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Zynga beat analysts’ expectations today, reporting its highest-ever bookings and revenues in the fourth quarter ended December 31 thanks to the strong performance of its existing games and the newly launched Harry Potter: Puzzles & Spells.
The social mobile game company’s revenue was $616 million, up 52% year-over-year, and bookings of $699 million, up 61% year-over-year. The bookings and revenue numbers were the highest ever, and profit numbers were strong as well.
The pandemic has been a tragedy in lost lives and economic hardships, but gaming is one of the few industries that appears to be emerging stronger than before the coronavirus hit. People are still playing more, and the San Francisco firm has also benefited from its acquisitions of Gram Games, Small Giant Games, Rollic, and Peak Games.
“It was a transformation year for us,” said CEO Frank Gibeau in an interview with GamesBeat. “We hit a new level of performance in the quarter and the year.”
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Gibeau said that Q4 capped off the year with the launch of a big Harry Potter game and the fruits rolling in from the two most recent acquisitions. The Rollic deal added hypercasual games, which you can play in a minute or so.
Gibeau agreed with App Annie’s insight that more people have picked up gaming, and many in lockdown have turned to mobile over PC or console games as more convenient. But Gibeau was cautious about saying that the behavior during lockdown has permanently changed toward a wider acceptance of games over other forms of entertainment.
But he said, “One of the few positives of this time is that interactive entertainment has found a new level of importance and relevance in the lives of people. More new people found games as a great way to spend time, and people who played games already found new ways to play and put more time into them. Whether that holds or not is the question. In general, there is a shift in the curve toward more gaming. But it’s a little muddy as a lot of countries went back into lockdowns (in the fourth quarter).”
The results were well ahead of guidance across all key financial measures. They were driven by record revenue and bookings for Words With Friends, in addition to record Q4 performances by Empires & Puzzles, CSR2, and the social slots and casual cards portfolios. And Gibeau is optimistic about 2021, as he predicts annual bookings could hit $2.8 billion.
“I feel like we are embarking on a 2021 that will be very strong for us,” Gibeau said.
Building upon its successful launch in September, Harry Potter: Puzzles & Spells gained momentum as players engaged in its social gameplay. Advertising in Q4 was also a key growth contributor, driven by strong seasonality and advertising yields as well as an excellent performance from Rollic in its first quarter at Zynga.
Together, these factors helped deliver operating cash flow of $206 million, up 119% year-over-year, the highest quarterly level in Zynga history.
In 2020, strong organic growth across live services coupled with contributions from acquisitions of Peak and Rollic drove Zynga’s highest annual revenue of $1.97 billion, up 49% year-over-year, and record bookings of $2.27 billion, up 45% year-over-year. Zynga also generated its best-ever annual operating cash flow of $429 million, up 63% year-over-year.
How the market will react
The stock market reaction to Zynga’s results is usually driven by whether it hits revenue or earnings targets. But it’s complicated, because Zynga is required to report some revenue later than when it actually receives it (like when a user buys in-game currency but doesn’t use it until much later). This is called deferred revenue. But if you add the changes in deferred revenue and current revenue, you get a better picture of the actual quarter’s results in a number dubbed bookings. Zynga’s management uses this number in how it guides expectations. And its investors view bookings as more important than revenues.
As a public company, Zynga is required to report quarterly results on a U.S. GAAP basis, while analysts and investors use non-GAAP financial metrics to assess a company’s underlying performance. Bookings and adjusted earnings before income tax, depreciation, and amortization (EBITDA), excluding the impact of deferred revenue, are among those metrics that are most highly scrutinized as they reflect the actual operating activity of the company better.
Here’s the numbers that really matter when it comes to stock market trading for Zynga’s stock.
Analysts had expected Zynga to report bookings of $678 million in the quarter, while Zynga itself guided to $670 million. Zynga beat those targets with $699 million.
And it also beat the analysts’ profit targets. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is more closely watched as a measure of the company’s profitability. After adjustments, the figure that analysts focus on (adjusted EBITDA, excluding the impact of deferred revenue) of $141 million, while Zynga guided to $135 million. The comparable profit target number that Zynga hit for adjusted profits was $173 million, well above expectations.
