Zynga's (ZNGA) turnaround is continuing apace -- even if its first-quarter earnings results look mixed at first glance. Sales for the period came in well ahead of the $240 million target that the company established for the period, but on the bottom line, losses more than doubled the $59 million ($0.06 per share) guidance that management previously provided.

The good news is that the bolder-than-expected red ink actually stemmed from bonuses Zynga paid for the strong performance of recently acquired titles.

A person using a mobile phone.

Image source: Zynga.

Zynga results: The raw numbers

Metric Q1 2019 Q1 2018
Sales $265.4 million $208.2 million
Net Income ($128.8 million) $5.6 million
Adjusted EPS ($0.14) $0.01

EPS = earnings per share. Data source: Zynga.

What happened with Zynga this quarter?

Zynga has been trying to steer toward more regular profitability by focusing on updates for its established franchises, but there are cyclical costs associated with creating new content as well as costs associated with releasing entirely new titles.

The company swung from a small profit in the prior-year quarter to a loss in this latest period, but that shouldn't worry investors. Business for smaller video game companies tends to be significantly more cyclical than for larger players like Electronic Arts or Activision Blizzard. Zynga is also putting up encouraging sales growth and appears to be managing costs effectively.

  • Total sales for the period climbed 27.5% as the business posted record mobile sales and bookings thanks to strong performance from titles, including CSR Racing 2, and the company's recent acquisitions.
  • Revenue for the company's online games segment grew 23.9% year over year to reach $200.2 million, and advertising revenue climbed 39.8% year over year to hit $65.2 million.
  • Daily active users declined 2% year over year, and monthly active users fell 12% year over year -- the addition of new titles wasn't enough to offset declines for long-running franchises like Zynga Poker and Words With Friends
  • The bigger-than-expected loss on the bottom line stemmed from bonuses paid to game development studios that Zynga acquired in 2018. Gram Games' Merge Dragons! and Small Giant Games' Empires & Puzzles each put up strong numbers, triggering bonus payments and elevating Zynga's expenses. 

What management had to say

Management emphasized the strength of the company's core franchise catalog, its "bold beats" strategy of delivering iterative content updates, and its strong pipeline as reasons for raising its full-year revenue and bookings targets. The quote below is from the executive-summary of the company's letter to shareholders:

Our focus on growing our live services portfolio is working. In particular, Empires & Puzzles, Merge Dragons! and CSR2 delivered strong revenue and record bookings in the quarter, while Words With Friends achieved its best Q1 revenue and bookings.

Given the strong momentum of our live services, we are raising our full year 2019 guidance to $1.2 billion in revenue, up 32% year-over-year and an increase of $50 million versus our prior guidance. We are raising our bookings guidance to $1.45 billion, up 50% year-over-year and an increase of $100 million versus our prior guidance. This puts us on track to deliver our strongest annual revenue since 2012 and highest bookings in Zynga history.

Looking forward

Zynga will continue to lean on content expansions for its core franchises, but it looks like the company is also ramping up development of new properties. The company recently put two games (Game of Thrones Casino and Puzzle Combat) into late testing stages, and it's got a Star Wars game in development, courtesy of a partnership with Walt Disney, plus plans to do more with the Harry Potter license. 

Like other video game publishers, Zynga is also looking to expand its presence in fast-growing international markets, target emerging technology platforms like augmented reality and virtual reality, and build its position in new genres of hyper-casual, social games. Investors can count on these initiatives, in addition to new software releases and acquisitions, being significant factors in long-term performance.