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Zynga (ZNGA) Down 14.8% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Zynga (ZNGA - Free Report) . Shares have lost about 14.8% 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 Incurs Loss in Q4 Despite Y/Y Top-Line Growth

Zynga reported a loss of 5 cents per share in fourth-quarter 2020 against the break-even earnings in the year-ago quarter.

Revenues surged 52.3% year over year to $616 million on strength in live services as well as benefits from the acquisitions of Peak and Rollic.

Contributions from the Social Slots portfolio, Words With Friends, CSR2, Empires & Puzzles and the Casual Cards portfolio, along with Rollic’s hyper-casual portfolio, aided the top line in the reported quarter. Moreover, growing player engagement in the recently-launched Harry Potter: Puzzles & Spells was a major positive.

The Zacks Consensus Estimate for earnings and revenues was pegged at 9 cents per share and $676.6 million, respectively.

Total bookings came in at $698.9 million, significantly up 61.3% year on year. This upside was driven by strong mobile bookings. The consensus mark for bookings was pegged at $675.5 million.

Quarter Details

Zynga’s online game or user pay revenues (80.9% of total revenues) jumped 53.6% year over year to $498.6 million.

In addition, Advertising revenues (19.1% of total revenues) and advertisement bookings (16.7% of total bookings) climbed 47.1%and 46.8% year over year to $117.4 million and $117 million, respectively. This upswing in advertising revenues resulted from strong demand in the holiday season along with first full quarter contributions from Rollic’s hyper-casual portfolio.

Mobile revenues (96.6% of total revenues) and mobile bookings surged 54% and 63.4% year over year to $595.3 million and $679.7 million, respectively. These increases were driven by robust live services performance.

On a geographic basis, revenues from the United States (59.8% of total revenues) grew 63.9% year over year to $418 million.

Also, International revenues (38.3% of total revenues) surged 50.4% to $235.7 million on impressive growth in Asia.

User Base Details

In the fourth quarter, user pay bookings were $582 million, up 64% year over year.

Zynga’s average mobile daily active users (DAUs) surged 77% year over year to 36 million.

Further, average mobile monthly active users (MAUs) soared 103%, year over year, to 134 million in the reported quarter.

The solid uptick in users was primarily driven by contributions from Toon Blast, Toy Blast and Rollic’s hyper-casual game portfolio.

Average mobile daily bookings per average mobile DAU (ABPU) edged down to $0.213 from the $0.223 reported in the year-ago quarter.

Operating Details

GAAP gross margin, as a percentage of revenues, declined to 59% from the year-ago quarter’s 65% on higher net increase in deferred revenues and amortization of acquired intangible assets.

Non-GAAP operating expenses (53.8% of total revenues) flared up 59.7% year over year to $331.2 million in the reported quarter chiefly on higher marketing investments.

Non-GAAP research & development (R&D), general & administrative (G&A) and sales & marketing (S&M) expenses shot up 19.4%, 9.5% and 88%, year over year, to $74 million, $23 million and $235 million, respectively.

Adjusted EBITDA came in at $89.9 million compared with the year-earlier quarter’s $75.4 million.

Balance Sheet

As of Dec 31, 2020, Zynga had cash, cash equivalents & short-term investments of $1.57 billion compared with $758 million as of Sep 30, 2020.

Cash flow provided by operating activities in fourth-quarter 2020 was $205.9 million compared with $113.3 million in third-quarter 2020. Free cash flow was $203.2 million in the fourth quarter compared with the previous quarter’s $108.7 million.

Guidance

For first-quarter 2021, Zynga expects revenues of $635 million and bookings of $680 million. Adjusted EBITDA is projected at $100 million, while loss is expected to be 5 cents per share.

For the full year 2021, the company expects to deliver revenue of $2.6 billion, indicating a growth of 32% year-over-year. Bookings are expected at $2.8 billion, indicating a growth of 23% year-over-year.

Adjusted EBITDA is estimated to be $450 million and loss is predicted to be 14 cents per share.

The company expects continued momentum in the live services portfolio, along with contributions from game launches, will be a major growth driver. Also, steady demand for Harry Potter: Puzzles & Spells as well as Rollic’s hyper-casual games is anticipated to boost player engagement for Zynga’s live services platform.

However, per the company, declines in older mobile and web game users might partially offset revenue growth, in 2021.

Note: The EPS data mentioned in the text of this section differs from the rest of report due to the difference in calculation or consideration of one-time items.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month. The consensus estimate has shifted -62.22% due to these changes.

VGM Scores

Currently, Zynga has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Zynga has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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