Analyst: Zynga Will Meet or Exceed Expectations

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

Zynga (NASDAQ:ZNG) will report fiscal first-quarter 2014 (ending March) results after market close on April 23 and hold a conference call at 2 p.m. Pacific Time (dial-in: 800-537-0745800-537-0745, conference ID: 23414326, webcast: investor.zynga.com).

We expect Zynga to meet or exceed Q1 guidance. Our Q1 estimates are for bookings of $150 million and earnings per share of $0, versus consensus of $148 million and 1 cent, and guidance of $138 million-$148 million and 1 cent. On April 10, Zynga announced the appointment of new CFO David Lee, and CEO Don Mattrick said that “the year is off to a solid start.” We believe that if Q1 results had fallen short of expectations, Zynga would have preannounced instead. Also, we believe that management has an “under-promise and over-deliver” approach to guidance, strengthening our belief that it will meet or exceed expectations.

We expect Zynga to provide Q2 guidance that brackets consensus at the high end, while reiterating FY:14 guidance. Our Q2 estimates are for bookings of $185 million and EPS of $0, versus consensus of $187 million and $0. Sequential growth will be driven by mobile relaunches of Words with Friends and Zynga Poker in March, and the mobile debut for FarmVille 2 in Q2. Management expects Q1 to be the weakest 2014 quarter, with sequential bookings and adjusted EBITDA growth expected throughout FY:14. For the year, our estimates are for bookings of $820 million and EPS of 4 cents, versus consensus of $788 million and 1 cent, and guidance of $760 million-$810 million and 1 cent to 3 cents.

We believe full-year bookings guidance may be conservative. Zynga’s three big games generated around $360 million in run-rate bookings as of Q4:13, with its other games generating roughly $240 million. By our reasoning, Zynga can achieve the high end of guidance ($810 million) with stable Zynga Poker revenues, $50 million in growth from Words with Friends, $50 million in growth from FarmVille 2, and $110 million in contribution from four or more new games. Zynga’s $200 million in bookings growth means that it will maintain market share this year.

Maintaining OUTPERFORM rating and 12-month price of $7. Our PT reflects an EV/bookings multiple of 6x our 2014 bookings estimate. We believe the relatively high multiple is warranted, as the risk of negative earnings or cash flow has been mitigated and bookings have begun to grow. Zynga shares are on the Wedbush Securities Investment Committee’s Best Ideas List.

Michael Pachter is an analyst at Wedbush Securities. 

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