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Zynga's Outlook Remains Promising Despite Mixed First Quarter

By Keith Noonan – May 14, 2020 at 11:59AM

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The video game company's recent acquisitions continue to pay off.

Zynga (ZNGA) published its first-quarter earnings earlier this month, delivering a mixed bag of results. Revenue for the quarter came in at $404 million, topping both management's guidance and the analyst consensus. But the company's GAAP net loss for the period worked out to $0.11 per share, exceeding the $0.03 per share from guidance and $0.01 per share Wall Street expectation. 

Zynga stock has declined roughly 3% since the earnings release. The company headed into its first-quarter earnings release with shares trading at their highest level since 2012, so it's not shocking that the stock has pulled back slightly. And as you'll see below, its earnings performance was much better than it looked on the surface.

A person using a mobile phone.

Image source: Getty Images.

Solid growth and a strong balance sheet

First-quarter sales climbed 52% year over year, and bookings for the period rose 18% year over year to reach $425 million. The company cited strong performance from the titles Merge Dragons! and Empires & Puzzles for the sales and bookings momentum.

Though revenue growth was strong in both the U.S. and international regions at 41% and 72%, respectively, the larger loss stemmed from bonus payments resulting from stronger-than-expected performance from titles developed by Small Giant Games and Gram Games, studios that Zynga acquired in 2018. Here's a note on the payouts from the company's letter to shareholders:

Given the strength in engagement and monetization in Empires & Puzzles, Merge Dragons!, and Merge Magic!, our acquisitions of Small Giant Games and Gram Games continue to perform ahead of our expectations, resulting in a $120 million contingent consideration expense versus our guidance of $25 million. This was the primary driver of the difference in our net loss of $104 million versus our guidance of a net loss of $26 million. On a year-over-year basis, our net loss improved by $25 million driven by a lower net increase in deferred revenue and stronger operating performance, partially offset by the higher year-over-year contingent consideration expense.

This isn't the first time that bigger bonus payments have led to a wider losses for Zynga, and investors should generally be pleased that these acquisitions are exceeding performance benchmarks.

Operating cash outflow for the quarter came in at $35 million, but the company still reported cash and short-term investments of $1.43 billion as of March 31. That leaves Zynga well positioned to make additional acquisitions that can drive growth, and CEO Frank Gibeau said in the first-quarter call that the company "continues to see opportunities to acquire talented teams and franchises around the world."

Keep an eye on user metrics

Besides the bottom-line miss, user numbers for the quarter were somewhat disappointing. Daily active users (DAUs) fell roughly 7% year over year to 21 million, and monthly active users (MAUs) dipped 5% to 68 million. The addition of Merge Magic! and Game of Thrones Slots Casino as active titles wasn't enough to offset declines for Words With Friends and other social games.

The declines came even as Zynga started to see increased engagement in conjunction with conditions created by the coronavirus in March. However, Gibeau noted that the engagement uptick spurred by the shelter-in-place conditions only started to kick in at the tail end of the quarter, and he indicated that heightened engagement for its portfolio was much more notable in April.

Zynga has been doing an admirable job of increasing monetization across its titles, but declining MAU and DAU metrics are a trend investors should watch closely. The company has video games, including Harry Potter: Puzzles & Spells, Puzzle Combat, and FarmVille 3 -- Animals in soft-launch stages, and investors should monitor what full-scale launches for these titles do for overall user levels. 

What's next for Zynga?

As the table below shows, Zynga's most recent guidance suggests that the business will continue to post impressive sales-and-bookings momentum in the next quarter and for the full year: 

Metric Q2 Target Q2 2019 Results FY 2020 Target FY2019 Results
Revenue $400 million $307 million $1.65 billion $1.32 billion
Bookings $460 million $376 million $1.80 billion $1.56 billion
Net income (loss) ($60 million) ($56 million) ($245 million) $42 million
Adjusted EBITDA $32 million $3 million $210 million $87 million

Data source: Zynga. Table by author. EBITDA = earnings before interest, taxes, depreciation, and amortization.

Zynga's recently issued full-year guidance also delivered generally encouraging revisions compared to the targets laid out when the company published fourth-quarter results in February. Zynga had previously guided for sales of $1.6 billion and bookings of $1.75 billion. The company's projected net-loss widened significantly from the previous guidance for a loss of $160 million, but the expanded projected loss likely stems from performance-driven bonus payments. 

Many of Zynga's core franchises still look strong, its most recent acquisitions have been a hit, and the company has plenty of room for long-term growth. The next big tests for the company will be launching new original properties, making more smart acquisitions moves, and expanding its user base.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zynga. The Motley Fool has a disclosure policy.

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