Zynga Beats Estimates, Boosted By OMGPOP Purchase

27 Apr, 2012

Zynga Inc beat Wall Street's quarterly revenue forecasts on the back of its purchase of social gaming startup OMGPOP and strong performances from new titles such as "Hidden Chronicles" and "Slingo."

But shares of the social gaming company fell as it failed to show stronger growth in player numbers for its Facebook games, its core business, analysts said.

The results came as Zynga shares have tumbled 38 per cent since its high on March 2 on doubts that the company could sustain its revenue growth.

Revenue grew to $321 million from $243 million in the first quarter last year.

Zynga made its biggest acquisition in late March, paying $183 million in cash for OMGPOP, soon after the obscure New York-based company's "Draw Something" game became a sensation in the mobile market.

While OMGPOP's mobile expertise fit into the San Francisco gamemaker's strategy, investors feared Zynga would increasingly turn to large and heavily leveraged acquisitions to fend off upstart rivals and drive growth. Draw Something has lost users in the weeks since the acquisition.

Zynga Chief Executive Mark Pincus assured analysts on a conference call on Thursday that the deal was "a rare instance" that did not represent any change in strategy.

"The way we build this business has been organic development," he said. "That's what you should expect to continue to drive the bulk of our growth."

Citing the OMGPOP acquisition, Zynga raised its 2012 revenue outlook to between $1.425 and $1.5 billion, but some analysts were not impressed.

"The guidance was all because of the acquisition and it was clear that the base business did not outperform," said Arvind Bhatia, an analyst at Sterne Agee. "They had to acquire to raise their numbers, but you're not going to be able to do that too many times."

At 26 cents, "the EPS guidance midpoint was below the consensus of 27 cents," said RW Baird senior analyst Colin Sebastian.

On an adjusted basis, Zynga reported a quarterly profit of $47 million, or 6 cents a share. That compares with earnings of $16.7 million a year earlier.

The adjusted figures exclude $133.9 million of stock-based expenses paid during the quarter by the company, which went public in December. On an non-adjusted basis, Zynga swung to a loss of $85 million.

Total monthly active users increased by 24 per cent to 292 million, with particularly strong growth in players on mobile devices, where Zynga has succeeded with products like Words with Friends. Monthly active users on mobile rose from 12 million to 21 million, making Zynga the largest mobile gaming network.

"Mobile was certainly a star performer, but it wasn't just mobile," Chief Operating Officer John Schappert said in an interview.

Still, Zynga's success in mobile may be partially masking its modest user growth on Facebook, the world's largest social media network which it has sought to rely less on for users.

Daily players of Farmville, once a premier title and a cash cow for Zynga, have plummeted 60 per cent from a year ago, although the game's base of hardcore fans have yielded strong revenues for the company.

In early March Zynga also unveiled "Project Z," a standalone website created to establish an independent revenue stream.

The company said Thursday it would begin marketing and cross promotion efforts to promote the website later this quarter.

"Zynga is still largely on Facebook in terms of revenue," said Sebastian. "Diversifying out of desktops to mobile devices is good for them over time."