3 Key Takeaways From Zynga's First-Quarter Earnings

Monetization still looks weak, but Zynga has future plans that could leave King in the dust.

Brandy Betz
Brandy Betz
Apr 24, 2014 at 11:05AM
Technology and Telecom

Source: Zynga

Zynga (NASDAQ:ZNGA) shares were up nearly 6% aftermarket Wednesday following the first-quarter report. The social gaming company beat revenue estimates and met loss per share expectations but reported weakened monetization metrics. But Zynga still has the advantage on competitor King (UNKNOWN:KING.DL) and the first-quarter report did contain a few pieces of promising news. What were the key takeaways? 

Analysts had estimated revenue of $164 million -- a 36% drop from the prior year's quarter -- with a one cent loss per share. Zynga reported $168 million and a non-GAAP loss per share of a cent. Over 78% of the quarter's revenues came from online game revenue while the rest came from advertising.

But Zynga's reports these days matter more for the monetization metrics and surprises that further hint at the company's future plans. Here are three key takeaways from Zynga's first-quarter report. 

1. Monetization metrics stumble
I previously detailed why the following metrics matter the most for Zynga's monetization. But it's also important to note that this quarter's numbers exclude any potential gains from the acquisition of NaturalMotion, which completed during this period. So how healthy did Zynga's monetization look? 

Average daily bookings per average daily user, or ABPU, rose 28% year-over-year. But as I mentioned before, that improvement only matters if daily active users, or DAUs, didn't tank at the same time. And DAUs were down over 46% from the previous year's quarter. So ABPU still isn't showing organic growth.

Monthly unique players, or MUPs, were down 44% year-over-year to 1.4 million while monthly unique users, or MUUs, were down 43% to 86 million. Calculating MUUs as a percentage of MUPs shows how many Zynga players are willing to make in-game purchases. The first quarter's answer comes out to about 2%, which is inline with Zynga's historic performance, but half the fourth-quarter paying audience of competitor King.

Source: Zynga filing 

So that's two strikes on monetization metrics. But did the company showed a lessened reliance on a small stable of games? 

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2. Continued game overreliance
In the fourth-quarter report, 62% of online game revenue came from three games: Farmville 2, Zynga Poker, and Farmville. Those titles remain the breadwinners for Zynga, but the dependence jumped up to 64% of online revenue. 

But there was some good news. Zynga's mobile monthly active users grew 11% since the fourth-quarter report and that way was led by Zynga Poker, which also had its first quarter-on-quarter bookings growth in nearly two years. Zynga has recently announced a newer version of Poker that's better tailored toward the mobile experience. And an offshoot of Farmville called Country Escape launched last week. 

It's not great that Zynga's still reliant on so few games, but at least the company is finding new ways to grow those titles. Zynga still looks better than King, which attributed over three-quarters of its fourth-quarter bookings to Candy Crush Saga. And Zynga only needs these titles to hold steady until its new plans are set into motion. 

3. Fresh hires hint at new focus
Zynga's fourth-quarter report included the announced acquisition of NaturalMotion, the developer of two popular mobile games. But NaturalMotion's real potential comes from a development technology that's been used in some of the top console games in recent years including Red Dead Redemption and Grand Theft Auto IV. Zynga wouldn't buy NaturalMotion unless it planned to use that technology. And that means a huge step away from the cartoonish style of Zynga's old titles-and of King's games.

The first-quarter report included some new hires that further supports Zynga's desire to change focus. Microsoft veteran Alex Garden joins as President of Zynga Studios, where Garden can apply experience gained during his term as the General Manager of Xbox Live. Another interesting hire was Oscar-nominated artist Henry LaBounta in the freshly created role of Chief Visual Officer. LaBounta's gaming credentials include works with both Microsoft and Electronic Arts and he has a cinematic background as a Visual Effects Supervisor for DreamWorks

These aren't the types of hires a company makes to churn out FarmVille 3. And the time for change was further illustrated by former CEO Mark Pincus stepping further away from the company by leaving his role as Chief Product Officer, though he remains board chairman. 

Zynga has something big in the works, but it will take time to find out exactly what those plans will entail. 

Foolish final thoughts
Zynga's first quarter was marked with weak monetization metrics and continued overreliance on a small group of games. But that doesn't matter. The NaturalMotion acquisition was a literal game-changer and the new hires further prove that Zynga's planning a new direction that will redefine the company and push it away from social gaming competitors like King.