Zynga Is Improving Its Average Revenue Per User, But Has A Long Way To Go

Zynga’s (NASDAQ:ZNGA) business has been declining continuously for the last few quarters, and there appears to be no near term solution for a turn around. Nevertheless the organizational restructuring and the hiring of new chief operating officer is likely to improve the company’s efficiency and the quality of its games. Perhaps a quick way to judge this will be looking at its average revenue per user, which seems to have shot up in the last two quarters, following a change in the strategy of launching a large number of social games. Zynga closed down a number of games in the second quarter of 2013 including The Ville, Empires & Allies, Dream Zoo and Zynga City on Tencent, and intends to direct its efforts and funds towards mid-core games. This seems like a better strategy and could attract more serious gamers. The improvement in average revenue per user is an indication of better average quality of Zynga’s games.

Unfortunately, the company operates in an industry where its users have a short interest span, and the company needs to continuously come up with original games. Unlike console gaming, it may be difficult for Zynga to create franchises with a loyal customer following.

Our price estimate for Zynga stands at $3.33, implying a discount of about 25% to the market price.

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Most Operating Metrics Have Shown Decline For Zynga

(Active users in millions and revenues/EBITDA in $ million)

Yet Quarterly Revenue Per Monthly Active User Has Gone Up

(Quarterly revenue per MAU in $)

Interpretation Of The Above Charts

Zynga has clearly trimmed down its gaming roster while maintaining some strength in its key gaming franchises Zynga Poker, Farmville and Farmville 2. These games account for roughly half of the company’s revenues and management plans to continue investing in them. Although the number of monthly active users has fallen by 57% since Q3 2012, the decline in revenues has been lower due to the offsetting impact of increasing ARPU (average revenue per user). This suggests that the company may revert to top line growth even before its user base stabilizes. That’s some good news for the struggling social gaming giant. One of the reasons why ARPU is growing is the increased demand from advertisers. In Q3 2013, Zynga’s ad revenue for daily active users (DAU) jumped 33% sequentially and 78% over the third quarter of 2012. That’s a huge jump, but should be taken with a pinch of salt because these figures are for daily active users. The situation doesn’t look that good in the bigger picture since there has been a significant decline in the number of monthly active users and related revenues.

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