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Zynga beat analysts’ expectations today, reporting stellar bookings and revenues in the first quarter that ended March 31 thanks to the strong performance of its existing games and Harry Potter: Puzzles & Spells.
Zynga also continued its acquisition spree, moving out of its usual food chain to agree to pay $250 million for Chartboost, a mobile advertising and monetization platform with 700 million monthly users.
San Francisco-based Zynga’s revenue was $680 million, up 68% year-over-year, and bookings of $720 million, up 69% year-over-year. The bookings and revenue numbers were the highest ever, and profit numbers were strong as well. In after-hours trading, Zynga’s stock price is up 4.2% to $10.57 a share.
The pandemic has been a tragedy in lost lives and economic hardships, but gaming is one of the few industries that appears to be emerging stronger than before the coronavirus hit. People are still playing more, and the San Francisco firm has also benefited from its acquisitions of Gram Games, Small Giant Games, Rollic, Peak Games, and Echtra Games. And last week, Zynga also acquired the maker of High Heels, a hypercasual game that Rollic publishes. During the first quarter, Zynga launched Small Giant’s second game, Puzzle Combat.
“It was a record quarter for us,” said Zynga CEO Frank Gibeau in an interview with GamesBeat. “Year over year, we were up 69% in bookings. Our audience was up 139% to 164 million monthly active users. Our user engagement is actually increasing over the last few quarters. And even as people are starting to return to school, and get back to normal, mobile games are going with them.”
Gibeau added, “What happens when things open up? We’re seeing our engagement levels stay high and grow. The business is doing well. One particular area that stood out was our advertising businesses up 108%, year over year. That is a function of Rollic, which had a string of hits with High Heels and Hair Challenge, Big Bounce, and 3D Block Runner.”
Gibeau said that the quarter benefited from continuing strong results from the Harry Potter game and the fruits rolling in from the two most recent acquisitions. The Rollic deal added hypercasual games, which you can play in a minute or so, such as High Heels. (Zynga bought the developer of High Heels last week to solidify that particular property).
The results were well ahead of guidance across all key financial measures. They were driven by strong revenue and bookings from Rollic’s hypercasual games, Toon Blast, Harry Potter: Puzzles & Spells, and Toy Blast. Live services revenues for ongoing games were also strong.
And Gibeau is optimistic about 2021, as he predicts annual bookings could hit $2.9 billion, more than the previously signaled target of $2.8 billion in bookings.
Building upon its successful launch in September, Harry Potter: Puzzles & Spells gained momentum as players engaged in its social gameplay. Advertising in Q1 was also a key growth contributor, hitting $123 million in revenue, up 108% from a year earlier.
The Chartboost deal
Zynga’s acquisition of Chartboost takes it outside of its usual food chain to another part of the industry — mobile game marketing, advertising, and monetization — and bringing it all inside a game company. Such skills are increasingly important, as advertising takes on a greater importance and Apple’s push toward privacy makes targeting advertising more difficult.
“By bringing them together with Zynga, we can create a great platform opportunity for the company to continue to accelerate growth,” Gibeau said.
Apple is changing the Identifier for Advertisers (IDFA) so that people can more easily opt-out of being tracked. That’s good for user privacy. But it makes it harder to target ads at gamers who spend money, which is what game companies have had to do in the absence of great discovery on iOS devices. Without access to IDFA data, game companies will have a harder time finding users.
“We can start to build out a really robust platform inside the mobile ecosystem, especially as IDFA rolls out with all of this turmoil,” Gibeau said. “This is an opportunity to grow our share by vertically integrating into ad tech and it gives us a real advantage and maximizes our game scale.”
As for IDFA’s effect, which started last week, some of that still remains uncertain, Gibeau said.
“It’s too early to tell what the data is telling anybody,” he said. “But i think the fundamentals are that IDFA in many ways will take the bipolar world of advertising, where Google and Facebook command more share, will change to having more viable networks out there for advertisers. It actually levels the playing field.”
