Is Zynga Back to Looking Good?

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

Zynga (NASDAQ:ZNGA) will report fiscal first-quarter results after market close on Wednesday, April 24, and hold a conference call at 2pm PT (dial-in: 800-537-0745, conference ID: 26402442, webcast: investor.zynga.com).

Expecting Q1 results at or above the high end of conservative guidance. We expect revenue of $265 million versus consensus of $210 million and guidance of $255-265 million, bookings of $210 million versus guidance of $200-210 million, adjusted EBITDA of $(1.3) million versus guidance of $(10)-0 million, and nonGAAP EPS of $(0.04) versus consensus of $(0.04) and guidance of $(0.05)-(0.04).

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On the Q4 results call, management attributed the sequential decline in bookings (20-23 percent) expected in Q1 to a light release slate. According to AppData, the MAU decline was well below this level, and we remain confident that Zynga can stem declines in unique payers. Also, we expect the emphasis on cost control to continue. In addition, Zynga has $188 million left in its share repurchase program.

We do not expect Zynga to provide additional fiscal year 2013 guidance. It is targeting an adjusted EBITDA margin of 0-10 percent. We do not expect additional color due to the volatility in the popularity and monetization of many Zynga games, including its most high-profile releases, coupled with the recent introduction of real money gaming. In addition, the company will seek to avoid underperforming expectations as many investors are once again warming to the stock after misses in the past…

Real money gaming presents a new bookings opportunity, but the near-term impact will be minimal. Earlier this month, Zynga released ZyngaPlusPoker and ZyngaPlusCasino in the U.K. with partner bwin.party, with additional launches expected throughout 2013. Zynga will have to overcome a number of competitors in the U.K., and even if the games prove to be popular with consumers and will likely have to share a significant portion of its profits with bwin.party, in our view.

Initiating our fiscal year 2014 estimates. We expect online game revenue to stabilize, while mobile and advertising revenue to increase markedly. In addition, we expect Zynga to remain committed to cost control, resulting in positive earnings for the year.

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Maintaining our OUTPERFORM rating and our 12-month price target of $4. Our price target reflects 2x cash (including marketable securities) 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.

Michael Pachter is an analyst at Wedbush Securities.