Zynga Q2A – Chalk and cheese

Bad results show the difference between consoles and handhelds.

•  Zynga reported weak Q2A results and cut its 2014E guidance as new revisions of its flagship games will take longer than expected to reach the market.
• The key metric for Zynga is bookings which is the value of virtual goods sold during the quarter.
• Q2A bookings and EPS were $175m and $0.00 compared to consensus at $191m and $0.00 respectively.
• Only aggressive cost management enabled Zynga from slipping into negative territory.
• On this front, it looks very much as if Zynga is cutting in the muscle of its creative machine as crucial new products such as Poker and Words with Friends will now be delayed.
• The result is that the outlook for the rest 2014E has been cut hard.
• Q3 bookings are expected to be $165m-$175m with EPS at LOSS$0.01 – $0.00.
• This is way below consensus at $212m in bookings and EPS of $0.01.
• Booking for the full year 2014E will now be $695m-$725m which is a meaningful reduction on the $770m-$810m that was forecast in April.
• The one bright spot was cash. This remained almost unchanged at $1.15bn compared to $1.14bn in April.
• This gives the company time to turn itself around despite the fact that aggressive cost cutting has meant that everything will now take longer than originally planned.
• Zynga’s business is now focused on bringing its existing and new titles to mobile in a new and exciting way.
• Unfortunately, the edge that it once had in social gaming has long since been competed away.
• Gaming is a brutally competitive space and Zynga seems to lack the innovation that will allow it to regain some of the lustre that it has lost.
• Mattrick has been in charge for a year and I suspect that he is finding it much more difficult than he expected.
• There is a big difference between console gaming and casual based gaming in that user loyalty and stickiness is much lower.
• This means one has to wow users with something that is really out of the ordinary to keep them coming back for more.
• Against the juggernauts of Clash of Clans (Supercell) and Candy Crush (King), Zynga still has no real answer and its pipeline is not exactly encouraging.
• Dominance in this industry can change very quickly which gives Zynga the opportunity.
• However, it will have to come up with something pretty special to breathe new life into the financials.
• Of this there is currently no sign.