Outlook: Zynga Bookings Exceed Guidance

App Store 2008

After the close on Thursday, Zynga (NASDAQ:ZNG) preannounced Q4:13 (ending December) results in conjunction with its announcement of an agreement to acquire NaturalMotion. Bookings were $147 million versus our estimate of $140 million, consensus of $141 million, and guidance of $130 – $140 million. EPS was $(0.03) versus our estimate of $(0.04), consensus of $(0.04), and guidance of $(0.05) – $(0.04).

Bookings exceeded guidance due in part to positive trends for key titles. Words with Friends had its highest bookings quarter in its five year history, with 33 percent sequential growth. Zynga’s Casino franchise achieved positive sequential bookings growth for the first time in the past eighteen months. Its new mobile slots game, Hit It Rich! is the top tablet game on the free iPad charts in the Casino category. In the next two weeks, Zynga plans to release another slots game.

Zynga provided much stronger-than-expected FY:14 guidance, a positive reflection on steps management has taken to refresh the product portfolio and rationalize spending. FY:14 guidance is for bookings of $760 – $810 million and non-GAAP EPS of $0.01 – $0.03 versus consensus of $629 million and $(0.04).

The NaturalMotion acquisition is expected to add games and technology. The acquisition accelerates Zynga’s mobile business and expands its creative pipeline, adding Racing and People Simulation. Zynga will also acquire NaturalMotion’s technology and tools, including Euphoria. After closing, Zynga will have five top brands and capabilities in Casino, Farm, People, Racing, and Words.

We believe the acquisition was expensive. Zynga paid $527 million (6.5 – 7.5x expected revenue) in cash and stock, higher than its $183 million OMGPOP purchase.

Management took the chance to clearly articulate its turnaround strategy on Thursday’s conference call. As expected, investors appear to have reacted positively to management’s vision for the company and commitment to profitability. Most importantly, management committed to revenue and profit growth in 2014, and guidance suggests that bookings bottomed in Q4.

We are maintaining OUTPERFORM and raising our price target to $6 from $5. Our revised PT reflects an EV/bookings multiple of 4.5x, applied to our 2014 bookings estimate. We believe the higher multiple is warranted, as the risk of negative earnings or cash flow has been mitigated and bookings have begun to grow.

Michael Pachter is an analyst at Wedbush Securities.

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