More Q4 details
The company had record online game — or user pay — revenue of $499 million, up 54% year-over-year, and user pay bookings of $582 million, up 64% year-over-year.
It also reported all-time best advertising revenue and bookings of $117 million, up 47% year-over-year. Record international revenue of $236 million, up 50% year-over-year, and international bookings of $280 million, up 57% year-over-year.
The company had record average mobile daily active users (DAUs, or those who play at least once a day) of 36 million, up 77% year-over-year, and best average mobile monthly active users (MAUs, or those who play at least once a month) of 134 million, up 103% year-over-year.
Zynga also increased its war chest for acquisitions. The company issued $875 million of convertible notes to strong investor demand, providing net cash proceeds of $794 million after the cost of the capped call transactions and associated issuance fees.
And it generated record quarterly operating cash flow of $206 million, up 119% year-over-year. Zynga beat its own revenue guidance by $46 million and its bookings guidance by $29 million.
The company reported a net loss of $53 million, $39 million better than its own guidance primarily driven by stronger operating performance and lower than expected net increase in deferred revenue. On a year-over-year basis, the net loss grew by $49 million primarily due to the higher net increase in deferred revenue, amortization of acquired intangibles, stock-based compensation, and net other (income) expense, partially offset by improved operating performance and lower contingent consideration expense.
Adjusted EBITDA was $90 million, above Zynga’s guidance by $55 million primarily driven by a stronger operating performance and lower than expected net increase in deferred revenue. On a year-over-year basis, Adjusted EBITDA increased $15 million driven by improved operating performance, partially offset by a higher net increase in deferred revenue.
Overall 2020 results
Zynga reported its highest annual revenue and bookings performances in Zynga history with revenue of $1.97 billion, up 49% year-over-year, and bookings of $2.27 billion, up 45% year-over-year.
The company also reported record user-pay revenue of $1.67 billion, up 59% year-over-year, and user-pay bookings of $1.96 billion, up 52% year-over-year.
It had record advertising revenue of $307 million, up 12% year-over-year, and advertising bookings of $306 million, also up 12% year-over-year. And it had record international revenue of $763 million, up 54% year-over-year, and international bookings of $897 million, up 43% year-over-year.
The company generated its highest annual operating cash flow of $429 million, up 63% year-over-year.
While Zynga has absorbed four acquisitions in recent years, the company may still have an appetite to buy more companies with its focus on good teams, technology, and franchises. Zynga added $794 million in net proceeds through a convertible notes (debt) offering in December, and it ended the year with $1.57 billion of cash and investments. That’s still a pretty good war chest, as Zynga’s competitors now go on their own acquisition binges.
Gibeau said Zynga is now anchored by eight Forever Franchises, which can generate more than $100 million a year for five years. Those games include Words With Friends, CSR2, Zynga Poker, Toon Blast, Toy Blast, Merge Dragons, Merge Magic, and Empires & Puzzles. FarmVille is usually on that list, but Zynga ended the Flash-based version of the original FarmVille, and it hasn’t yet launched FarmVille 3. Zynga keeps those Forever Franchises generating revenues from those games via live services. Gibeau said Zynga Poker in particular had rebounded well from problems in past years.
Zynga also expects launches of new games to be a meaningful growth driver in the years ahead. Those games include Puzzle Combat and FarmVille 3. Both titles have been progressing well in soft launch and are on track to launch worldwide in the first half of 2021. Zynga also expects its first Star Wars game to enter soft launch in early summer, with the potential to launch by the end of the year. CityVille is still in development, but the game isn’t scheduled yet.
Zynga also anticipates hypercasual games will be a big growth opportunity, thanks to its acquisition of Rollic. Hypercasual games (as well as instant games) are highly accessible, driven by simple concepts that are easy-to-play and appeal to a large and diverse audience of players, many of whom may be first-time mobile gamers. Such games can often be played in a minute or less.
