Zynga’s Q1 FY2014 Results Point to Promising Growth from Mobile Gaming

Edited by Vani Rao

Farmville 2 and Zynga Poker led turnaround

Social gaming giant Zynga Inc. (NASDAQ:ZNGA) announced its first-quarter FY2014 results on April 23, 2014. Zynga, known for its flagship products Zynga Poker and FarmVille 2, reported strong earnings that met the upper range of the company’s guidance. Zynga’s Chief Executive Don Mattrick stated that for the first time in two years, the company delivered sequential growth across key performance metrics including bookings, adjusted EBITDA, mobile bookings mix, and audience.

During Q1 FY2014, Zynga’s revenues fell by 36% to $168.02 million as compared to $263.58 million in the year-ago period. However, revenue exceeded the earlier estimates of $163.38 as per the data compiled by Bloomberg. Zynga reported loss of $0.01 per share, in line with Street’s expectations. What is more worrisome is the fact that Zynga has been witnessing a decline in its revenues in the recent quarters, as depicted in the graph below.

Source: Bloomberg/WSA
Source: Bloomberg/WSA

On the brighter side, Zynga’s revenue from advertising has been steadily increasing over the last few quarters. During the quarter under review, the company’s advertising revenue came in at $35.8 million, representing an increase of 5% compared to Q1 2013 and an increase of 49% compared to Q4 2013, as shown in the graph below.

Source: Bloomberg/WSA
Source: Bloomberg/WSA

Gaming portfolio spearheads Zynga’s turnaround

  • Zynga Poker’s mobile audience grew by 19%, its strongest mobile audience growth in previous eight quarters.
  • Zynga launched FarmVille 2 in 16 languages across the iOS and Android platforms on April 17, 2014.
  • FarmVille 2, Zynga Poker, and FarmVille accounted for 30%, 24%, and 10% of the overall online gaming revenue, respectively, in Q1 2014 compared to 26%, 21%, and 15%, respectively, in Q4 2013.
  • Words With Friends grew its monthly audience by 8% and daily active users (DAUs) by 9% QoQ. Bookings grew 43% on a YoY basis.

Corporate rejig

While industry analysts have always been critical of Zynga’s management and its leadership, Zynga ushered in a new management team by hiring key personnel to strengthen its leadership and decision making at the top level.

  • On April 23, 2014, Zynga hired Alex Garden as President of Zynga Studios. Alex Garden has formerly held leadership responsibilities in Microsoft Corp. (NASDAQ:MSFT), where he served as General Manager of the Xbox Live division. With 25 years of experience in the entertainment industry, Garden will mentor Zynga’s existing team and enhance the company’s creative and technical capabilities.
  • Zynga’s founder Mark Pincus stepped down from the position of the CEO last year and had now become the company’s Chief Product Officer.
  • On April 23, 2014, Zynga announced the appointment of Jennifer Nuckles as its Chief Marketing Officer. Nuckles has more than 18 years of industry experience; she most recently served as Chief Marketing Officer of Plum District.
  • Also on April 23, 2014, Henry LaBounta was named the company’s first Chief Visual Officer and will work closely with the creative team.

Outlook for FY2014

  • Zynga’s bookings are projected in the range of $770-810 million.
  • Zynga expects adjusted EBITDA in range between $70 million and $100 million.
  • The company projects Non-GAAP EPS to range between $0.01 and $0.03, on a share count of approximately 930 million shares.

The brighter side: Zynga playing it right

  • Zynga’s focus on mobile gaming has started to pay rich dividends, as evident from company’s recent results. With ever-growing mobile gaming business, the company can tap huge opportunities in the mobile gaming domain.
  • Zynga’s management is expecting that in 2014, for the very first time in company’s history, its mobile bookings will outshine its web bookings.

Zynga’s stock performance

Since making its stock market debut in 2011, Zynga’s stock has witnessed a volatile trend in previous few months. The company’s stock recorded its 52-week high of $5.89 on March 12, 2014. However, the recent market sentiment has taken its toll on Zynga’s stock, and it has depreciated by 40%, from its 52-week high, to its current price of $3.90 as on May 2, 2014 (as shown in the graph below). Zynga’s endeavor to transition itself into a major gaming company can prove beneficial for itself and its shareholders. Given the company’s robust gaming portfolio and its emphasis to tap the rapidly growing mobile gaming business, the social gaming giant is poised for a turnaround. We at WSA believe that the stock is expected to rebound from its current market price in the medium to long term.

Source: Bloomberg
Source: Bloomberg

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