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Tickers in this Article: HMC, IGT, MCD, ZNGA
Zynga Inc. (ZNGA) reported better-than-expected fourth-quarter 2012 results. Accounting for stock-based compensation expenses, Zynga lost 1 cent per share, narrower than the Zacks Consensus Estimate of a loss of 4 cents. On a non-GAAP basis, the company reported EPS of 1 cent, which was down from 5 cents earned in the year-ago quarter.

Quarter Details

Though total revenue for the quarter remained flat on year-over-year basis at $311.2 million, it comfortably beat the Zacks Consensus Estimate of $214 million. However, on a sequential basis, revenues were down 2%.

Advertising revenues jumped 35% year over year to $37.0 million, due to the addition of several new advertisers.  Companies such as Progressive Insurance and LG Electronics were added by Zynga, while McDonald's (MCD), Honda (HMC), and NBC Universal renewed their advertising deals with the social game maker.

Online game revenues were down 3% year over year to $274 million. Bookings decreased 15% year over year to $261.3 million in the reported quarter, primarily due to lower web user pay from its games. However, bookings improved 2% on a sequential basis, aided by the launch of FarmVille 2.

Daily Active Users ("DAU") were up 3% year over year to 56 million but down 6% sequentially. Monthly Active Users ("MAU") spiked 24% year over year to 298 million. However, on a sequential basis, MAU were down 4%.

During the quarter, Zynga launched 6 new games (4 web-based and 2 mobile games). Moreover, the company entered into a partnership with bwin.party that will enable Zynga to offer real money gaming in UK.

The company undertook several cost-cutting initiatives, which included spending cuts in marketing acquisition, data hosting, and outside services. Zynga also shut several of its remote studios (Boston and Japan) and trimmed its workforce. These resulted in a 65.7% annual decrease in costs to $273.6 million.

Adjusted EBITDA was $45.0 million in the quarter, down from $67.8 million reported in the year-ago quarter. However, on a sequential basis, adjusted EBITDA was up from $16.2 million.

Zynga reported non-GAAP profit of $6.9 million in the quarter compared with net income of $37.2 million a year ago. However, including stock based compensation of $14.9 million, net loss came in at $7.9 million.

At the end of fourth quarter, Zynga had cash and cash equivalents (including marketable securities) of $1.28 billion compared with $1.32 billion in the previous quarter. Zynga generated cash flow from operating activities of $19.8 million versus $30.1 million in the previous quarter. Free cash flow was $29.5 million.

Outlook

For the first quarter of 2013, Zynga expects non-GAAP loss per share in the range of 5 cents to 4 cents per share. Stock-based expense is expected to be between $35 million and $45 million

The company expects to generate revenues in between $255 million and $265 million. Bookings for the first quarter are projected in the range of $200 million-$210 million.

Moreover, Zynga expects adjusted EBITDA to be in the range of ($10) million to break even in the first quarter. For fiscal 2013, Zynga expects adjusted EBITDA margin to be between 0% and 10%.

Recommendation

We believe that Zynga is well positioned to grow in the near term based on its innovative product pipeline and its dominant position in the social and mobile gaming sector. The company's expansion in the advertising space is another positive for the company. Zynga's initiatives to expand in the real money casino and poker games across different platforms should act in its favor. However, we believe that competition from International Game Technology (IGT) could be a possible headwind.

Moreover, shareholder friendly initiatives such as the buyback and cost reduction program will drive the stock in the near term.

However, we also note that barriers to entry are low in the social gaming market and this will attract new entrants, thereby further increasing competition for Zynga over the long term.

Currently, Zynga has a Zacks Rank #2 (Buy).

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