Zynga Beats Expectations On Earnings, Posts A $3M Profit

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Zynga today beat analyst expectations for its third-quarter earnings, bringing in about $176 million in bookings with flat earnings, and revenue of $196 million. Analysts were expecting a loss of 1 cent per share for the company’s earnings.

It’s an interesting time for Zynga’s earnings report. Activision Blizzard just yesterday said it would acquire King Digital, the company behind Candy Crush Saga, for $5.9 billion. Zynga’s been in a tough position as it transitions to mobile, moving from a time when it was incredibly strong on desktop to finding itself under pressure from mobile games like Candy Crush Saga. Zynga’s strategy is to go deep on several categories — such as casino and Words With Friends, among others, CEO Mark Pincus said in an interview.

“It’s along this trendline I talked about in the beginning that companies over time differentiating themselves by having a large diverse player network, being multi-category on their game development, and owning and developing leading mobile franchises,” Pincus said. “I also think there’s some other categories in mobile that we have deeper investments in and we’ve built strong positions in, like social casino — we’re number two in slots — and action strategy with Empires & Allies, which we’re just getting back into. And we’ve made a huge commitment with acquiring Natural Motion. We intend to be a major longterm player and provider in action-strategy.”

Shares of Zynga were about flat after rising as much as 3 percent in extended trading on the earnings report, after rising 2.5 percent in regular trading. On the year, Zynga shares are down by about 7 percent. Zynga’s revenue was up 11 percent from the third quarter last year, when it reported $176.6 million in revenue. It reported a net income of $3 million, which is well up from the net loss it reported in the third quarter last year of $57.1 million.

The culprit of the share’s movement is likely a combination of a few things: a big share repurchase program, posting a net profit and beating earnings expectations, but still seeing its user numbers continue to fall.

The company authorized a $200 million share repurchase program, something that will surely please investors given the cash that the company has on its balance sheet. It had around $1.1 billion in cash, cash equivalents and marketable securities. As part of the earnings announcement, the company also said its chief financial officer David Lee would also step down.

“We feel like we’re very well capitalized and financed, and we just look at our position in the market today and where we think our prospects are over the next three to five years, with the board we thought that it was a good point in time to change our cap table a little bit with the stock buyback,” Pincus said.

In particular, the company pointed to the strength of its slots and Poker games, as well as Words With Friends. Mobile bookings now account for 69 percent of the company’s total bookings, up from 66 percent in the second quarter this year. Pincus said that, while the company had initially missed out on the slots category, it has quickly brought itself back with high quality Slots games to be second in the category. Despite an audience decline, bookings for Words With Friends great 34 percent year-over-year, the company said.

“Social casino really is our original legacy, and the original legacy of social gaming,” CEO Mark Pincus said in an interview. “Our poker game was the first major social game, and we really missed the opportunity when it expanded to slots, and slots was really terrific for social gaming because it matched up so well with an adult female audience that social gaming is really appealing to for the first time. Slots is really a great category for us, we missed it not from lack of effort — we had a few slots efforts and they failed, so we were trying — and we learned the hard way that you really need to go deep on quality for that category and that audience.”

The company’s Monthly Active Users continued to fall, to 75 million in the third quarter this year — which is down from 103 million in the third quarter last year — though the average booking per user rose in that same period. Zynga made around 10 cents per monthly active user, up from 7.9 cents per active user in the third quarter last year and around 9 cents in the second quarter this year.

As part of the earnings report, the company also said it was delaying two of its titles — CSR Racing 2 and Dawn of Titans. The reasoning behind that, Pincus said, was that while the games had soft-launched they weren’t quite ready for mass-market. The games have been delayed till 2016, the company said.

The elephant in the room, of course, is now Activision Blizzard. But King has found itself having difficulty expanding beyond the massive hit of Candy Crush Saga. Even while it continues to produce new games, the company has seen its revenue and earnings performance somewhat lag, with shares largely flat before the acquisition was announced. It’s a position Zynga is familiar with, and hopes to avoid in the future.

“You will over time see those companies that have made those commitments, and you’ll see companies that didn’t,” Pincus said. “The companies that didn’t, that have an amazing franchise in one category, it’s not obvious they’ll have the same launch and growth prospects.”