Zynga Gets in the Game

 | Feb 15, 2012 | 9:33 AM EST
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Zynga's (ZNGA) first quarterly report as a public company seemed to confuse investors. The stock initially plummeted on the results, falling below $13 from a closing price of $14.35.

Yet, within minutes, the stock recovered all those losses and went green. But as the after-hours session continued, the stock slumped back to close the session at $13.30 -- close to where it wasin this morning's premarket trading.

Why were investors spooked? Big headline losses of $435 million for the quarter, compared to last year's profit of $42 million. Yet, most of these losses were related to one-time compensation charges. They are non-recurring. And, backing them out, Zynga's EPS was $0.05 a share, which actually beat expectations by $0.02.

There were two other things that worried investors though: (1) Zynga's quarter-on-quarter growth, which was only 1% and (2) its guidance for next quarter, which was also cautious.

Management's 2012 outlook included:

  • Bookings between $1.35 billion and $1.45 billion, which would represent a 14% increase (mid-range) from that most recent quarter annualized.
  • Adjusted EBITDA between $390 million and $440 million, which would be roughly flat with Zynga's year ended 2010.
  • Full-year, non-GAAP EPS between $0.24-$0.28, which would be flat with 2011 and actually much less than its 2010 number of $0.38.

Almost certainly, Zynga and its CEO Mark Pincus are low-balling these guidance points so they can exceed them.

Yet, focusing more on the recent quarter's results, it certainly appears that the rapid growth of the company is slowing. Part of the sizzle that sold this steak in the IPO roadshow is that this wasn't another Electronic Arts (EA), Changyou (CYOU), Perfect World (PWRD) or Giant Interactive (GA).

Zynga was supposed to be a new kind of gaming company: a social networking-based gaming venture that was piggybacking on Facebook's success. The bulls believe that as Facebook users scale up their engagement on that platform, they will also scale up their gaming.

Yet, the flat quarter-over-quarter growth points out a flaw in that theory. In fact, it suggests that Zynga is quite similar to all the other gaming companies. Many ride a few hits to big growth. Many are reliant on their "whales," which account for the vast majority of the company's profitability, and many have trouble continuing to keep the hits coming once their franchise game slows.

It appears that Zynga's response to this slow growth has been to try and acquire companies. That wasn't working so well pre-IPO. With the recent ramp in the stock, it has the currency to go out and throw money around, so it might still be able to buy some revenues.

However, those who are waiting for explosive growth from Zynga might have to deal with paint-drying growth instead in the short term.


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