5 Key Metrics for Zynga Investors to Focus On

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Zynga (NASDAQ: ZNGA) is on the comeback trail, and investors are taking notice. Sales are on an upswing, the business is profitable for the first time since the fourth quarter of 2012, and its shares now trade in the range of three-year highs.

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That's laudable progress, but the recent stock gains and sales and earnings achievements also warrant a closer look at the company's operations. Here are five key metrics that investors should pay attention to in order to track Zynga's turnaround.

1. Mobile revenue growth

Zynga used to generate the large majority of its sales from games that were played on Facebook and other browser-based portals, but as business conditions on these platforms became less favorable, the social games company was forced to shift to mobile.

Though the transition has not been an easy one, it appears its strategy for smartphones and tablets is starting to find its footing. Last quarter, 86% of its sales came from mobile, with the category's sales increasing 30% year over year and gaining enough ground to offset declines for web-based products and drive overall sales up roughly 15% over the prior-year period.  

2. Active users

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Monthly active users (MAUs) and daily active users (DAUs) are among the most important metrics for Zynga investors to watch, because they track the size of the company's audience and how engaged players are. The chart below gives a look at MAU and DAU trends over the last five quarters:

Investors should also try to gauge how far Zynga is managing to grow its user base organically and to what extent user growth is coming from the acquisition of outside studios and game properties.

3. Payer conversion

Zynga's games are typically free to play, which means that the company has to find ways to generate sales after the initial download. Its current model revolves around selling items and currencies for its titles, with in-game purchases accounting for roughly 78% of sales last quarter.

Along with growing its user base, increasing the rate at which players are making purchases is one of the company's key avenues to sales and earnings growth. The chart below shows the percentage of Zynga players who paid for in-game content over the last five quarters:

4. Ad revenue

Besides in-game purchases, advertising makes up Zynga's other core revenue stream. Last quarter, ad sales fell 1% year over year to contribute 22% of overall revenue -- down from 25% in the prior-year period. The drop-off stemmed from declining performance for Words With Friends -- one of the company's most important titles -- even as Zynga made moves to fortify its ad business with the acquisition of Harpan and its popular ad-based solitaire games. 

One strategy that Zynga is particularly interested in is "watch to earn", which rewards players with in-game currency for watching sponsored content. In-game purchases will likely remain the company's biggest sales contributor for the foreseeable future, but the performance of "watch to earn" and the broader ad segment remains important. 

5. The relationship between sales and margins

Increased confidence in Zynga's ability to grow sales and margins has been a driving force behind its share price gains over the last year, and the extent to which the company can deliver on both those fronts will shape performance going forward.

Here's CFO James Griffin on the May 9 earnings call detailing expectations to match the EBITDA margins of leading industry peers and offering a target for the company's margins in 2018 -- (transcript courtesy of Thomson Reuters):

When we talk about peers, we're talking about more the larger gaming companies like Activision and EA, and we would also throw in there King before the acquisition, where their margins are closer to the 30-plus percent range. And as I have said in a number of calls, our base camp, as we look at that, is to try and get first to 20% and then, over the long term, get to 30%. As we think about it in terms of being on track, I feel comfortable right now, given the progress and momentum we have in the company that we're on track to deliver the first base camp of 20% in FY '18.

In the most recent earnings call, conducted Aug. 2, Griffin followed up on the topic of hitting its 2018 EBITDA margin target and stated that the company sees room for improved efficiency in its research and development process, marketing, and general and administrative operations but placed the most emphasis on improving engagement and monetization for its lineup of core titles. For reference, its adjusted EBITDA margin was roughly 14% in the June-ended quarter.

Based on Griffin's comments, the company has not modeled breakout performance for any of its 2018 releases into hitting next year's margin target, so it's possible that strong performance for upcoming titles could push profitability significantly above expectations. 

With Zynga focusing primarily on getting the most out of its current franchise hits as opposed to new releases, the relationship between sales and margins growth is important to watch. Creating updates for its core titles will typically be less expensive and risky than developing new games and should improve margins, but the trade-off is that there's less potential for explosive revenue growth and the popularity of core games like Zynga Poker could eventually start to taper off.

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Keith Noonan owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard and Facebook. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.