Zynga Earnings Preview: Deep Stock Analysis for Investors

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

Zynga (NASDAQ:ZNGA) will report fiscal Q3:12 (ending September) results after market close on Wednesday, October 24, and hold a conference call at 2pm PT (dial-in: 800-537-0745, conference ID:  38920337, webcast: investor.zynga.com).

On October 4, Zynga negatively pre-announced Q3 earnings. Zynga expects revenue between $300-305 million, well below our estimate at the time, but above then-consensus, and non-GAAP EPS of $(0.01)-0.00, roughly in-line with expectations. The company cited weakness in certain games within its Ville-style category, although FarmVille 2 drove solid daily bookings, on par with CastleVille, and mobile has remained strong. Zynga had not provided Q3 guidance previously.

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Given the company’s negative pre-announcement earlier this month, we expect Q3 results in line with our recently revised estimates. We expect revenue of $305 million, compared with consensus of $261 million and the preannounced amount of $300- 305 million. We expect break-even EPS, in line with consensus and at the high end of the pre-announced range of $(0.01)-0.00.

In addition, Zynga significantly lowered FY:12 guidance once again.  The company lowered FY:12 bookings guidance to $1.085-1.100 billion from $1.150-1.225 billion and EBITDA guidance to $147-162 million from $180-250 million, and announced an impairment charge of $85-95 million for OMGPOP,  developer of Draw Something, acquired in March 2012 for cash of ≈ $183 million. We do not expect any changes to full-year guidance when the company presents Q3 results.

Management is expected to detail planned cost reductions and its transition strategy on the Q3 call. Zynga is expected to reduce costs in Q4 and downsize its R&D pipeline as it transitions away from first-party online game development towards becoming a multiplatform game network, with a strong focus on mobile. Investor reaction to the turnaround strategy will be reflected in Zynga shares.

Zynga’s turnaround attempt will not be completed in the near-term.  However, a reinvented Zynga, with fewer employees and fewer games under developmentshould see its margins rise, particularly as it grows its mobile and advertising base.

Maintaining our OUTPERFORM rating and our 12-month price target of $4. As we previously revised our FY:13 EPS estimate to break-even, our price target reflects 2x cash and real estate of $2/share. Despite recent weakness, we believe there is significant upside to our price target if execution improves.

Michael Pachter is an analyst at Wedbush Securities. 

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