Zynga: 2016 In Review

by Trefis Team
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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 better than expected Q2 bookings and revenue results and the launch of its highly anticipated game CSR Racing 2 (June 30). However, due to disappointing second and third quarter results, Zynga’s stock is down over 8% in the last month and is currently trading at around $2.60.

The company’s stock has lost about 36% of its value in the last three 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 nine months of the year, which was partially offset by a 22% 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 recently launched CSR Racing 2 and FarmVille: Tropic Escape.znga-17Bookings is a non-GAAP financial measure used by Zynga. It is equal to Revenue minus the 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-20
  2. Decrease in Adjusted EBITDA But Increase in 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.znga-21In 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 the first nine months was about $38 million. The company expects this figure to range between $12-16 million in Q4 2016.
  3. Continuous Decline In User Base: 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 at the end of September 2016. 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
  4. Increase In Daily User Engagement (DAUs/MAUs): Even though Zynga’s monthly active user base declined by about 13% in Q3 2016, its daily active user count was almost constant. This shows some stickiness in the company’s loyal active user base. MAUs are also likely to improve in the near term with the launch of new games such as CSR 2 and FarmVille: Tropic Escape.znga-16
  5. Lower Q4 Guidance: 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.

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See our full analysis for Zynga here.

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