Zynga Inc. (NASDAQ: ZNGA) is a leading developer of the world’s most popular social games that are played by more than 100 million monthly consumers. The Company has created evergreen franchises such as FarmVille, Zynga Casino and Words With Friends. The company is headquartered in San Francisco, Calif., and has additional offices in the U.S., Canada, Finland, U.K., Ireland and India.
During February 2017, Zynga purchased Solitaire mobile game applications from Harpan LLC for approximately $42.5 million in cash. Harpan primarily runs one flagship game, “Solitaire”, which accounts for most its userbase. It is available on both iOS and Android.
Solitaire is already feature among the top-10 card games in the App Store and in the top-20 of the overall games category. The app also commands a place in the top-100 games on the Android download charts. Zynga’s management claims that over a billion people have played its games since 2007. Adding Harpan’s 150 million might further strengthen its business risk profile.
So far as economic synergies are concerned, the game currently displays only banner advertising, and Zynga’s management is sanguine about further monetizing the product by inserting in-game adverts. Therefore, the deal has strengthened Zynga’s leadership spread and could lead to great potential to generate significant future advertising revenue.
Moreover, the recent acquisitions are expected to strengthen the business and financial risk profile of the company and this is expected to drive the stock price as well. Additionally, Zynga has ample downside protection with a relatively reasonable market cap of $2.4 billion and substantial cash and valuable real estate in its books.
As per the last earnings announcement, the company reported GAAP Revenue of $190.5 million; above the high end of the guidance range, up 3% Y/Y and up 4% Q/Q. The Net Loss was $35.4 million, which is below management guidance range but an improvement of $15.8 million or 31% Y/Y, and $6.3 million or 15% Q/Q.
About the Company: Founded in 2007, Zynga’s mission has been to connect the world through games. To-date, more than 1 billion people have played Zynga’s games across Web and mobile, including FarmVille, Zynga Poker, Words With Friends, Hit it Rich! Slots and CSR Racing.
Major revenue sources: The Company has the following product profile and its contribution to overall topline.
Key highlights of 2016 and key revenue drivers for 2017:
During 2016, ZNGA launched several new games on mobile and web, including Willy Wonka and the Chocolate Factory Slots, Wizard of Oz: Magic Match, CSR Racing 2, FarmVille: Tropic Escape and Dawn of Titans.
During February 2017, Zynga purchased Solitaire mobile game applications from Harpan LLC. The game currently displays only banner advertising, and Zynga’s management is optimistic about further monetizing the product by inserting in-game adverts. Therefore, the deal has strengthened Zynga’s leadership spread and could lead to great potential to generate significant future advertising revenue.
Dawn of Titans and CSR come to the company through the NaturalMotion acquisition. As per management, the Bugatti Chiron launch for CSRS was the top grossing racing game in 37 countries in App store. This is expected to drive revenue during 2017.
The company continues to strengthen its product profile by adding new features and content introduction. In fact, some of the company’s longstanding winners continued to ride on a rapid growth path. Particularly, Words With Friends and Zynga Poker increased bookings by 32% and 20%, respectively. In Q4 Zynga Poker mobile bookings were up 44% Y/Y and ongoing franchises like these, lead to lesser R&D and higher yields over the medium to longer term.
During 2016, Zynga focused on its strategy of growing its existing portfolio of games. i.e. the ones which already have a strong brand recall and have potential to engage players for years as enduring entertainment brands.
Risk Factors & Stock Influences:
- The company had many new games launches in the recent past along with acquisitions as well. The performance of this portfolio expansion would remain a key business driver and potential stock trigger for the company
- Despite having a wide product portfolio, the company’s market share is significantly dependent on its flagship products, and if its top games do not maintain their popularity, results of operations could be harmed.
- The company faces significant competition in all aspects of its business. Therefore, in this competitive landscape, the company’s ability to sustain revenue growth while improving profitability will remain a challenge.
- The company operates in a rapidly changing fast paced industry. Therefore, it must continue to launch, innovate and enhance successful games that players like, and attract and retain a significant number of players to grow revenue and sustain competitive position.
Earnings Review:
Total revenue decreased $23.3 million in 2016 as compared to 2015 due to a decrease in online game revenue, offset by an increase in advertising and other revenue. Bookings increased $54.6 million in 2016 due to increases in both online game and advertising and other bookings resulting from new game launches in 2016.
Profitability:
Adjusted EBITDA, which includes the impact of changes in deferred revenue, was $48.8 million, down $33.0 million or 40% Y/Y with strong operational performance in 2016 more than offset by the swing in deferred revenue Y/Y.
Cash Flow & Balance Sheet:
As of December 31, 2016, ZNGA had cash and cash equivalents of $852.5 million, which consisted of cash, money market funds, corporate debt securities and U.S. government and government agency debt securities. In 2016, the company made capital expenditures of $10.3 million, which included hardware and software to support business operations.
Operating cash flow was $60.0 million, a $104.5 million increase compared to 2015 and the company’s best performance since 2012.
Total current assets were $965.5 million vs. $1.12 billion for the end of 2015. Total liabilities however remain about the same at $325 million
Stock Performance
On Thursday, April 27th, 2017, ZNGA shares increased by 0.71% to $2.84 on an average volume of 7.55 million shares exchanging hands. Market capitalization is $2.43 billion. The current RSI is 56.15
In the past 52 weeks, shares of ZNGA have traded as low as $2.27 and as high as $3.08
At $2.84, shares of ZNGA are trading above their 50-day moving average (MA) at $2.78 and above their 200-day MA at $2.77.
The present support and resistance levels for the stock are at $2.79 & $2.87 respectively.
Analysts expect stability in earnings during current year and believe that better results should drive better return on equity (RoE) and stock price over the near to medium term. With that in mind, a majority of the brokerage firms have retained an outperform rating with a target price up to $4.25/share from its present levels of $2.84/share.
Zynga is scheduled to discuss First Quarter 2017 Financial Results on May 4, 2017. Earnings are expected to hold steady in coming quarters and the company is expected to post revenue of around $197 Million in the current quarter. As per analyst’s expectations, the high and low revenue estimates for the current quarter are $201.7 Million and $184.9 Million, respectively. Zynga reported revenue of $191.21 Million in the same period last year.
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