Analyst: Can Zynga Surpass Expectations for 2013?

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Zynga (NASDAQ:ZNGA): Revenue and profitability were better than expected in Q4. Total revenue was $311 million, compared with our estimate of $275 million and consensus of $212 million (no revenue guidance provided). Non-GAAP EPS was $0.01 (excluding $0.07/share of net charges), compared with our estimate of $(0.03), consensus of $(0.03) and implied guidance of $(0.04) – (0.03). The beat was driven primarily by better monetization (ABPU was up 6% sequentially vs. our down 20% expectation), and by sun-setting 13 games and reducing headcount by ≈ 5%.

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Q1 guidance below our expectations. Initial Q1:13 guidance is for revenue of $255 – 265 million, bookings of $200 – 210 million, adjusted EBITDA of $(10) million – breakeven, and non-GAAP EPS of $(0.05) – (0.04). Zynga provided initial FY:13 guidance for a target adjusted EBITDA margin of 0 – 10%.

We believe Zynga can surpass our conservative 2013 estimates. While we are modeling a conservative $(0.03) loss in FY:13, we think that Zynga can achieve breakeven for FY:13 through better expense management, and believe that the company’s focus on fewer games may allow it to deliver a profit.

Share repurchases should continue. Although share repurchases during the quarter were…

modest, management intends to continue to purchase stock in 2013 under the remaining $188 million authorization. At the current share price, a fully executed program could result in accretion of 7%, amplifying per share profitability once the company returns to positive earnings.

Real money gaming presents a new bookings growth opportunity. Zynga intends to launch real money games in the UK during 1H:13. The opportunity is largely a test, as the UK market has a number of RMG competitors, and even if the experiment is a success, Zynga will likely have to share a significant portion of its profits with its UK partner. We expect minimal contribution from the UK in 2013.

Strong mobile growth. Zynga saw its monthly active mobile users grow to 72 million during the quarter, and the company is seeing solid engagement from its players. As social gaming hours shift from PCs to mobile devices, Zynga’s strong presence on smartphones and tablets should provide it a competitive advantage.

Maintaining our OUTPERFORM rating and our 12-month price target of $4. Our price target reflects 2x cash and real estate of $2/share. We believe the flexibility inherent in Zynga’s business model makes a return to profitability far more likely than a period of sustained losses. We believe our price target is achievable once Zynga management demonstrates that it can execute on its plan.

Michael Pachter is an analyst at Wedbush Morgan.

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