Another quarter and the user metrics at Zynga (NASDAQ: ZNGA ) continue to slump. The good news for the social game producer is that the company easily surpassed estimates on bookings and revenue, providing a level of comfort that the slide is coming to an end. The new CEO Don Mattrick hasn't so much produced new games as he has instilled confidence in the future.
Last quarter, Don outlined enormous future growth on mobile platforms that unfortunately other public game producers aren't reaching either. Massive game publisher Electronic Arts (NASDAQ: EA ) and small developer Glu Mobile (NASDAQ: GLUU ) have both struggled to capture significant market share from the future platform of gaming.
The good and bad
In real terms, the third quarter earnings report showed a business still in decline. Revenue was down 36% from the comparable quarter last year. Monthly active users (MAUs) plunged a whopping 57% year-over-year. Even more concerning was the MAUs sequential quarterly decline of 29%. From a positive point of view, the social gaming giant still had 133 million MAUs in the quarter.
In relative terms, the numbers were better than expected, especially in regard to bookings and revenue. Analysts expected revenue to fall below $150 million and it actually hit $203 million. Bookings for the quarter were forecasted between $125 million to $150 million and actually came in at $152 million. Revenue guidance averages $180 million, whereas the analyst community pegged the number slightly below $150 million. The numbers were clearly bad, but the expectations were for an absolute collapse that didn't occur. The company's stock initially soared on the news, but within two trading days it provides a investors an attractive entry point.
The big picture
As much as anything, the new CEO has brought a level of focus to the firm. Prior to his arrival, everybody was clamoring around real-money gaming (RMG) as the savior for Zynga. Don has correctly reminded investors that the core social gaming business continues to explode. The issue is the execution around the core business by the previous management. The need doesn't exist to dramatically shift the business; rather, the company needs to focus on making better games to capture the market.
Last quarter, Don presented some stats regarding the gaming growth rates on the major platforms highlighting how the market was growing without Zynga. This quarter he reminded investors of the potential that exists in mobile. The expectation is that smartphone users will double worldwide to 2.5 billion by 2017. More importantly, more than 50% of the time spent on smartphones and tablets involves playing games.
Even more interesting, he threw out that Zynga achieved peak bookings margins of 47% and adjusted EBITDA hit $393 million. Most might doubt whether Zynga can recapture this market, but in the next couple of years the market will be vastly larger than when it generated that EBITDA level.
The biggest problems for the publicly traded game developers are the lack of success in developing consistent mobile winners. Monetizing on mobile has proved to be far different than the successes that Zynga produced on Facebook or Electronic Arts with consoles. This presents a massive opportunity to conquer the mobile market with the assets and tools of Zynga and Electronic Arts, but it also presents a risk that neither will ever be successful. Current champion Supercell was just rewarded with a lofty $3 billion valuation based on the success of only two games. Previously King.com, Rovio Entertainment and others were successful in producing chart-topping games. The question remains whether a mobile game is more luck and momentum than pure development talents and spending.
To highlight the point, the current iPhone chart courtesy of AppAnnie.com lists the following games from the public firms. Ironically, the smaller Glu Moible has the top game in "Deer Hunter 2014" that has consistently sat in the top ten over the last month. Zynga has the consistent "Zynga Poker" that sits in the top 20 on a regular basis. Electronic Arts has two games, "The Simpsons: Tapped Out" and "The Sims Freeplay," that both sit in the top 30.
While Glu Mobile generates substantially all of its revenue from mobile, it still struggled to reach $20 million in quarterly numbers prior to the "Deer Hunter 2014" success. Electronic Arts now obtains half of revenue from digital channels, but the AppAnnie.com data suggests limited mobile success with only two games in the top 50.
While investors continue to ponder the future of Zynga, the company appears perfectly aligned to take advantage of the global shift to smartphones and tablets. With several strong game franchises, a war chest of cash, and a new CEO, the company has all the ingredients to turnaround its business. During phase 1, the new CEO has successfully stabilized the business. Now he'll need to prove that mobile game development has improved at Zynga, but the rewards could be huge if he's successful.
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