Zynga Q2 Exceeds Guidance, Will Q3 Do as Well, Analysts Review and Target Price

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 FarmVilleZynga PokerWords With FriendsHit it Rich! Slots and CSR Racing.


Recent announcements:

  • Words With Friends 2 Debuts Tile Styles, the Game’s First Ever Customizable Game-Board Feature:

On Sep. 27, 2018, the company announced the launch of Tile Styles, the first ever customizable game-board feature introduced to the forever franchise and #1 mobile word game, Words with Friends 2. Tile Styles allows players to personalize their game by swapping out the iconic yellow word tiles with a collection of vibrant solid colors and captivating patterns.

  • Zynga Poker and the World Poker Tour® Take Their Partnership In-Game: On Sep. 10, 2018, the company announced that it would be taking its multi-year partnership deal with renowned poker tournament series, the World Poker Tour®, into the digital realm of Zynga Poker, the world’s largest free-to-play poker game. Beginning Sep 10th, the players can now experience the authentic tournament style play that the World Poker Tour is known for in the competitive virtual world of Zynga Poker, marking the game’s largest ever in-game partnership with additional competitive modes in future quarters.
  • Zynga Announces Multi-Year Agreement with Disney to Develop a New Free-To-Play Mobile Star Wars™ Game: On August 21, 2018, the company announced a multi-year licensing agreement with Disney to develop and publish a new mobile game, with the option for a second game, that brings to life the universe of Star Wars ™ for players around the world. As a part of the agreement, Zynga will also assume operation of the live service of Star Wars ™: Commander, a free-to-play real-time strategy game developed by Disney. The Star Wars licensing agreement aligns with Zynga’s strategic priorities to create new forever franchises and grow its live services. Financial Results:

Before these announcements, on August 1st, the company released its financial results for the quarter ended June 30, 2018. The company had a strong first half of the year, delivering Q2 results ahead of its guidance, driven by strength in its mobile live services and continued improvement in the operating leverage. Zynga’ live services strategy of creating innovative, bold beats and feature enhancements that increase player engagement is paying off, as its forever franchises – Words With Friends, CSR2 and Zynga Poker – collectively delivered double-digit year-over-year mobile revenue and bookings growth.


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Q2 2018 performance overview:

Q3 Guidance:

  • Revenue of $218 million
  • A net increase in deferred revenue of $30 million
  • Bookings of $248 million
  • Net loss of $21 million
  • Adjusted EBITDA of $16 million

The management is now strategizing to grow Zynga in four ways. First, by delivering growth in its live services; second, by building new games with the goal of creating forever franchises; third, by investing in new emerging mobile technologies; and forth, by exploring M&A opportunities that will enhance its growth potential. First, it’ll continue to focus on growing its live services through innovative, bold beats.

Upcoming events: The company will report its third quarter 2018 financial results on Wednesday, October 31, 2018. At this time, Zynga will post management’s Q3 2018 Quarterly Earnings Letter, which includes Zynga’s third quarter results and fourth quarter financial guidance.


Analysts believe ZNGA ended the first half of 2018 with a much stronger foundation for the future as it continues to make progress towards its improved margin goals by the end of 2018 and achieving margins more in line with its peers over the long term.


Analyst views and brokerage actions:

Per www.marketbeat.com, Their average twelve-month price target is $4.9278, suggesting that the stock has a possible upside of 23.19%. The high price target for ZNGA is $6.00, and the low-price target for ZNGA is $3.70. There are currently two sell ratings, and 7 buy ratings for the stock, resulting in a consensus rating of “Buy.”


Below are the excerpts of recent ratings by brokerage house:

About the Company: Since its founding 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. Zynga’s games are available on a number of global platforms including Apple iOS, Google Android, and Facebook.  The company is headquartered in San Francisco, Calif., and has additional offices in the U.S., Canada, U.K., Ireland, India, Turkey and Finland.

Financial results:

Its mobile live services drove Zynga’ strong performance in Q2, in particular, its forever franchises – Words With Friends, CSR2 and Zynga Poker. Zynga’ focus on creating innovative, bold beats and feature enhancements continued to drive deeper engagement with its players and contributed to double-digit year-over-year mobile revenue and bookings growth collectively across its forever franchises.


The company tuning to quality over quantity and, based on player feedback and soft launch results, it expects to launch new titles in some or all of these categories into 2019 and beyond.

Revenue: In Q2, revenue was $217.0 million, above the company’ guidance by $9.0 million and up $7.8 million or 4% year-over-year. Bookings were $233.9 million, beating the guidance by $5.9 million and up $24.7 million or 12% year-over-year. The company had a net loss of $0.9 million, $14.1 million better than management’ guidance and a decline of $6.0 million in net income year-over-year.

EBIDTA: Zynga’ Adjusted EBITDA was $26.7 million, above the company’ guidance by $7.7 million, and a decrease of $3.2 million year-over-year. The company generated operating cash flow of $41.1 million in the quarter, up 9% year-over-year.


Cash Flow & Balance Sheet:

ZNGA ended the quarter with cash and short-term investments of $210 million and $182 million respectively, down from $372 million and $308 million a year ago. This quarter Generated operating cash flow of $41.1 million, up 9% year-over-year.



Guidance for 2018:

Management commentary on the guidance:

  • The company’ upcoming performance will be driven primarily by bold beat execution across its live services and a full quarter contribution from its acquisition of Gram Games.
  • The management anticipates that its year-over-year growth will benefit from full quarter contributions from its Casual Cards and Gram Games acquisitions as well as strength across its forever franchises.
  • The company continues to expect its sequential and year-over-year progression to be affected by declines in web and older mobile games.
  • Similar to Q2, ZNGA’ expects a significant net increase in deferred revenue as it continues to defer the majority of user pay bookings from the recently acquired portfolio of titles from Gram Games in addition to a net increase in deferred revenue from the live service user pay bookings, in particular from Words With Friends and CSR2.
  • The company expects its gross margins to be comparable with Q2 and the operating expenses to increase sequentially, primarily due to a full quarter of contribution from Gram Games.


Risk Factors & Stock Influences:

  1. The company has new games launches in the recent past along with acquisitions. The performance of this portfolio expansion would remain a key business driver and potential stock trigger for the company
  2. Despite having an extensive product portfolio, the company’s market share is significantly dependent on top products, and if its top games do not maintain their popularity, results of operations could be harmed.
  3. 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 would remain a challenge.
  4. Another key risk is related to government regulations. ZNGA’s business is subject to government regulation, which mandates how it operates, increases pricing, expands contents and subjects its services to additional competitive pressures, it said, any adverse regulatory development could potentially lower market share and hence return
  5. 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 the competitive position.


Stock Performance

  • On Friday, Oct 19th, 2018, ZNGA closed at $4.00, with a robust average volume of 11.7 million shares exchanging hands. Market capitalization is $3.441 billion. The current RSI is 45.94
  • In the past 52 weeks, shares of ZNGA have traded as low as $3.20 and as high as $4.57
  • At $4.00, shares of ZNGA are trading around its 50-day moving average (MA) at $4.00 and above its 200-day moving average (MA) at $3.90
  • The present support and resistance levels for the stock are at $3.90 & $4.18 respectively.



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