Zynga Inc (NASDAQ:ZNGA) announced financial results for the third quarter ended September 30, 2016.

“In Q3, we executed well on our core business and our new launches. Our outperformance in the quarter was due to our over-delivery on CSR2 and advertising. We successfully launched two new, high quality mobile games, and our focus on our key live mobile franchises is paying off as demonstrated by the strong year-over-year growth of Zynga Poker, Social Slots and Words With Friends. As a team, we have shown good momentum in our turnaround in a number of key areas including (1) delivering new, high quality mobile games, (2) growing our existing, live mobile franchises, and (3) unlocking more operating leverage. Looking forward, we are focused on delivering mass market, high quality social games that drive long term engagement and audience growth,” said Frank Gibeau, Chief Executive Officer of Zynga.

“Our Q3 GAAP revenues were above our expected range at $182.4 million, and our GAAP net loss was $41.7 million, below the low end of our guidance range,” said Ger Griffin, Chief Financial Officer of Zynga. “The change in deferred revenue was $14.3 million, above our expected level of $10 million, and our bookings were above the high end of our guidance range at $196.7 million, up 12% year over year and 13% sequentially. Q3 Adjusted EBITDA (previously reported methodology) was also above our guidance range at $17.9 million. Adjusted EBITDA (new methodology) was $3.6 million. We are making steady progress, and as we look for opportunities to create shareholder value we continue to assess our capital allocation strategy. As part of that effort, we are announcing a two-year, $200 million share repurchase program. This is an initial step in our capital allocation strategy as we look for opportunities to deliver long term shareholder value.”

Financial Highlights

  • GAAP Revenue of $182.4 million; above the high end of the guidance range, down 7% year-over-year and flat sequentially
  • GAAP Net loss of $41.7 million; below the low end of the guidance range
  • Deferred revenue balance increased by $14.3 million in Q3; above our guidance
  • Bookings of $196.7 million; above the high end of the guidance range, up 12% year-over-year and up 13% sequentially
  • Non-GAAP operating expenses of $126.5 million; up 7% year-over-year and up 7% sequentially, driven by an increase in marketing spend to support the launches of CSR Racing 2 and FarmVille: Tropic Escape
  • Adjusted EBITDA (previously reported methodology) of $17.9 million; above the high end of the guidance range, up 44% year-over-year and up 55% sequentially
  • Adjusted EBITDA (new methodology) of $3.6 million
  • $870.8 million in cash, cash equivalents and marketable securities, up $2.4 million from the prior quarter end

Mobile Highlights

  • Mobile revenue of $145.9 million or 80% of overall revenue; up 16% year-over-year and up 6% sequentially
  • Mobile bookings of $162.3 million or 83% of overall bookings; up 34% year-over-year and up 19% sequentially
  • Average Mobile Daily Active Users (mobile DAUs) of 16 million; up 1% year-over-year and up 7% sequentially
  • Apple and Google continue to be our two largest platform partners for online game bookings

