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Zynga Provides Dull Outlook

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Zynga Inc. (ZNGA - Snapshot Report) recently announced its fiscal third quarter 2012 preliminary results, wherein the company projected a quarterly loss. Following the announcement, shares of Zynga took a tumble, closing roughly 12.0% lower on Friday. The company is expected to report its third quarter results on October 24, 2012.

For the third quarter, Zynga expects to generate revenues in the range of $300 million to $305 million, which is higher than the Zacks Consensus Estimate of $263 million. Bookings are expected to be in the range of $250 million to $255 million.

Despite strong revenues, the company expects a loss in its third quarter owing to soft demand and charges ($85 million and $95 million, respectively) related to the OMGPOP acquisition. The company projects third quarter net loss of between $90 million and $105 million. Non-GAAP net loss is expected to be in the range of $2 million to $5 million. Zynga expects to report diluted loss per share of between 12 cents and 14 cents. On a non-GAAP basis, Zynga anticipates loss per share of 1 cent to a break even.

At the time of its second quarter earnings announcement in July, Zynga had reduced its fiscal 2012 outlook. Now, concurrent with the pre-announcement, the company again lowered its fiscal 2012 forecasts due to delay in game launches and lowered revenue projections for popular web based games. Zynga reduced bookings estimates from $1.150 billion-$1.225 billion to $1.085 billion-$1.100 billion. Moreover, the company lowered its projected adjusted EBITDA from $180 million-$250 million to $147 million-$162 million.

We believe that the higher spending on research & development, technology and game development will affect the company’s profitability going forward. Further, Zynga’s over-dependence on Facebook Inc. (FB - Analyst Report) and significant cannibalization effect on its earlier games (as users quickly move on to the latest title in the “Ville” series), may hurt its growth going forward. We also note that barriers to entry are low in the social gaming market, which will attract new entrants, further increasing competition for Zynga over the long term.

However, we believe that Zynga is well positioned to grow in the near term based on its innovative product pipeline and its dominant position in the social and mobile gaming sector. The company’s constant investments in the field of mobile gaming are expected to act as a positive catalyst going forward. Moreover, Zynga’s new network “Zynga with Friends” is expected to reduce its reliance on Facebook over the long term and help develop into a multiplatform game network.

Thus, we remain Neutral over the long term (6-12 months). Currently, Zynga has a Zacks #3 Rank, which implies a Hold rating over the short term (1-3 months).

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