Why Is Zynga (ZNGA) Up 7.8% Since Last Earnings Report?

A month has gone by since the last earnings report for Zynga (ZNGA). Shares have added about 7.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Zynga due for a pullback? 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 Q4 Earnings Break Even, Revenues Rise Y/Y

Zynga reported breakeven earnings in fourth-quarter 2019, flat year over year.

Revenues jumped 62.6% year over year to $404.5 million driven by strength in live services, and robust growth in international markets.

In particular, Words With Friends, Empires & Puzzles, and contribution from Merge Magic!’s first full quarter post launch drove top-line growth in the reported quarter.

The Zacks Consensus Estimate for earnings and revenues was pegged at 6 cents per share and $418 million, respectively.

Total bookings came in at $433 million, up 62.2% year over year driven by strong mobile bookings. The consensus mark for bookings was pegged at $418 million.

Quarter Details

Zynga’s online game revenues (80.3% of total revenues) increased 83.5% year over year to $324.7 million on the back of its popular five franchises — CSR Racing, Words With Friends, Zynga Poker, Empires & Puzzles and Merge Dragons!.

Notably, Words With Friends and Empires & Puzzles both witnessed record revenues and bookings in the reported quarter.

Advertising revenues (19.7% of total revenue) and advertisement bookings (18.5% of total bookings) increased 11.1% and 12.7%, respectively year over year to $79.7 million and $80 million. Growth was driven by strong payer engagement throughout the holiday season, as well as one-time benefits from advertising network deals.

Mobile revenues (95.7% of total revenue) and mobile bookings increased 69.7% and 67.7%, respectively year over year to $387 million and $416 million. The increase was driven by robust live services performance.

In addition, Game of Thrones Slots Casino saw positive player reception for the new high limit area, The Highgarden Club, in addition to social features that drove player interaction in the fourth quarter.

On a geographic basis, revenues from the United States (61.1% of total revenues) increased 52.5% year over year to $247 million.

Moreover, International revenues (38.9% of total revenues) increased 80.5% to $157 million. The company benefited from self-publishing of Empires & Puzzles in South Korea, Japan and Taiwan in the third quarter.

User-Base Details

In the fourth quarter, user pay revenues were $325 million, up 84% year over year, and user pay bookings were $354 million, up 80% year over year.

However, Zynga’s average mobile daily active users (DAUs) decreased 1% year over year to 20 million. The addition of Empires & Puzzles and Merge Magic! was more than offset by decreases in older mobile titles such as Zynga Poker and chat games.

Moreover, average mobile monthly active users (MAUs) decreased 10% year over year to 66 million in the reported quarter, primarily due to declines in Zynga Poker, chat games and older mobile titles, partially offset by the additions of Empires & Puzzles, Merge Magic! and Merge Dragons!.

Average mobile daily bookings per average mobile DAU (ABPU) grew 72% year over year to $0.223 in the reported quarter.

Operating Details

GAAP gross margin contracted 200 basis points (bps) year over year to 65% due to a higher user pay bookings mix as well as increased amortization of acquired intangible assets.

Non-GAAP operating expenses (51.3% of total revenue) increased 46.7% year over year to $207.4 million in the reported quarter primarily due to the increase in sales and market investments.

Non-GAAP general & administrative (G&A), research & development (R&D) and sales & marketing (S&M) expenses increased 5.4%, 8.1% and 93.6% year over year, to $20.5 million, $62 million and $124.9 million, respectively.

Adjusted EBITDA increased 103.1% year over year to $74.4 million. Adjusted EBITDA margin expanded 370 bps year over year to 18.6%.

Balance Sheet

As of Dec 31, 2019, Zynga had cash and cash equivalents & short-term investments of approximately $1.36 billion compared with $1.38 billion as of Sep 30, 2019.

Cash flow from operating activities in fourth-quarter 2019 was $94 million compared with $69 million in third-quarter 2019. Free cash flow was $89.2 million in the fourth quarter compared with $59.7 million in the previous quarter.

Guidance

For first-quarter 2020, Zynga expects revenues of $385 million and bookings of $400 million.

Management expects the top-line to benefit from mobile live services with expected sequential growth across its five forever franchises.

Operating expense is expected to increase sequentially. Adjusted EBIDTA is expected to be $57 million. Net loss is expected to be $26 million.

For 2020, management expects revenues of $1.6 billion and bookings of $1.75 billion.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -49.02% due to these changes.

VGM Scores

At this time, Zynga has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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.