Does Zynga Need a New Gaming Face for Revival?

Edited by Vani Rao

Zynga Inc. (NASDAQ:ZNGA) Beats Estimate, Operation Streamlining Tapered Losses

Zynga Inc. (NASDAQ:ZNGA) reported Q3 revenue of $203 million, down 36% year-over-year, and bookings of $152 million, down 40% year-over-year. Revenue washigher than the high end of company’s guidance of $200 million and our estimate of $177million.Zynga’sbetter-than-expected revenue is mainly attributed to its operational streamlining, cost cutting, and renewed focus on its mobile games.

Post the better-than-expected results, Zynga’s stocks rallied more than 14.5% to its 52-week high of $4.05 during intraday trade before finishing the day 5.49% higher at $3.73 on Friday.

Pre-result and post-result price movement for Zynga Inc.

Source: Bloomberg
Source: Bloomberg

New Management- Hope for a Better Future

Zynga Inc. is witnessing a shake-up in its top brass in the recent months. In July 2013, Don A. Mattrick joined Zynga as Chief Executive Officer, replacing Mark Pincus, who continues to serve as Chairman of the Board and Chief Product Officer.Zyngais also in process of hiring Clive Downie as Chief Operating Officer by 4November. Mr.Downie, who is defecting from a mobile game maker called DeNA, previously worked with Mattrick at video game maker Electronic Arts Inc.With the new management in place, Zynga is expected to come up with new business strategies to gain more share in the fast-growing smartphones and tablets markets.

Street Cheers Zynga’sBetter-than-expected Results

Zynga reported revenue of $203 million for Q32013, down 36% compared to Q3 2012 and 12% compared to Q2 2013. Its online gaming revenue was $174 million, a decrease of 39% compared to Q3 2012 and 14% compared to Q2 2013. Advertising revenue stood at $28 million, a declineof 9% compared to Q3 2012 and an increase of 3% compared to Q2 2013.

The chart below clearly indicates that except for Zynga’s flagship games like FarmVille 2, Zynga Poker, and FarmVille, no other game made any significant contribution to its revenue. FarmVille 2, Zynga Poker, and FarmVille accounted for 22%, 19%, and 18% of its online gaming revenue, respectively, during Q32013 compared to 15%, 20%, and 16%, respectively, inQ2 2013.Other online gaming revenue, which accounted for less than 10% of the overall online gaming revenue in the previous quarters, witnessed a major decline inQ3 2013.

Zynga’s Q3 2013 revenue by games (in $ million)

Source: Zynga
Source: Zynga

Mobile Centric Strategy

During Q3 2013,Zynga reported bookings of $152 million, down 40% year-over-year. Web bookings fell sharply to $106 million from $205 million inQ32012 and from $138 million in Q2 2013. Mobile bookings performed better than the other segments, reporting a slight decline to $46 million compared to $51 million inQ3 2012. Zynga’s Q3 2013 Bookings (in $million)

Source: Zynga
Source: Zynga

Reduced CostsProps upMargins

During the quarter under review, Zynga reduced its research and development (R&D) costs significantly, which helped it report better-than-expected EBITIDA margin. R&D expense was down to $81 million from $155 millioninQ3 2012. Adjusted EBITDA margin rose to 5% from 4% as of Q2 2013.The chart below shows the declining trend of adjusted EBITDA and adjusted EBITDA margin.

Source: Zynga
Source: Zynga

New Games Offer Stiff Competition; Hurt User Base

With the advent of new games like Candy Crush Saga, Pet Rescue Saga, and Farm Heroes Saga from King.com, world’s leading skill gaming site, Zynga continues to witness downward pressure on its active user counts during Q3 2013. As a result, daily active users (DAUs) fell 49%to 30 million from 60 million in Q3 2012, andmonthly active users (MAUs) fell57% to 133 million from 311 million inQ3 2012. In addition, monthly unique users (MUUs) decreased 45%to 97 million from 177 million in Q3 2012.Thechart below shows the falling active user count from Q32011 to Q32013.

Source: Zynga
Source: Zynga
Source: Zynga
Source: Zynga
Source: Zynga
Source: Zynga

Narrower Loss– Way to Go!

Zynga’s net loss narrowed to $68,000from $53 million in Q3 2012 and $16 million in Q2 2013. Diluted net loss per share was $0.00 for Q32013 compared to ($0.07) for Q3 2012 and ($0.02) for Q2 2013.The company’s renewed focus on reducing operating cost is likely to continue in coming quarters; however, it will be interesting to see if the company compromises with its quality of R&D while focusing too much on cost reduction.

3 of the top 10 games on Facebook are Zynga’s

Zynga still enjoys the status of one of the most established franchises with Facebook. As of 30 September 2013, Zynga had 3 of the top 10 games on Facebook (see chart below), based on DAUs reported by the Facebook API. The most popular Zynga games on Facebook are FarmVille 2, Zynga Poker (Texas HoldEm Poker), and Words With Friends. These games together contributed 11.75 million DAUs on Facebook, far lesser than Candy Crush Saga’s 15.57 million DAUs.

Source: AppData
Source: AppData

WSA’s on Zynga

In light of thebetter-than-expected third quarter results, the increased focus on the mobile segment, revamped management team, and Zynga growth potential and real money game, WSA revises Zynga’s Q4 revenue estimate to $188 million, slightly higher than the high end of Q4 2013 guidance of $185 million. We revise our EPS estimate for FY 2013 to -$0.04. WSA revised its EPS estimates for FY2014 and FY2015 to-$0.05and -$0.04, respectively.Based on the DCF valuation technique, with the weighted average cost of capital of 13.2% and 3% terminal growth, WSA values Zynga at $3.45. We expect Zynga’s valuation to change if it manages to get a new face for its gaming portfolio, which is very likely considering its past gaming innovations.Third quarter releases like Fairy Tale Twist, Ninja Kingdom, and Hit It Rich have already been able to attract a considerable number of users, and thereby help Zynga to enhance its user base in upcoming quarters.

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