Zynga Earnings Analysis: One Big Concern Investors Must Note

Zynga’s (NASDAQ: ZNGA) Q1 earnings were roughly in-line with expectations. Total revenue was $321 million, compared with our estimate of $319 million and consensus of $317 million. Online game revenue was $293 million, compared with our estimate of $281 million. Advertising revenue was $28 million, compared with our estimate of $38 million. Non-GAAP EPS was $0.06, compared with our estimate and consensus of $0.05, helped by other income of $15 million. The company did not provide Q1:12guidance.

Guidance adjusted to reflect OMGPOP acquisition.  The company increased FY:12 bookings guidance to $1.425 – 1.5 billion from $1.35 – 1.45 billion, and adjusted FY:12 non-GAAP EPS guidance to $0.23 – 0.29 from $0.24 – 0.28. The company did not provide Q2:12guidance. We are increasing our FY:12 estimates for revenue to $1.63 billion from $1.59 billion, and for EPS to $0.32 from $0.31 to reflect revised guidance and Q1 results. We are increasing our FY:13 estimates for revenue to $2.16 billion from $2.09 billion, and for EPS to $0.46 from $0.44.

Committed to mobile growth. Zynga grew mobile average DAUs to 21 million in Q1:12, up from 12 million in Q4:11, making it the largest mobile gaming network by DAUs. The OMGPOP acquisition should allow Zynga to extend its leadership position, as Draw Something currently has 11 million DAUs.

High degree of revenue concentration among top games remains a concern. Although the company downplayed the impact of sliding AppData stats (such as those for FarmVille) on monetization, investors had a negative reaction to the disclosure that mobile accounted for the majority of bookings growth in the quarter. Zynga shares may be range bound until management provides answers to the monetization concerns of investors, instead of asking for patience until 2H when bookings will likely pick up.

Maintaining our OUTPERFORM rating and our 12-month price target of $17. Our price target reflects an EV/EBITDA multiple of ≈ 19x our estimate for 2013 adjusted EBITDA, or an EV/EPS multiple of ≈ 33x our 2013 EPS estimate. We think that the company’s market dominance and rapid recent user growth will allow it to continue robust growth for the foreseeable future.

Michael Pachter is an analyst at Wedbush Morgan.

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