Zynga closed the quarter with 2,395 employees, and Chartboost will add 100.
How the market will react
The stock market reaction to Zynga’s results is usually driven by whether it hits revenue or earnings targets. But it’s complicated, because Zynga is required to report some revenue later than when it actually receives it (like when a user buys in-game currency but doesn’t use it until much later). This is called deferred revenue. But if you add the changes in deferred revenue and current revenue, you get a better picture of the actual quarter’s results in a number dubbed bookings. Zynga’s management uses this number in how it guides expectations. And its investors view bookings as more important than revenues.
As a public company, Zynga is required to report quarterly results on a U.S. GAAP basis, while analysts and investors use non-GAAP financial metrics to assess a company’s underlying performance. Bookings and adjusted earnings before income tax, depreciation, and amortization (EBITDA), excluding the impact of deferred revenue, are among those metrics that are most highly scrutinized as they reflect the actual operating activity of the company better.
Here’s the numbers that really matter when it comes to stock market trading for Zynga’s stock.
Analysts had expected Zynga to report bookings of $686 million in the quarter, while Zynga itself guided to $680 million. Zynga beat those targets with $720 million.
And it also beat the analysts’ profit targets. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is more closely watched as a measure of the company’s profitability. After adjustments, the figure that analysts focus on (adjusted EBITDA, excluding the impact of deferred revenue) of $150.2 million, while Zynga guided to $145 million. The comparable profit target number that Zynga hit for adjusted profits was $162.2 million, well above expectations.
More Q1 details
The company had record online game (or user pay) revenue of $557 million, up 62% year-over-year, and user pay bookings of $596 million, up 63% year-over-year.
The company had record average mobile daily active users (DAUs, or those who play at least once a day) of 38 million, up 85% year-over-year, and average mobile monthly active users (MAUs, or those who play at least once a month) of 164 million, up 139% year-over-year.
In the previous quarter, Zynga increased its war chest for acquisitions. The company issued $875 million of convertible notes to strong investor demand, providing net cash proceeds of $794 million after the cost of the capped call transactions and associated issuance fees.
The company reported a net loss of $23 million, $27 million better than its own guidance. This was primarily driven by stronger operating performance, higher other income, and lower than expected net increase in deferred revenue. On a year-over-year basis, the net loss grew by $81 million, primarily due to the higher net increase in deferred revenue, amortization of acquired intangibles, and stock-based compensation, partially offset by improved operating performance and lower contingent consideration expense.
Adjusted EBITDA was $123 million, which is $23 million above Zynga’s guidance. This was primarily driven by a stronger operating performance and lower than expected net increase in deferred revenue. On a year-over-year basis, Adjusted EBITDA increased $55 million driven by improved operating performance, partially offset by a higher net increase in deferred revenue.
While Zynga has absorbed four acquisitions in recent years, the company may still have an appetite to buy more companies with its focus on good teams, technology, and franchises.
Gibeau said Zynga is now anchored by eight “Forever Franchises,” which can generate more than $100 million a year for five years. These include Words With Friends, CSR2, Zynga Poker, Toon Blast, Toy Blast, Merge Dragons, Merge Magic, and Empires & Puzzles.
FarmVille is usually on that list, but Zynga ended the Flash-based version of the original FarmVille, and it hasn’t yet launched FarmVille 3. Zynga keeps generating revenues from those games via live services. Zynga Poker in particular had rebounded well from problems in past years, and it is doing well alongside Zynga’s social casino games.
Zynga also expects launches of new games to be a meaningful growth driver in the years ahead. With Puzzle Combat out the door, Zynga is focusing on FarmVille 3 and Star Wars: Hunters. CityVille is still in development, but the game isn’t scheduled yet. FarmVille 3 is in its final stages of testing.
Zynga also anticipates hypercasual games will be a big growth opportunity, thanks to its acquisition of Rollic. Hypercasual games (as well as instant games) are highly accessible, driven by simple concepts that are easy-to-play and appeal to a large and diverse audience of players, many of whom may be first-time mobile gamers. Such games can often be played in a minute or less.
