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Zynga (ZNGA) Down 8.5% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Zynga (ZNGA - Free Report) . Shares have lost about 8.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Zynga due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Zynga’s Q2 Loss Wider Year Over Year, Revenues Up

Zynga reported second-quarter 2020 loss of 16 cents per share. The figure was wider than a loss of 6 cents reported in the year-ago quarter.

Revenues surged 56.9% year over year to $452 million driven by strength in live services, and robust growth in international markets.

In particular, contributions from Social Slots portfolio, Words With Friends, CSR2 and Empires & Puzzles drove the top line in the reported quarter.

The Zacks Consensus Estimate for earnings and revenues was pegged at 8 cents per share and $503 million, respectively.

Total bookings came in at $543 million, up 54.7% year over year. The upside was driven by strong mobile bookings. The consensus mark for bookings was pegged at $503 million.

Quarter Details

Zynga’s online game revenues (85.9% of total revenues) increased 61.3% year over year to $388.2 million on the back of its five popular franchises — CSR Racing, Words With Friends, Zynga Poker, Empires & Puzzles and Merge Dragons! Along with strong player engagements across titles as a result of coronavirus-induced self-quarantine by users globally.

Meanwhile, Advertising revenues (14.1% of total revenue) and advertisement bookings (11.6% of total bookings) declined 3.5% and 4.5%, respectively year over year to $63.5 million and $63 million. The downside was caused by lower advertising demand as a result of coronavirus lockdown.

Mobile revenues (95.9% of total revenue) and mobile bookings increased 50.9% and 39.1%, respectively year over year to $433 million and $498 million. The increase was driven by robust live services performance.

On a geographic basis, revenues from the United States (61.1% of total revenues) increased 56.8% year over year to $276 million.

Moreover, International revenues (38.9% of total revenues) increased 57.1% to $176 million.

User-Base Details

In the second quarter, user pay revenues were $388 million, up 61% year over year. User pay bookings were $455 million, up 47% year over year.

Zynga’s average mobile daily active users (DAUs) increased 4% year over year to 22 million. The addition of Empires & Puzzles and Merge Magic! was more than offset by declines in older mobile titles such as Zynga Poker and chat games.

Moreover, average mobile monthly active users (MAUs) were flat year over year at 70 million in the reported quarter, primarily due to declines in Zynga Poker, chat games and older mobile titles. This was partially offset by the additions of Empires & Puzzles, Merge Magic! and Merge Dragons!.

Average mobile daily bookings per average mobile DAU (ABPU) rallied 32% year over year to $0.248 in the reported quarter.

Operating Details

GAAP gross margin, as a percentage of revenues, expanded to 60% from 59% in the year-ago quarter due to lower net increase in deferred revenues.

Non-GAAP operating expenses (49.2% of total revenue) increased 13.3% year over year to $222.1 million in the reported quarter primarily, due to increase in sales and market investments.

Non-GAAP research & development (R&D), general & administrative (G&A) and sales & marketing (S&M) expenses increased 0.9%, 22.4% and 18.2% year over year to $66.5 million, $24.8 million and $130.7 million, respectively.

Adjusted EBITDA was $70 million compared with $2.9 million in the year-ago quarter.

Balance Sheet

As of Jun 30, 2020, Zynga had cash and cash equivalents & short-term investments of approximately $1.55 billion compared with $1.26 billion as of Mar 31, 2020.

Cash flow provided by operating activities in second-quarter 2020 was $1.45 billion compared with $35.1 million cash flow used in operating activities in first-quarter 2020. Free cash flow was $1.42 billion in the second quarter compared with negative $43.7 million in the previous quarter.

Guidance

For third-quarter 2020, Zynga expects revenues of $445 million and bookings of $620 million.

Management expects the top line to benefit from mobile live services with expected sequential growth across its five forever franchises including full-quarter contributions from Toon Blast, Toy Blast and Merge Magic!.

For 2020, management expects revenues of $1.8 billion and bookings of $2.2 billion.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted 280% due to these changes.

VGM Scores

At this time, Zynga has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Zynga has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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