Zynga earnings preview: A little good may boost shares

Analysts expect Zynga to beat consensus estimates; but the bears are pricing in a miss

When Zynga reports its second-quarter results after the close Wednesday, analysts expect the social gaming powerhouse to surprise the Street with some better-than-expected results, while Zynga bears are pricing in a miss.

In anticipation of this report, Zynga shares traded in volatile fashion Tuesday, popping as high as $5.24 (a 6% spike), before shares ended the day at $4.91, down 3%.

Scott Devitt of Morgan Stanley wrote in a note this week that Zynga investors “have priced in a miss,” maintaining his price target at $12. “We believe bears are overlooking positive data trends implying that reported users will be stronger than expected, and Zynga owners could benefit from a short squeeze if the company meets consensus expectations,” he said.

On the flipside, many analysts believe that Zynga will exceed expectations for Q2 and create a bullish atmosphere, something Zynga shareholders would really appreciate. After all, shares of Zynga have fallen 63% during the last four months.  

The good news for Zynga is that since this has been a tough quarter for Zynga, and expectations have been really low for the company, some analysts believe that meeting estimates for bookings would be enough to drive the stock higher.  

For the second quarter, analysts estimate bookings of $345 million and non-GAAP earnings per share of five to six cents a share. This actually represents almost no growth from Q1 where the company reported a profit of six cents a share on $329 million in bookings.  Analysts also estimate that Zynga revenue will be near $344.85 million for Q2, representing 8% growth quarter-over-quarter. Year-over-year numbers were not available since the company just went public in December, but those details should be included in the report released Wednesday. 

“We expect Zynga to deliver in-line 2Q bookings, which we think is enough to move the stock higher given sentiment in the name remains weak,” according to a statement sent by J.P. Morgan analysts.

For Zynga, bookings are often considered a more accurate measure of how the company did during the period. Bookings represent what Zynga sells in the quarter whereas revenue that are allotted over multiple quarters as virtual goods are spent within games.

With an excess of 292 million users in 175 countries, Zynga will need to show additional growth in this quarterly report, especially since growth of users has stalled over the last few months, as newer games have been slow to gain traction such as Hidden Chronicles and Slingo. 

According to AppData, Zynga’s monthly active users through the Facebook platform has slid back more than 4% over the last month.

Part of the battle to combat this leveling-off has included Zynga's effort to build its gaming catalog with creation, acquisition and third-party connections.

Last month, Zynga announced some upcoming games that it anticipates a strong future such as The Ville and FarmVille 2. Zynga has also expressed its attempt to become a gaming platform that will accept third party creators -- thus increasing the opportunity to cross-promote as well as build a larger user base. 

Last quarter, Zynga said that it would show slow sequential growth in the first half of the year and projected that its non-GAAP earnings would be in the range of 23 cents to 29 cents a share on bookings somewhere between $1.4 billion to $1.5 billion. 

Zynga had reported MAUs of 292 million for the first quarter, with 65 million daily active users, or DAUs, which represented an increase of 6% from the same period last year.

Numbers to look for in the quarterly report:

Revenue and bookings: 

Obviously analysts are going to want to see some improvement or growth from the $321 million in revenue. Bookings last quarter reached $329.2 million, up 15% from the prior year, greatly due to OMGPOP's Draw Something game, but investors will be looking to see if that will continue to be an upward trend. 

Usership numbers:

Since Zynga already prepped the investors that the usership base was slowing its growth, there are not high expectations for this area, but it will be a number that analysts will be picking apart, especially if Zynga points out the source of any major growth in the number of users.

Research and development:

Zynga has upped its research and development budget noticeably each quarter. Last quarter, Zynga spent nearly 30% of its revenue on R+D efforts. More than $90 million went into R+D in Q1 2012 compared to the $67 million spent for the same quarter in 2011. Hopefully Zynga will express how its R+D department is turning these investments into cash inflow and analysts will be looking to see if this expense goes up or stays stable.