Rollic’s top games include Tangle Masters, Go Knots, High Heels, Wood Shop, Big Bounce, 3D Blob Runner, and Hair Challenge.
Zynga also has Star Wars on the horizon.
“We announced Star Wars: Hunters. As I mentioned earlier, we acquired Echtra,” Gibeau said. “We’re investing in hypercasual, crossplay games, ad tech, combined with our live services model and our new games like Farmville 3 coming. Puzzle Combat just released, Harry Potter’s still cranking, and so those combined strategies really continue to make us very bullish and confident about the future.”
Zynga is also developing several cross-platform games that will further expand its potential market for players. Many of the largest interactive entertainment properties in the world today are free-to-play cross-platform play experiences.
I can imagine that Star Wars is on that list of games that’s on PCs or consoles, but Zynga isn’t yet saying that for sure. You can imagine that fans of the Forever Franchises might play the games on their consoles and PCs, if those games are available. And so Zynga is going after that opportunity, Gibeau said. In March, Zynga acquired PC game developer Echtra Games, the maker of the Torchlight franchise (think as a lighter take on Diablo).
Zynga is also investing in new advertising technologies and solutions that will enable us to further expand its position in the mobile advertising ecosystem and unlock more value across Zynga’s network of games. At the core of Zynga’s live services platform is its first-party data network, which captures key insights about how players are interacting with its games.
As for headwinds, the larger mobile industry faces uncertainty around the Identifier for Advertisers (IDFA), which Apple is changing as it favors user privacy over targeted advertising. That is coming soon and it is expected to hurt game companies that need to target big-spending gamers.
But Gibeau said that IDFA will likely have an uncertain effect on Zynga as it could hurt the company’s advertising business and capability to target gamers. He noted that could be offset by Zynga’s huge mass of players who trust it with their data as well as well-known game properties that can do well even if users can’t be precisely targeted. There could be short-term effects on advertising yields in Q2 and Q3. Chartboost’s deal will likely close in Q3.
In 2021, Zynga expects to deliver revenue of $2.7 billion, up 37% from a year earlier, and bookings of $2.9 billion, slightly higher than its expectations in the previous quarter and up 28% year-over-year. Previously, Zynga had expected $2.84 million.
Zynga anticipates a net loss of $135 million and adjusted EBITDA of $450 million. Analysts had been expecting full-year EBITDA (excluding the impact of deferred revenue) of $669.3 million, and Zynga estimates that number for 2021 will hit $650 million now. Zynga expects to invest more in its growth initiatives.
Gibeau said Zynga has also factored Apple’s recent changes to IDFA into its guidance. This will create some short-term pressure on advertising yields, primarily in Q2 and Q3. However, the teams have multiple strategies in place that should more than offset this potential headwind including yield optimizations and opportunities to expand our advertising inventory.
“We raised the estimates for the year by $100 million,” Gibeau said. “A lot of game companies don’t lean in that hard in the first quarter. But we’re going to take the full year of $2.8 billion in bookings to $2.9 billion. And that’s because we’re confident in how the trends are evolving from return to work, and how mobile games are continuing to prosper.”
For the first quarter ending June 30, Zynga expects revenue of $675 million, up 49% year-over-year, with bookings of $710 million, up 37% year-over-year. Analysts had been expecting bookings of $694 million in Q2.
The net loss will be $30 million, while adjusted EBITDA will be $115 million. Analysts were expecting EBITDA (excluding impact of deferred revenues) of $154.5 million, and Zynga expects it will hit $150 million in Q2. While that number is lower, Zynga said it is taking its profits and reinvesting them so that it can strengthen the company in the future.
Zynga also expects some modest marketing costs as it ramps up some new titles.
“Engagement is up. I feel like we’re really well positioned to continue to grow the company and master the difficult comparison” for the second-quarter year-ago results, which were boosted by the boom in gaming during the pandemic, Gibeau said. “Our guidance takes that into account.”
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