Zynga Earnings Wow, But Can It Survive?

Joel Anderson |

Zynga Earnings Wow, But Can It Survive?Shares in game-maker Zynga (ZNGA) beat expectations in its Q1 earnings report, released on Thursday. The company has been a battleground stock since its IPO in December of last year, raising serious questions about whether or not a company so heavily reliant on a single source for its revenue, Facebook (FB) in this case, can continue to show a profit.

Company Swings to Loss but Still Impresses

 

Zynga swung to a loss in the first quarter, but still managed to beat expectations. Zynga lost $85.4 million, or $0.12 per share, but it saw revenues grow some 32 percent to $321 million. The company's loss was also driven by one-time expenses, including nearly $135 million in stock compensation costs, and the adjusted earnings were actually at $0.06 per share. Analysts polled by Bloomberg anticipated adjusted earnings of $0.05 per share and revenues of $315.9 million.

Guidance, Acquisitions Drive Optimism for Some but Not All

Zynga made waves when it paid $180 million to purchase OMGPOP earlier this year, following up a 2011 calendar year that saw the company make some 15 company acquisitions for $45.5 million. With OMGPOP and its popular new game Draw Something, Zynga was able to raise its full-year revenue guidance to $1.43 billion to $1.5 billion. It also changed guidance for earnings, excluding one-time items, to $0.23 to $0.29 per share from $0.24 to $0.28 per share.

The core question facing Zynga is one similar to issues facing Google (GOOG) and Facebook: monetizing mobile users is more difficult even as they become a much larger portion of customers.

“Mobile is fine, but it doesn’t monetize as well,” said Arvind Bhatia, analyst at Sterne Agee & Leach.

Zynga, though, seems to believe that it will be able to overcome this trend in the future.

“I wouldn’t say mobile is more difficult to monetize,” said COO John Schappert in an interview. “I would say that we’re early days in mobile, and it’s reminiscent of the early days of social gaming on the Web.”

However, the persistent question of Zynga's dependence on Facebook remains hard to shake. Even as the company expands its platform and seeks out new revenue sources, the vast majority of its profits are tied to this one source. CEO Mark Pinchus continued to tout the company's ability to expand.

"The way we build this business has been organic development," he said. "That's what you should expect to continue to drive the bulk of our growth."

Many analysts, though, remain skeptical that Zynga can continue to grow.

"The guidance was all because of the acquisition and it was clear that the base business did not outperform," said Bhatia. "They had to acquire to raise their numbers, but you're not going to be able to do that too many times."

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
FB Facebook Inc. 128.69 1.38 1.08 15,636,155
MWG Morgan Stanley Cap Tr IV Gtd Cap Secs n/a n/a n/a 0
ZNGA Zynga Inc. 2.88 0.05 1.77 12,155,366

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