Key Takeaways From Zynga’s Earnings

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Zynga (NASDAQ:ZNGA) announced weak third quarter results Wednesday, with the company’s revenues declining 7% year-over-year (y-o-y) to $182.4 million, missing average consensus estimates of $187.2 million. Zynga’s loss of 5 cents per share also missed market expectations of a profit of 1 cent a share. Zynga has been trying to turn around its online game business for the past several quarters, and management stated that bookings are a better way of measuring Zynga’s performance than revenue growth. The gaming company generated $197 million in bookings during this quarter, which was above both the company’s high-end guidance and the year-ago quarter.

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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.

In the third quarter, adjusted EBITDA declined 44% y-o-y to $17.9 million but beat the company’s own guidance of $12-16 million. This decline in adjusted EBITDA was driven by higher costs, owing to mobile payment processing fees due to the launch of CSR Racing 2, headcount-related expenses and marketing costs for CSR Racing 2 and FarmVille: Tropic Escape, offset by better than expected bookings.

Going forward, Zynga will employ a new method to calculate adjusted EBITDA which will include the change in deferred revenue. Per the new method, the company’s adjusted EBITDA in Q3 2016 was about $4 million. The company expects this figure to range between $12-16 million in Q4 2016.znga-10

The company’s free cash flow improved from (-$6.6) million in Q3 2015 to $18.3 million in the previous quarter driven by robust increase in cash flows from operating activities. This is a positive sign and bodes well for Zynga’s turnaround strategy going forward.

Monthly Unique Users Increase

Zynga continues to lose monthly and daily active players. Its user base declined on both the web and mobile platforms, with monthly active users (DAUs) declining 13% y-o-y to 66 million. However, the company was able to increase its average monthly unique users (MUUs) as well as its average monthly unique payers (MUPs) both y-o-y and quarter-over-quarter to 57 million and 1.3 million, respectively. The company is currently focusing on new games such as CSR Racing 2 and FarmVille: Tropic Escape to interest its users, and success with these games could lead to higher user growth and user engagement going forward. znga-12

Q4 Guidance: Losses To Continue

For the fourth quarter, Zynga projects revenue in the range of $180 to $190 million, against consensus estimates of around 202.8 million. The company expects adjusted EBITDA (new methodology) to be between $12 million and $14 million and bookings to be in the range of $185 million to $195 million. In terms of bottom line, the company expects a net loss of $25 to $27 million in the quarter.znga-11

 

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