Zynga's Deteriorating Outlook - Time To Move On

| About: Zynga (ZNGA)
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In a recent press release, Zynga (NASDAQ:ZNGA) announced its Q1 2013 results. In its most recent quarter, the company was able to earn profits for the first time, a small amount of $4.13 million, but nonetheless a positive sign given the large amounts of losses that the company has accumulated over the previous quarters. Despite this positive, the company's stock price has fallen to $3.13 from $3.35, a drop of around 7%. In this article we will analyze the progress of ZNGA over a few quarters in order to determine why the company's stock price has fallen, and also to estimate what the future holds for ZNGA.

Operational Performance

The company experienced a drop in Average Daily Active Users to 52 million in Q1 2013 from 65 million in Q1 2012 and 56 million in Q4 2012. This constitutes a drop of 20% YoY and 7% QoQ. Similarly, the company's Average Monthly Active Users also dropped by 13% YoY and 15% QoQ. As is visible from the graphs above, both Average DAU and Average MAU have been gradually dropping over the past 4 quarters.

ZNGA has also experienced a drop in its Average Monthly Unique Users and Average Monthly Unique Payers over the past 4 quarters. Average MUU dropped to 150 million, a drop of 18% YoY and 10% QoQ. The Average MUP dropped to 2.5 million, a drop of 29% YoY and 14% QoQ.

The company's Average Daily Bookings per User also dropped in the most recent quarter, but unlike previous indicators, this has experienced a mixed trend over the last 4 quarters. The above indicator also saw a decrease of 11% YoY and 4% QoQ to the current level of $0.049.

The reason for such a drop in the traffic amount and revenue per user amounts experienced by ZNGA is the advent of new competitors during these periods. The combined effect of a decrease in all these indicators resulted in a drop in total revenues of around 18% YoY and 15% QoQ.

Financial Performance

The biggest issue that the company is facing right now is the constant decline in its revenues. Q1 2013 was the third straight quarter in which the company experienced a decline in sales and the most recent quarter saw the largest decline in revenues of 15% QoQ.

The above table is better able to portray the problem that ZNGA is facing. As can be seen, the online games revenues, which is the company's core business, has been experiencing a decline over the past 12 months. The revenue CAGR over the past 4 quarters has been -5.9% and over the past 6 quarters has been equal to -3.7%.

While ZNGA's advertising revenues have dropped in the most recent quarter, they generally had been increasing in the past. The company's advertising revenues are directly proportional to its user traffic. As can be seen, the two negative values in the above table correspond to the largest decline in the company's Average Daily Active Users.

Bookings, which are equivalent to revenues and change in deferred revenues, which according to the company is a better indicator of the company's performance than revenues, also declined in the current period by 12% QoQ and 30% YoY. The CAGR in Bookings over the past twelve months is equivalent to -9%.

The Adjusted EBITDA also declined by 36% QoQ and 67% YoY. This is incredible given that this is the only period in which the company has been able to earn a net profit and a positive EPS. However, EPS was only boosted by $8.77 million of tax benefits in the current quarter. If we remove this figure, the company's net income comes to around -$4.63 million and an EPS close to -$0.12. Thus, essentially the company's performance has deteriorated over the past few quarters.

Future Outlook

The outlook of the company is extremely negative. Increasing competition and lowering revenue per users would suggest that the next quarter would yet again bring further decline in the financials of the company. The company estimates that the Q2 2013 revenues would be between $225 million to $235 million, suggesting a QoQ decline of 11% to 15%. The company also forecasted its Q2 2013 net loss to be ranging between $26.5 million and $36.5 million, an increase of more than 700%. Even if we assume that the company has overestimated its losses by 50%, even then the decline in net income comes up to be more than 350%. These stats suggest some very poor upcoming periods for the company, thus I suggest to sell the stock as soon as possible.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.