Zynga Earnings: Second-Quarter Results Bode Well for Turnaround Strategy

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Zynga (NASDAQ: ZNGA) reported earnings after market close on August 2, delivering sales and earnings results that were better than expectations. The company's transition away from browser-based games continues to make progress, with roughly 86% of sales in the quarter coming from the company's mobile offerings -- up from 76% in the prior year period.

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Here's how sales and earnings stacked up against the prior-year quarter and the preceding-sequential quarter:

  Q2 2017 Q1 2017 Q2 2016
Net Revenue $209.2 million  $194.3 million $181.7 million
Net Income $5.1 million ($9.5 million)   ($4.4 million)

The company had guided for a loss of $0.01 per share for the quarter ended June 30, but actual results came in with a positive EPS of $0.01. Sales of $209.2 million came in 4.6% ahead of the company's projections of $200 million for the quarter. Between a sales beat and the company's first GAAP pre-tax profit since fourth-quarter 2012, it was a good earnings period for Zynga.

Mobile drives results

Under CEO Frank Gibeau, who came into the role in 2016, Zynga has been focused on achieving consistent profitability by maximizing sales generated from its existing catalog of mobile games. The following quote from the company's letter to shareholders gives a good summary of the progress that its mobile business saw last quarter:

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We're particularly pleased with the trends we're seeing in mobile. In Q2, we achieved record mobile revenue and bookings, with revenue up 30% year-over-year and bookings up 33% year-over-year. Mobile revenue now represents 86% of total revenue, up from 76% one year ago and mobile bookings represents 87% of our total bookings, up from 78% a year ago. Mobile user pay revenue was up 39% year-over-year, and mobile user pay bookings were up 45% year-overyear -- both of which were the best in Zynga's history. We also saw encouraging growth in audience where we reached 19 million average DAUs (daily active users), up 28% year-over-year and the strongest year-over-year growth we've seen in more than two years.

Improved engagement on mobile and the company's strategy of increasing monetization from its existing catalog of games instead of devoting substantial resources to new game development appears to be creating significant earnings and cash flow momentum.

Performance for key titles

Mobile revenue climbed 30% year over year to reach $180 million in the second quarter, with sales benefiting from strong engagement for Zynga Poker as well as other key franchises. Mobile revenue for Poker was up 61% year over year, and the company expects the game to play a big role in its future performance and will continue to deliver updates (or what the company calls "bold beats") to expand the player base and keep existing users active. 

CSR Racing 2, which launched in June 2016, had a strong quarter with revenue up 14% and up 9% sequentially. Zynga's Slots games also had a record quarter, delivering a 6% sales increase year over year and the category's highest monetization levels ever.

While Zynga typically does not breakout revenue contributions for titles that account for less than 10% of sales in a given period, the scarcity of updates on the performance of its strategy game Dawn of Titans could be a sign that the title is underperforming. On the other hand, the company's second-quarter letter to shareholders did make clear that Dawn of Titans will see a series of feature updates later this year and that it sees the game as an important performance driver going forward.

Here's the breakdown of second-quarter online game sales by revenue contribution:

Franchise Share of Q2 Online Game Sales
Slots 29%
Zynga Poker 21%
Farmville 17%
CSR Racing 15%
Other 18%

Online game sales does not include advertising-driven revenues, which is a category in which Words With Friends and the recently acquired solitaire games from Harpan are the key contributors. Mobile revenue for Words With Friends was down 15% year over year in the second quarter and was the primary factor in a 1% year over year decline in advertising sales.

What's next for Zynga?

The company issued third quarter guidance calling for EPS of $0.01 on $210 million in sales and $7 million in net income. The company's letter to shareholders 

As we enter the second half of the year, growing our live services continues to be a top priority. Today, we have the strongest mobile portfolio in company history, delivering new highs in revenue and bookings. Across all our forever franchises, we're taking a longer-term view of our business and focusing on delivering quality and innovation for our players. We believe there's more opportunity to unlock value with our mobile franchises and are investing in bold beat roadmaps for 2017 and 2018. In addition to live services, new title development will continue to play an important role at Zynga. Looking forward to 2018 and beyond, we're actively developing new games in categories such as action strategy, casual, and invest express.

CEO Frank Gibeau seems to be making good on his promise to quickly get the company into profitable territory. Whether the company finds a balance between updating existing franchises and the development of new games that produces favorable results over the long-term is less clear, but, for the time being, there seems to be considerable momentum behind Zynga's turnaround effort.

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