Don't Expect Upside In Zynga Shares Until Audience Growth Materializes

Baird’s Colin Sebastian mentioned that the audience trend and mixed guidance overshadowed Zynga Inc’s ZNGA Q2 results. Sebastian maintained a Neutral rating on the company, with a price target of $3.

Strong Results

The company reported better-than-anticipated Q2 results, driven by the strength in Zynga Poker and Words With Friends, as well as lower sequential marketing spend.

“However, the stabilizing audience trends experienced in Q1 reversed slightly, as DAUs declined 7 percent Q/Q, which is likely to rekindle concerns over engagement even as Zynga improves monetization, and benefits from healthy trends for CSR Racing,” the analyst stated.

Bookings came in at $175 million, flat year on year but above the consensus and guidance, driven by Words With Friends and Zynga Poker.

The EBITDA margin was also well ahead of the consensus and guidance, primarily driven by revenue outperformance and 14 percent lower sequential marketing spend “as Zynga pivoted to higher ROI advertising channels and rationalizes head-count.”

However, the active user metrics fell from the Q1 levels, suggesting that continuing efforts to drive monetization and engagement, as well as execute a turnaround in an intensely competitive mobile gaming environment.

Sebastian believes that the Q3 guidance could prove conservative, given that the mobile strategy is still to bear fruit.

Q3 Guidance

“Q3 bookings/EBITDA guidance of $180-$190 million and $12-$16 million were slightly below consensus,” the analyst stated, while adding that the guidance was “driven by a sequential increase in marketing expenses to support CSR Racing 2 adoption and the upcoming release of Farmville in late Q3.”

Management continued to be optimistic regarding the company’s release slate, while taking a more disciplined approach to its game portfolio.

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