Zynga: A Modest Pop After The Game Developer Takes Small Measures To Improve Performance

| About: Zynga (ZNGA)
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Shares of Zynga (ZNGA) traded with gains of 15% in after hours trading on Wednesday. The developer of social games reported its third quarter results after the market close.

Third Quarter Results

Zynga reported third quarter revenues of $316.6 million, up 3% on the year. Bookings, an important guidance of future revenues fell 11% to $256 million. Revenues came in ahead of the company's own lowered forecast of $300-$305 million.

Non-GAAP earnings per share came in at $0.00 versus a profit of $0.04 in the third quarter last year. Zynga previously guided for flat to slightly negative earnings.

On a GAAP-basis, Zynga reported a net loss of $0.07 per share, versus a break-even result last year. Net losses for the quarter, totaled $52.7 million. Net losses are less severe than previously guided losses of $90-$105 million. The company took a $95.5 million impairment charge on the acquisition of OMGPOP, earlier this year.

The number of daily active users, an important metric, rose 10% on the year to 60 million.

Zynga furthermore announced 150 lay-offs, some 5% of its workforce. The company will take $8-$12 million in restructuring charges, in an attempt to save some $15-$20 million in the final quarter of the year.

Furthermore, a new buyback program worth $200 million was announced, sufficient to retire over 10% of the company's shares outstanding.

CEO and Founder Mark Pincus commented on the results:

"While the last several months have been challenging for us, Zynga remains well positioned to capitalize on the growth of social gaming. We're implementing a number of steps to drive long-term growth and profitability. The successful launches of FamVille 2 and ChefVille in the third quarter demonstrate that when we develop great games, our large player audience engages. It's more clear than ever that along with search, shop, and share, play is a fundamental pillar of the Internet, and Zynga continues to be the leader."


Zynga updates its full year outlook to the following. Bookings for the year are expected to come in between $1.09-$1.10 billion. This implies bookings of roughly $210 million for the fourth quarter, down significantly from bookings of $255.6 million in the third quarter.

Adjusted EBITDA is expected to come in between $152 and $162 million, implying an $11 million EBITDA loss in the fourth quarter. The loss compares to a $16.2 million positive EBITDA result in the third quarter.

Full year non-GAAP earnings per share are expected to come in between $0.02 and $0.03 per share, based on a share count of 830 million. The company is expected to report significant losses on a GAAP basis for the full year.


Zynga ended its third quarter with $1.32 billion in cash, equivalents and marketable securities. The company operates with $100 million in long-term debt, for a net cash position of $1.22 billion.

For the first nine months of 2012, Zynga generated revenues of $970 million. The company reported a net loss of $160.9 million, or $0.22 per share.

Factoring in a 15% jump in after hours trading, the market values the company at $1.8 billion. Excluding the net cash position of $1.2 billion, this values operating assets at just $600 million.

Investment Thesis

Year to date, shares of Zynga have fallen some almost 80%. Shares started the year at $9 and peaked at $15 in March. The peak of the social game hype was marked by the acquisition of OMGPOP, the maker of "Draw Something". A secondary offering at peak levels and a disastrous public offering of Facebook marked the pop of the bubble.

Zynga was forced to warn for future profits and revenues in the months following the peak. Furthermore, many talented developers left the company after the value of their option packages fell to zero.

The operational performance remains dismal, despite the revenue beat. CEO Pincus continues to face credibility issues. Yet the existence of the company does not come into doubt given the rock-solid balance sheet, which includes over $1.3 billion in cash, equivalents and marketable securities. The valuation of operating assets at just $600 million indicates that investors continue to have little faith.

I remain unconvinced that the company has turned the tide. Zynga has taken measures, but they are anything but drastic. A couple of weeks ago I argued that the company should take dramatic reforms.

Yesterday's announced job cuts only total 5% of the company's workforce. Furthermore, CEO Pincus has not given up control to regain credibility, and the $200 million share buyback program is modest, if the company believes shares are undervalued. Additionally, Facebook (FB), which posted strong earnings yesterday, mentioned that revenues from Zynga were down 20%, while revenues from other game providers were up by 40%.

The measures Zynga has taken yesterday are not convincing. Furthermore, the company's "beat" on revenues and earnings is not a sign of strength, rather a sign that the company has very bad insight in its short-term financial outlook. Speculative investors could buy some shares in anticipation of large changes at the company, but serious investors should stay away.

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.