Will Zynga Inc Crush King in the First Quarter?

Source: Zynga 

Zynga (NASDAQ: ZNGA  ) reports first-quarter results on Wednesday. The social gaming company has struggled to monetize its free-to-play games. A fourth-quarter mobile technology acquisition could prove beneficial in the future, but for now the company has to rely on its stable of existing games. Will Zynga's earnings report have better luck than competitor King's (NYSE: KING  ) IPO last month?     

Analysts estimate first-quarter revenue of $164 million and a loss per share of $0.01. Zynga beat revenue estimates in three of the past five quarters, but missed EPS estimates for as many quarters. 

In the turbulent climate surrounding the company, it's the monetization metrics that will matter the most. Here's what to watch in Zynga's first-quarter report. 

News to know 
In a perfect world, share prices on earnings day would only react to the news in the release. But in reality, investors are thinking about all the recent news that has broken about the company and its industry. 

Zynga's fourth-quarter release was the most notable report in the company's history due to the announced acquisition of NaturalMotion, a mobile gaming company with two popular titles and a development technology used in some of the hottest console games in recent years. How Zynga decides to use this acquisition could either spell the death of NaturalMotion or completely rewrite the social gaming landscape. The first quarter might not include any additional news about Zynga's plans for NaturalMotion.

But, as Zynga prepares for the future, a competitor's presentation could potentially cause waves for the company. Candy Crush Saga maker King had its IPO debut last month. Shares crashed nearly 16% on the first day, and are now down more than 7%. Investors wary of King's weaknesses might look for similar cracks in Zynga. 

Key metrics to watch 
Earnings releases always contain a smattering of metrics including daily active users and monthly active users. But, the monetization metrics matter the most. 

Zynga considers average bookings per daily active user, or ABPU, a key metric for monetization of users through both in-app purchases and advertising. In the fourth-quarter, Zynga reported ABPU growth of 19% year-over-year. But, the growth was mostly due to a drop of nearly 52% in daily active users, or DAUs. So, ABPU growth is only a good sign if it isn't tied to a massive DAU drop.

Another problem with ABPU is that it includes advertising revenue, which only accounted for about 14% of fourth-quarter revenue. But, there's another monetization calculation that focuses more on in-game purchases.

Monthly unique users, or MUUs, represent the number of unique players that have played a Zynga game in a given month. Monthly unique players, or MUPs, represents the number of unique players that made an in-game purchase in a given month. Calculate MUUs as a percentage of MUPs and the answer represents the number of Zynga players willing to make in-game purchases.  

Historically, the company has monetized about 2% of its player base. An increase in that percentage would  be impressive, but the company at least needs to increase the number of monthly players so that the 2% cut represents more people and purchases.  

Not all games monetize equally, so investors need to check that Zynga is not relying too heavily on one title to boost its metrics. 

Continued over-reliance?
Zynga's fourth-quarter report disclosed that over 60% of online revenue came from three titles: Farmville 2, Zynga Poker, and Farmville. Ideally, Zynga would begin to spread the monetization around to more titles. But, King has an even worse over-reliance problem. 

King's pre-IPO paperwork showed that more than three-quarters of the company's fourth-quarter gross bookings came from Candy Crush Saga.   The company currently monetizes 4% of its user base -- double that of Zynga -- but that won't matter if Candy Crush has a big fall in popularity, or if Zynga improves its own monetization percentage.  

Foolish final thoughts 
Keep an eye on ABPU, MUUs, and MUPs in the first-quarter report for an idea of how well Zynga monetized. Also, check to see if the percentage of revenue has spread out to include more game titles. It's still too soon for the NaturalMotion acquisition to make an impact, but the report will still show the overall health of Zynga's existing business. 

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