Has Farmville 2 Put Zynga Back On Track?

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

Zynga (NASDAQ:ZNGA) Q1 results were better-than-expected because of FarmVille 2 and cost control. FarmVille 2 drove Q1 bookings well above guidance, and more than offset a light release slate and declines in web games. Total revenue was $264 million, compared with our estimate of $265 million, consensus of $210 million, and guidance of $255-265 million. Non-GAAP EPS was $0.01, compared with our estimate of $(0.04), consensus of $(0.04), and guidance of $(0.05)-(0.04).

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Weak Q2 guidance appears to have contributed to a sell-off after the close as of the time of writing. After generating revenue of $264 million, bookings of $230 million, and non-GAAP EPS of $0.01 in Q1, all near or significantly above the high end of guidance, management guided to Q2 revenue of $225-235 million (down 11 percent q-o-q at the high-end) and bookings of $180-190 million (down 17 percent q-o-q at the high-end) and non-GAAP EPS of $(0.04)-(0.03), which suggests that sustained profitability will be difficult to achieve, and reversing positive momentum. The company attributed the disappointing guidance to the continued decay of some older games, as well as a Q2 release slate skewed towards the end of the quarter.

Maintaining our FY:13 estimate for revenue of $970 million, but raising our EPS estimate to $0.03 from $(0.03) for better-than-expected profitability in Q1. Maintaining our FY:14 estimates for revenue of $1.02 billion and EPS of $0.15…

Mobile growth continues to be strong. Mobile bookings, which were up 21 percent y-o-y, accounted for 22 percent of total bookings in the quarter, up from 12 percent a year earlier. Although mobile MAUs declined sequentially due to only one launch, audience metrics are expected to improve in the second half of the year helped by several Q2 launches, including Draw Something 2 on Wednesday.

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Real money gaming presents a new and significant growth opportunity, but many hurdles must be overcome before RMG meaningfully contributes to revenue. Zynga must overcome significant competitive and legislative issues, among others. The near-term impact of real money gaming should be limited.

Maintaining our OUTPERFORM rating and raising our price target to $4.25 from $4 to reflect Q1 upside and improving fortunes in the back half of the year when the number of launches increases. Our revised price target reflects 15x our FY:14 EPS estimate of $0.15 plus $2/share in cash and investments.

Michael Pachter is an analyst at Wedbush Securities. 

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