Third Quarter 2016 Financial Summary

  • Revenue: Revenue was $182 million for the third quarter of 2016, flat compared to the second quarter of 2016 and a decrease of 7% compared to the third quarter of 2015. Online game revenue was $134 million, a decrease of 1% compared to the second quarter of 2016 and a decrease of 11% compared to the third quarter of 2015. Advertising and other revenue was $48 million, an increase of 5% compared to the second quarter of 2016 and an increase of 8% compared to the third quarter of 2015. Zynga Poker, Wizard of Oz Slots, Hit It Rich! Slots and FarmVille 2 accounted for 19%, 12%, 12%, and 11% of online game revenue, respectively, for the third quarter of 2016 while FarmVille 2, Zynga Poker, Hit It Rich! Slots, FarmVille 2: Country Escape and Wizard of Oz Slots, accounted for 21%, 17%, 16%, 14%, and 12%, respectively, for the third quarter of 2015.
  • Change in deferred revenue: The change in deferred revenue was $14 million from the second quarter of 2016 to the third quarter of 2016.
  • Bookings: Bookings were $197 million for the third quarter of 2016, an increase of 13% compared to the second quarter of 2016 and an increase of 12% compared to the third quarter of 2015. The quarter-over-quarter increase in bookings was primarily due to the launch ofCSR Racing 2 at the end of June 2016.
  • Net income (loss): Net loss was ($42) million for the third quarter of 2016, compared to net loss of ($4) million for the second quarter of 2016 and net income of $3 million for the third quarter of 2015. The quarter-over-quarter change in net loss was primarily due to $21 million of impairment on intangible assets and higher costs and expenses (primarily, in order of significance, mobile payment processing fees due to the launch of CSR Racing 2, headcount-related expenses and marketing costs for CSR Racing 2 and FarmVille: Tropic Escape).
  • Adjusted EBITDA
    • New methodology: Adjusted EBITDA, including the change in deferred revenue, was $4 million for the third quarter of 2016, compared to $19 million in the second quarter of 2016 and $32 million for the third quarter of 2015. The quarter-over-quarter change in Adjusted EBITDA (new methodology) was due to higher costs and expenses (primarily, in order of significance, mobile payment processing fees due to the launch of CSR Racing 2, headcount-related expenses and marketing costs for CSR Racing 2 andFarmVille: Tropic Escape).
    • Previously reported methodology: Adjusted EBITDA, excluding the change in deferred revenue, was $18 million for the third quarter of 2016, compared to $12 million in the second quarter of 2016 and $12 million for the third quarter of 2015. The quarter-over-quarter change in Adjusted EBITDA (previously reported methodology) was due to higher costs and expenses (primarily, in order of significance, mobile payment processing fees due to the launch of CSR Racing 2, headcount-related expenses and marketing costs for CSR Racing 2 and FarmVille: Tropic Escape), offset by an increase in bookings.
  • Net income (loss) per share: Diluted net income (loss) per share was ($0.05) for the third quarter of 2016, compared to ($0.01) for the second quarter of 2016 and $0.00 for the third quarter of 2015.
  • Cash and cash flow: As of September 30, 2016, cash, cash equivalents and marketable securities were approximately $871 million, compared to $868 million as of June 30, 2016. Cash flow from operations was $21 million for the third quarter of 2016, compared to $15 million for the second quarter of 2016 and $(5) million for the third quarter of 2015. Free cash flow was $18 million for the third quarter of 2016 compared to $13 million for the second quarter of 2016 and $(7) million for the third quarter of 2015.

Fourth Quarter Outlook

Zynga’s outlook for the fourth quarter of 2016 is as follows:

GAAP:

  • Revenue is projected to be in the range of $180 million to $190 million
  • Net loss is projected to be in the range of ($27) million to ($25) million
  • Net loss per share is projected to be ($0.03) based on a share count projected to be approximately 889 million shares
  • The change in deferred revenue is projected to be $5 million

Non-GAAP:

  • Bookings are projected to be in the range of $185 million to $195 million
  • Adjusted EBITDA (new methodology) is projected to be in the range of $12 million to $14 million

Share Repurchase Program

In November 2016, a share repurchase program was authorized for up to $200 million of our outstanding Class A common stock that remains in effect through the end of October 2018. The timing and amount of any stock repurchases will be determined based on market conditions, share price and other factors. The program does not require us to repurchase any specific number of shares of our Class A common stock, and may be modified, suspended or terminated at any time without notice. The stock repurchase program will be funded from existing cash on hand or other sources of funding as the Company may determine to be appropriate. Share repurchases under these authorizations may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, purchases through 10b5-1 plans or by any combination of such methods. Repurchases of our Class A common stock in the open market could result in increased volatility in our stock price. There is no guarantee that we will do any share repurchases under the program or otherwise in the future. (Original Source)

Shares of Zynga are down nearly 2% to $2.69 in after-hours trading Wednesday. ZNGA has a 1-year high of $3.04 and a 1-year low of $1.78. The stock’s 50-day moving average is $2.88 and its 200-day moving average is $2.69.

On the ratings front, Zynga has been the subject of a number of recent research reports. In a report issued on September 23, Cowen analyst Doug Creutz reiterated a Buy rating on ZNGA, with a price target of $3.50, which implies an upside of 25% from current levels. Separately, on September 16, The Benchmark Company’s Mike Hickey reiterated a Buy rating on the stock and has a price target of $3.48.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Doug Creutz and Mike Hickey have a yearly average return of 14.3% and 11.4% respectively. Creutz has a success rate of 57% and is ranked #403 out of 4173 analysts, while Hickey has a success rate of 66% and is ranked #233.

Overall, one research analyst has rated the stock with a Sell rating, 4 research analysts have assigned a Hold rating and 4 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $3.43 which is 22.5% above where the stock opened today.

Zynga, Inc. engages in the development and provision of online social games. Its products are played over the Internet, mobile applications, and social networking sites. It offers Chess with Friends, Crazy Cake Swap, Draw Something, FarmVille, Gems With Friends, Ice Age: Arctic Blast, Looney Tunes Dash, Speed Guess Something, What’s The Phrase, Wizard of Oz Magic Match, Yummy Gummy, Free Slots, Black Diamond Casino, Hit It Rich!, Zynga Poker, and Willy Wonka Slots.