Investor Relations, July 17, 2015 []