Zynga Mid Year Review: Free Cash Flow Improving But Declining User Base Still A Concern

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Zynga‘s (NASDAQ:ZNGA) stock price has witnessed a slight appreciation since the start of this year, but this relative price stability belies its eventful first two quarters. The stock lost 30% of its value year-to-date (YTD) after disappointing fourth quarter and full year 2015 results on February 10, but regained some of its lost value after posting better than expected first quarter results on May 4. The stock gained close to 30% in the three months following the first quarter results announcement driven by the consensus beating Q2 bookings and revenue results and launch of its highly anticipated game CSR Racing 2 (June 30). However, due to disappointing second quarter results announced on August 3, Zynga’s stock is down about 9% in the last month and is currently trading at around $2.72.

On the plus side, the company’s stock is up over 19% in the last six months and 9% in the last year. However, it has lost about 12% of its value in the last two years and its performance in the next few quarters is also likely to be mixed. Here’s why:

  1. Decline In Revenues: Zynga reported a 12% decline in revenue from online games in the first six months of the year, which was partially offset by a 31% increase in advertising revenue in the same period. Going forward, we expect sales to continue to decline on a year-over-year (y-o-y) basis owing to a declining user base, but total bookings could improve driven by growth in the company’s key franchises: Words With Friends, Slots, Zynga Poker and the newly launched CSR Racing 2 and FarmVille: Tropic Escape.znga-1Bookings is a non-GAAP financial measure used by Zynga. It is equal to Revenue minus change in deferred revenue. Deferred revenue is the recorded sale of virtual goods which is recognized as revenue over the estimated average life of those virtual goods.znga-3
  2. Increase in Adjusted EBITDA & Free Cash Flow: Zynga’s adjusted EBITDA improved over 7x y-o-y to $22.5 million and free cash flow improved to $7.3 million in the first six months of the year driven by lower R&D expenses and lower general and administrative costs. The company expects its adjusted EBITDA to continue to grow y-o-y in the third quarter as well driven by cost-cutting measures. Compared to an adjusted EBITDA of $12 million in Q3 2015, Zynga expects to report adjusted EBITDA of $12-16 million in the current quarter.
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  3. Continuous Decline In User Base: Zynga continues to lose monthly and daily active players. In the second quarter, its user base declined on both the web and mobile platforms, with average daily active users (DAUs) declining 15% y-o-y to 18 million and average monthly active users (MAUs) declining 26% to 61 million. The company will be focusing on games such as CSR Racing 2 and FarmVille: Tropic Escape to interest its users, and success with these new games could lead to an increase in bookings and gaming revenue in the upcoming quarters. zynga_06
  4. Mixed Q3 Guidance: For the third quarter, Zynga projects revenue in the range of $170-180 million, implying a decline of 8-13% y-o-y, and bookings to be in the range of $180-190 million, implying an increase of 3-9% y-o-y. The company also expects adjusted EBITDA to range between $12-$16 million, implying a growth of  0-33%.

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See our full analysis for Zynga here.

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