Zynga Inc. (ZNGA) is scheduled to release its fiscal first-quarter 2012 results after market closes today. In the run up to the earnings results, no substantial movement in analysts’ estimates for the quarter was noticed.
Prior Quarter Recap
Zynga reported dismal fourth quarter loss of 56 cents per share (including stock-based compensation expense), which were miles short of the Zacks Consensus earnings estimate of 3 cents per share. Earnings (excluding stock-based compensation) declined 44.4% year over year to 5 cents per share in the reported quarter. The year-over-year decline was primarily on account of higher operating expenses, which fully offset a healthy growth in the top line during the quarter.
Revenues increased 59.0% year over year to $311.2 million, primarily driven by strong growth in advertising and online gaming revenue.
For further details please read: Zynga Reports Disappointing 4Q
Outlook
For fiscal 2012, Zynga expects earnings in the range of 24 cents to 28 cents per share. Stock-based compensation expense is projected to be in the range of $400 million to $425 million for the year. Currently, the Zacks Consensus Estimate stands at 27 cents.
Bookings are projected in the range of $1.35 billion to $1.45 billion. Adjusted EBITDA is estimated in the range of $390 million to $440 million for the full year. Capital expenditures are projected in the range of $140 million to $160 million for full year 2012.
Estimates Trend Revision
Over the past 30 days, none of the 17 analysts covering the stock revised their estimates for the quarter. Thus, the Zacks Consensus Estimate for the first quarter is pinned at 5 cents per share.
For fiscal 2012, 3 of the 17 analysts covering the stock revised their estimates upward, while one analyst made a downward revision to the estimates. Yet, over the last 30 days, the Zacks Consensus Estimate for fiscal 2012 is pinned at 27 cents per share.
Analysts covering the stock expect the company to perform better on the back of its popular titles like like FarmVille and CityVille. Moreover, analysts believe that strategic acquisitions and new game releases will be the growth catalysts for 2012. Additionally, growth in the mobile gaming segment is expected to offset the decline in Facebook revenue in the short run.
Our Take
We believe that Zynga is well positioned to grow over the long term due to the staggering growth outlook for the social gaming sector over the next couple of years. According to one of the studies conducted by Strategy Analytics, the global online games’ market, which includes social and mobile games, is currently worth $4.0 billion and is expected to triple in the next five years.
We believe that an increase in the number of social gamers will further boost spending on virtual goods, lead-generation offerings and advertising over the long term. These trends will likely boost Zynga’s growth over the long term. Moreover, the upcoming IPO of Facebook also bodes well for Zynga. Much of Zynga’s success is attributed to the huge popularity of Facebook, which contributes a major portion of Zynga’s gross revenues.
Additionally, the recent acquisition of rival social game developer OMGPOP will not only expand Zynga’s mobile gaming portfolio, but will also lower its dependency on Facebook. Zynga expanded its presence in the mobile gaming sector by acquiring a number of companies including Newtoy in 2010 and Five Mobile in 2011. We believe that Zynga will continue to pursue acquisitions in the mobile gaming segment going forward.
However, higher spending on research and development, and technology and game development are expected to hurt profitability going forward. Moreover, Zynga faces significant competition from other established players such as Electronic Arts Inc (EA). We also note that barriers to entry are low in the social gaming market, and this will attract new entrants, thereby further increasing competition for Zynga over the long term.
We have a Neutral recommendation on Zynga over the long term. Currently, Zynga has a Zacks #3 Rank, which implies a Hold rating in the short term.
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