Zynga reported mixed results for the third quarter that ended September 30, beating revenue and bookings expectations but falling short on its profits after adjusting for one-time gains.
It's a bit complicated to figure out, as Zynga is doing a lot better than it said it would, but for various reasons, it isn't making as much profit as expected. But those who delve into the numbers would probably agree that the profit shortfall isn't a bad problem. In after-hours trading, Zynga's stock price is up 4.2% to $6.47 a share.
The San Francisco publisher of social mobile games reported its highest quarterly revenue and bookings in history ($345 million and $395 million, respectively), with mobile revenue up 54% from a year ago and mobile bookings up 64%.
Revenue is based on the change in deferred revenue and bookings. Accounting rules require Zynga to spread revenue received upfront from a user over the lifetime of that user's engagement.
Despite the strong revenue growth from games like Empire & Puzzles and Merge Dragons, the company lost money on an adjusted basis in part because it had to pay a higher bonus to the companies it acquired (Small Giant Games and Gram Games) because they hit their incentive targets.
"We had a really good Q3. We actually hit a record in terms of our revenue and bookings highest in our, in our history from a quarterly standpoint," said CEO Frank Gibeau in an interview with GamesBeat. "We delivered numbers that were above guidance and above consensus on the top and the bottom. It's been so strong and with there's so much momentum in the business that we've actually raised our guidance for the full year."
If Q4 goes as expected, then "it will be the biggest year in the history of Zynga in terms of revenue and bookings since the IPO" in 2011, Gibeau said.
Zynga posted GAAP net income of $230 million, thanks to a $314 million one-time gain from the sale (and lease back) of the company's headquarters in San Francisco. If you exclude the one-time gain, Zynga had a loss of $84 million.
Analysts had been expecting bookings of $385 million (a number that Zynga beat with $395 million) and non-GAAP profits of 5 cents a share, or $46 million (a number that Zynga missed). Its deferred revenue balance is now $403 million, compared to $174 million a year ago.
"On a non-GAAP basis, it was a very strong profit quarter for us," Gibeau said.
Overall performance in the quarter was driven by strong momentum across live services as well as initial contributions from recently launched titles.
In particular, Words With Friends, Zynga Poker and CSR2 were strong contributors in the quarter while Empires & Puzzles and Merge Dragons grew to new quarterly revenue and bookings highs.
"CSR and Words With Friends and Zynga Poker are delivering, and we are starting to see contributions from Merge Magic, which is off to a good start, as well as the Game of Thrones social casino game," Gibeau said.
Zynga got its product pipeline going again with the launch of another new title - Merge Magic, which the company said is off to a great start. This comes on the heels of the recently launched Game of Thrones Slots Casino, which has become the fastest-growing slots title in its first full quarter post-launch.
Zynga is raising its full-year 2019 guidance to $1.28 billion in revenue, up 41% year-over-year and an increase of $42 million versus prior guidance. The company is also raising bookings guidance to $1.55 billion, up 59% year-over-year and an increase of $46 million versus prior guidance.
Mobile revenue was $328 million, and it now accounts for 96% of revenues. Facebook desktop web revenue, once the core of the company, is now just 4%.
International revenue and bookings grew 67% and 89% year-over-year, respectively, and now represent 38% of total revenue and 41% of total bookings versus 34% of total revenue and bookings in the prior year period.
Gram Games and Small Giant Games continue to perform ahead of Zynga's expectations, resulting in an increase in contingent consideration expense (the bonus for hitting targets) of $61 million in the quarter. This is one reason the company's net income of $230 million fell short by $20 million of Zynga's own guidance.
"The good news is they're generating a lot of EBITDA (earnings before income taxes, depreciation, and amortization) and the accounting treatment of that means you have to book more of a reserve against it," Gibeau said.
Zynga said that social slots were up 23% in mobile bookings from a year ago, and Zynga Poker grew bookings sequentially.
Going forward, Zynga is working on new games such as FarmVille 3, which is in soft launch, or limited release. Another title, Puzzle Combat, is also in soft launch.
Zynga's ad revenue was $64 million in the quarter, down 3% from a year ago, as Zynga had some new accounts that kicked in a year ago. Advertising is expected to grow in the low double-digits in the future.
In Q3, the average mobile daily active users (DAUs) were down 1% year-over-year as the addition of Empires & Puzzles and audience growth in Merge Dragons were offset by decreases in older mobile and chat games, as well as in Zynga Poker and Words With Friends.
Our average mobile monthly active users (MAUs) declined by 13% year-over-year for reasons similar to mobile DAUs, with a greater impact from the decision to sunset certain chat games. Gibeau said the company shifted more of its messenger games from Facebook Messenger to Snapchat. In general, Zynga is generating more revenues from a smaller base of users.
Zynga is also working on new games including FarmVille 3, Puzzle Combat, CityVille, and licensed titles including Harry Potter and two Star Wars games.
"We're in growth mode, we're not in fixed mode anymore," Gibeau said. "And it feels like our multiyear strategy is really unfolding. And as the new game pipeline continues to work, that's the growth driver and, and we're still in a position with $1.45 billion on the balance sheet. So we're still very interested in acquisitions and we'll look for the right teams and the right types of franchises to bring into the company."
Zynga has about 1,874 employees, down 144 from a year ago.
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