Rollic’s top games include Tangle Masters, Go Knots and Wood Shop. So far in Q1, two of Rollic’s new hypercasual titles games (High Heels and Blob Runner 3D) have each reached the No. 1 top downloaded U.S. Android game positions as well as the No. 1 and No. 2 top downloaded U.S. iPhone game positions, respectively.
“You’ll see us really double-down on games like High Heels,” Gibeau said.
The latter is a game where you try to balance on high-heel shoes. The game went viral on TikTok.
Zynga is also developing several cross-platform play games that will further expand total addressable market. Gamers have been excited to seamlessly play across mobile, PCs and consoles for a long time and recent innovations in technology, including 5G, help to make this a reality. Many of the largest interactive entertainment properties in the world today are free-to-play cross-platform play experiences.
I can imagine that Star Wars is on that list of games that’s on PCs or consoles, but Zynga isn’t yet saying that for sure. You can imagine that fans of the Forever Franchises might play the games on their consoles and PCs, if those games are available. And so Zynga is going after that opportunity, Gibeau said.
Zynga is also expanding its live services portfolio in international markets, particularly in Asia, where titles such as Toon Blast and Empires & Puzzles are doing well. More recently, Harry Potter: Puzzles & Spells is showing positive initial player engagement in Japan and South Korea.
Zynga is also investing in new advertising technologies and solutions that will enable us to further expand its position in the mobile advertising ecosystem and unlock more value across Zynga’s network of games. At the core of Zynga’s live services platform is its first-party data network, which captures key insights about how players are interacting with its games.
As for headwinds, the larger mobile industry faces uncertainty around the Identifier for Advertisers (IDFA), which Apple is changing as it favors user privacy over targeted advertising. That is coming soon and it is expected to hurt game companies that need to target big-spending gamers. But Gibeau said that IDFA will likely have a neutral effect on Zynga as it could hurt the company’s advertising business and capability to target gamers. He noted that could be offset by the fact that Zynga has a huge mass of its own players who trust it with their data as well as well-known game properties that can do well even if users can’t be precisely targeted.
“We are in a position where we are not likely affected,” Gibeau said.
In 2020, Zynga more than doubled the average mobile MAUs from 66 million in Q4 2019 to 134 million in Q4 2020.
This significantly expands the company’s first-party data network and the insights this audience provides, while also strengthening its ability to navigate upcoming privacy changes in the mobile ecosystem.
In 2021, Zynga expects to deliver revenue of $2.6 billion, up 32% year-over-year, and bookings of $2.8 billion, up 23% year-over-year.
For 2021, Zynga expects revenue of $2.6 billion (up 32%) and bookings of $2.8 billion (up 23%). Analysts had been expecting $2.75 billion in bookings. COVID-19, of course, could have a positive or negative impact upon these projections.
Zynga anticipates a net loss of $150 million and adjusted EBITDA of $450 million. Analysts had been expecting full-year EBITDA (excluding impact of deferred revenue) of $653 million, and Zynga estimates that number for 2021 will hit $650 million now.
Zynga anticipates an increase in gross margins due to a lower net increase in deferred revenue as well as a higher mix of advertising versus user pay, partially offset by higher amortization expense for acquired intangible assets. Marketing costs will be higher in 2021 as the company launches new games and other initiatives such as cross-platform play development and hypercasual games as well as advertising technologies.
For the first quarter ending March 31, Zynga expects revenue of $635 million, up 57% year-over-year, with bookings of $680 million, up 60% year-over-year. Analysts had been expecting bookings of $657 million in Q1.
The net loss will be $50 million, while adjusted EBITDA will be $100 million. Analysts were expecting EBITDA (excluding impact of deferred revenues) of $151 million, and Zynga expects it will hit $145 million in Q1.
The topline performance will be driven by live services, which includes the year-over-year additions of Toon Blast, Toy Blast and Harry Potter: Puzzles & Spells as well as existing and new hyper-casual games from Rollic, in addition to collective growth across the remainder of the live services portfolio. These gains will be partially offset by declines in older mobile and web titles.
Zynga also expects some higher marketing costs as it ramps up some new titles.
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