Zynga (NASDAQ:ZNGA) is a company that, not long after going public, looked like it could have been a sizeable loss for early investors. With a seeming inexorable link to Facebook in its early days, thanks to their core title of Farmville, what started as a listing of $10 rose to a peak of $14.69 following the IPO of Facebook. The following years weren’t so kind, with the shares plummeting, ties with Facebook being broken and the market, in general, being difficult.
However, what has been a slow, planned turnaround over the previous four years seems to be taking hold. Driven by acquisitions and what are considered ‘Forever Franchises’, of which two were acquired last year, Zynga has posted revenues of $265 million, with net bookings $359m.
Countering the significantly increased revenue and bookings comes to a much larger loss than previously expected. With a guidance of a net loss of $59 million, Zynga blew past this with a loss of $129m. However, the cause of this loss was a direct result of the outperformance of recent acquisitions. Specifically, Merge Dragons! from Gram Games and Empires & Puzzles from Small Giant Games, resulting in bonus payments of $86 million rather than the $10m expected.
The greater net loss versus guidance was primarily driven by the outperformance of recent acquisitions. Specifically, Merge Dragons and Empires & Puzzles are performing well ahead of expectations and as a result, Zynga recorded a $86 million increase in the contingent consideration (or bonus) for the acquisitions versus guidance of a $10 million increase.
Zynga: Driving Acquisitions and Pushing Large IP’s
Of the five ‘Forever Franchises’ for Zynga, only one was actually developed by the company. This being Zynga Poker. Words with Friends as acquired with developers Newtoy back in 2010. CSR Racing was acquired with developers NaturalMotion in 2014. Both Merge Dragons and Empires & Puzzles were acquired with their relevant developers last year.
Indeed, in 2018 Zynga spent close to $1 billion on the two acquisitions last year, though the strength of the two core titles appears to be making the deal look good already. Further to that, following the $527 million acquisition of NaturalMotion, the strength of CSR Racing will be complemented with a recent deal signed with Walt Disney (NYSE:DIS) to operate the mobile game Star Wars: Commander as well as develop up to two more mobile titles in the Star Wars universe.
Furthermore, Zynga has signed multiple deals to develop and publish titles based on Game of Thrones and Harry Potter. Adding on to these titles, the company hopes to rejuvenate a number of their own IP’s. In the pipeline are titles based on existing IP’s like FarmVille and Puzzle Combat. Additional content is also planned for the ‘Forever’ titles, aiming to engage the current audience as well as attract both new and lapsed people. One example is CSR Racing, which following a partnership with Universal will feature Fast & Furious themed events.
One game that has found a recovery over recent times is the aforementioned Zynga Poker, which ran into troubles following the move from Facebook. Zynga state that “Zynga Poker continues to recover from platform changes and adjustments to its in-game economy that began in mid-2018. Q1 mobile revenue was down 17% year-over-year and mobile bookings were down 22% year-over-year. The sequential decline has improved versus that of Q4 2018 as mobile revenue was down 8% and mobile bookings were down 7% sequentially”. The company do believe that the title will recover and return to growth in the second half of the year.
The same outlook is expected of Social Slot games, particularly when the full introduction of titles like Game of Thrones Slots Casino are released.
Breaking Down the Figures and Looking Forward
From the revenue of $265m, mobile user pay – the money spent by players – hit a record revenue of $183m, a year-on-year increase of 31%. Mobile user pay bookings rose YoY by 85%, coming to $278m. Rounding these figures up comes advertising revenues and bookings, which are $63 million, a 48% YoY increase in revenue and 46% YoY increase in bookings.
Driven by the success of their new titles, Zynga has raised their full-year guidance to revenues of $1.2 billion with bookings of $1.45bn. Second quarter guidance predicts revenues of $280m, a net loss of $70m and with bookings of $360m.
Our Q2 topline performance will be driven by our mobile live services, anchored by our five forever franchises. We expect the year-over-year growth in bookings to be primarily driven by full quarter contributions from Small Giant Games and Gram Games in addition to strength in Words With Friends and CSR2. We expect this growth will be partially offset by declines in web and older mobile games as well as year-over-year softness in Zynga Poker.
Our bookings growth in Q2 will outpace revenue, driven primarily by the continued deferral of bookings from Empires & Puzzles and Merge Dragons!. This will account for the majority of the $80 million net increase in deferred revenue, up $63 million or 374% year-over-year. While the release of this deferral will have a positive impact on revenue and profitability in future quarters, it represents an $80 million reduction in revenue, net income and Adjusted EBITDA in Q2.
Should the recovery of titles like Zynga Poker prove correct, particularly combined with the potential of high-profile IP’s like Star Wars, Game of Thrones and Harry Potter be developed into strong user-catching games, the recovery of Zynga seems like it could continue. Particularly so with the recent success of Merge Dragons! and Empires & Puzzles, the two recently acquired titles.
The full details can be found in the Quarterly Earnings Letter and Financial Results.
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