Earnings Expectations for Zynga, on Deck

Earnings Expectations for Zynga, on Deck

Zynga Inc. (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

Over the years, the company has been through a really interesting all-around transformation, and expansion, Zynga’ strong business risk profile is led by the continuous launch of new and successful products, new services to grow its top line, grow profits and grow overall audience and market reach.

From an industry perspective, the company is eyeing at an overall mobile market of above $100 billion with two and a half billion smart devices enabled by 2021. The company is witnessing engagement in the game raising by whopping 20% year-over-year, so that’s more more moves per day, per player. And that’s had a huge positive impact on the overall growth business.

Latest financial results: On October 31st, the company released its financial results for the quarter ended Sep 30, 2018. Zynga continues to report robust business financial led by improving operational efficiency, cost-cutting initiatives. Also, from liquidity and financial flexibility perspective, Zynga is now cash flow positive, and its cash balances being channelized into several M&A strategies. The management is focussed on both its strategic and tactic capital allocation strategy.

Q3 2018 performance overview:

Upgraded Q4 2018 Guidance:

  • Zynga is raising its fourth-quarter 2018 guidance based on the strong performance of holiday bold beats across its live service portfolio – in particular, Words With Friends, Merge Dragons! and CSR2.In addition, Wonka’s World of Candy is off to a promising start since its launch in early November.
  • As a reminder, this performance does not include any contributions from Small Giant as the transaction is expected to close effective as of January 1, 2019.

Updated Q4 2018 guidance is as follows:

Upcoming events/Near term catalyst: The Company will report its fourth quarter and full year 2018 financial results on Wednesday, February 6, 2019. At this time, Zynga will post management’s Q4 2018 Quarterly Earnings Letter, which includes Zynga’s fourth quarter and full year 2018 results and first quarter 2019 financial guidance. Analysts tracking the stock believes that ZNGA ended 2018 with a very stronger foundation for the future as it continues to make progress towards its improved margin goals and achieving margins more in line with its peers over the long term.

Recent announcements:

  • Acquisition of Small Giant Games, Creator of Hit Mobile Game Franchise Empires & Puzzles: On Dec 20th, the company announced that it has entered into an agreement to acquire Helsinki-based mobile game studio, Small Giant Games (“Small Giant”), creator of the hit franchise Empires & Puzzles. Small Giant adds an experienced team and another innovative Forever Franchise to Zynga’s live service portfolio while also expanding its new game pipeline. Small Giant is expected to be accretive to Zynga’s profitability and be a meaningful growth driver in 2019 and beyond.
  • The launch of New CSR Racing 2 Legends Features: On Nov 21st, the Company announced the launch of Legends, its biggest feature release to date in the world’s most popular mobile drag racing game, CSR Racing 2 (CSR2). Legends allow players to virtually experience restoring, customizing, and racing 16 legendary vehicles with superior power and performance, including the McLaren F1, Lamborghini Countach, Saleen S7 Twin Turbo, and Pontiac GTO “The Judge.”
  • The launch of Wonka’s World of Candy: On Nov 1st, the company announced the launch of Wonka’s World of Candy based on the iconic original feature film, “Willy Wonka and the Chocolate Factory.” Licensed by Warner Bros. Interactive Entertainment, the new game expands the Match-3 experience by incorporating exciting builder elements for players as they prepare the factory for its grand re-opening.

Analyst views and brokerage actions: Per www.marketbeat.com, Their average twelve-month price target is $4.88, suggesting that the stock has a possible upside of 8.44%. The high price target for ZNGA is $5.30, and the low-price target for ZNGA is $4.00. There are currently two sell ratings, one hold rating and 8 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:

Q3 Financial Highlights

  • Revenue of $233.2 million; above the company’ guidance and up 4% year-over-year.
  • GAAP operating expenses of $149.9 million; up 8% year-over-year.
  • Net income of $10.2 million; $31.2 million above the guidance and down $7.9 million year-over-year.
  • The net increase in deferred revenue of $15.6 million; versus the guidance of a net increase of $30.0 million.
  • Bookings of $248.9 million; above the guidance and up 17% year-over-year.
  • Non-GAAP operating expenses of $128.9 million; up 6% year-over-year.
  • Adjusted EBITDA of $38.0 million; above the guidance and a decrease of $6.6 million year-over-year
  • Generated operating cash flow of $41.1 million; up 17% year-over-year.

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 its 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, Feb 2nd, 2019, ZNGA closed at $4.50, with a robust average volume of 12.08 million shares exchanging hands. Market capitalization is $4.166 billion. The current RSI is 73.82
  • In the past 52 weeks, shares of ZNGA have traded as low as $3.20 and as high as $4.57
  • At $4.50, shares of ZNGA are trading above its 50-day moving average (MA) at $3.92 and above its 200-day moving average (MA) at $3.97

The present support and resistance levels for the stock are at $4.44 & $4.58 respectively.

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