Zynga's (ZNGA) second quarter saw the company record another period of encouraging operating results and finalize moves to increase its cash assets -- paving the way for new acquisitions. The company's sales for the June quarter came in significantly ahead of management's $280 million target, and its net loss for the period arrived significantly lower than management's target for a loss of $70 million. Second-quarter bookings also beat the company's guidance for bookings of $360 million.
The weakest part of the video game developer's earnings release was its unimpressive daily active user (DAU) growth and a decline for monthly active users (MAUs) compared with the prior-year period. However, these trends appear less concerning in light of increases for the company's full-year bookings and revenue guidance and confirmation that additional acquisitions are likely on the way.
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Zynga results: The raw numbers
| Metric | Q2 2019 | Q2 2018 |
|---|---|---|
| Sales | $306 million | $217 million |
| Bookings | $376 million | $233.9 million |
| Net Income | ($56 million) | ($0.9 million) |
| EPS | ($0.06) | $0.00 |
DATA SOURCE: ZYNGA. EPS = EARNINGS PER SHARE.
What happened with Zynga this quarter?
- Sales for the quarter were up 41% year over year, and bookings for the period were up 61%. Operating cash flow hit $99 million, up 140% year-over-year and representing the company's best performance since the fourth quarter of 2011.
- The company delivered record bookings for the quarter, aided by Empires & Puzzles and Merge Dragons! -- games brought into the fold by recent acquisitions. However, other Zynga franchises like Words With Friends, CSR2, Zynga Poker, and Hit It Rich! Slots continued to perform relatively well and were solid contributors in the quarter.
- The company's advertising segment posted record second-quarter performance, climbing 26% year over year to deliver revenue of $66 million.
- The company launched Game of Thrones Slots Casino in May and reported strong early results and a favorable outlook for the title. It also released Tiny Royale on Snap's Snapchat-based gaming platform.
What management had to say
Zynga is on track to post record bookings in the current fiscal year and its highest annual revenue since 2012, largely thanks to recent, successful acquisitions, and management has taken steps to free up resources that will be used to power the company's next growth phases.
The following quote from the executive summary of the company's letter to shareholders details the company's recent cash-raising moves:
In terms of capital allocation, we executed our objective to increase our cash reserves. Given favorable market conditions, we raised $690 million in a convertible notes offering, which was well-received and generated net cash proceeds of approximately $600 million in the quarter after the cost of the capped call transactions and associated issuance fees. In addition, given a strong San Francisco real estate market, on July 1, we completed the sale-leaseback of our headquarters building, which provided net proceeds of approximately $580 million after taxes and fees. As of July 1, we had approximately $1.4 billion of cash and investments, which we anticipate will be used primarily to fund future acquisitions to further accelerate our growth.
Looking forward
Following the strong second-quarter results, the company once again raised its full-year guidance. Zynga is now targeting revenue of $1.24 billion for 2019, up $40 million from the company's previous guidance and representing an increase of 37% year over year. It also raised its bookings guidance to $1.5 billion, up $50 million from its previous target and representing an increase of 55% year over year. For the third quarter, Zynga expects to record revenue of $325 million, up 39% year over year, and bookings of $380 million, up 53% year over year.
With its turnaround completed, Zynga appears to be more focused on releasing new titles than it has been in recent years. Investors should continue to monitor MAU and DAU trends. Tepid performance there in the recent quarter isn't hugely concerning at present, and it can be offset by more efficient monetization of engaged players, but it highlights the importance of the company's upcoming games and next acquisition moves.
Investors should also expect revenue growth deceleration in 2020, with the company guiding for low-double digit sales and bookings growth. The substantial slowdown despite new game launches likely has to do with comparison to the contributions from recently acquired studios in the current fiscal year. However, management expects margin to improve and move closer in line with industry peers.
