ZNGA: Zynga Crashes in After Hours Trading; Draw Something Expectations Lowered

Zynga lowers Draw Something 
expectations (via Flickr)
Zynga (ZNGA), an online social gaming/app company that generates 12% of Facebook's revenues (via Facebook's S-1 filing, see below), reported a huge earnings miss and then cut its outlook substantially. ZNGA closed down 38.16% at $3.14 and Facebook (FB) closed down 7.6% at $27.10 in after hours trading. FB reports its earnings tomorrow, so we'll see if it gets hit next.

Below is more on Zynga's miss from its earnings release ending June 30, as well as its lowered outlook. Zynga lowered its expectations on Draw Something, a social game like Pictionary, which was one of the fastest growing apps earlier this year. The game's daily active users essentially peaked right when Zynga bought OMGPop for $200 million on March 21, 2012.

First, here is more information from CNBC's Julia Boorstin and Zynga's CEO Mark Pincus from the conference call (via Bloomberg TV):

"But what really dragged on Zynga's stock is the fact that the company lowered its outlook for 2012, saying it now expects bookings in the range of $1.15 billion to $1.225 billion, far short of the up to $1.5 billion Wall Street expected. (source: CNBC.com)"

  • "Q2 Revenue of $332 million, up 19% year-over-year, six months year-to-date revenue of $653 million, up 25% year-over-year
  • Q2 Bookings of $302 million, up 10% year-over-year, six months year-to-date bookings of $631 million, up 12% year-over-year
  • Q2 GAAP EPS of ($0.03), down from $0.00 in the second quarter of 2011, six months year-to-date GAAP EPS of ($0.15), down from $0.00 in the first half of 2011
  • Non-GAAP EPS of $0.01, down from $0.05 in the second quarter of 2011, six months year-to-date non-GAAP EPS of $0.06, down from $0.16 in the first half of 2011"
  • Source: Zynga's earnings release)

"2012 Outlook

We are lowering our outlook to reflect delays in launching new games, a faster decline in existing web games due in part to a more challenging environment on the Facebook web platform, and reduced expectations for Draw Something. As a result, our updated outlook for 2012 is as follows:
  • Bookings are projected to be in the range of $1.15 billion to $1.225 billion.
  • Adjusted EBITDA is projected to be in the range of $180 million to $250 million.
  • Stock-based expense is projected to be in the range of $410 million to $430 million.
  • Capital expenditures are projected to be in the range of $370 million to $380 million, which includes the purchase of our corporate headquarters building in April 2012.
  • Our effective tax rate for non-GAAP net income is projected to be in the range of 50% to 60%.
  • Non-GAAP weighted-average diluted shares outstanding are projected to be approximately 845 million shares in the fourth quarter of 2012.
  • Full year 2012 non-GAAP EPS is projected to be in the range of $0.04 to $0.09."
  • Source: Zynga's earnings release

Draw Something's DAU's declined to 3.4 million from 15 million (via appdata.com). Crazy app volatility. It looks like the city social games like Zynga's The Ville and Electronic Arts' SimCity Social are performing well right now.

Check out Draw Something's rise and fall. It would be interesting to see DAUs retest the previous highs.
  • 10 Days After Launch, Draw Something App Has 1.2 Million Downloads (Feb 22, Business Insider)
  • OMG: 5-Week-Old App Draw Something Hits 20 Million Downloads And Generates 6-Figures Per Day (March 12, Business Insider)
  • Zynga buys OMGPOP games company for $200 million: source (March 21, Reuters)
  • Draw Something Tops 50 Million Downloads in 50 Days (April 4, PC Magazine)
"We believe it's not only the fastest growing original mobile game of all time - 50 days to hit 50 million downloads - but one of the fastest growing web sensations that we've seen." - Zynga Statement

Look at the trend of Draw Something's daily active users (DAU) from April-May 2012 via The Atlantic Wire. DAUs crashed from 15 million to 10 million DAUs during April. And yesterday DAUs were at 3.4 million, according to appdata.com.

This is what analysts are expecting from Facebook's earnings release:

"On average, analysts are expecting Facebook to post earnings of 12 cents per share on revenue of $1.16 billion, according to a poll by FactSet. In all of 2011, it had net income of $1 billion and revenue of $3.71 billion, according to regulatory filings." (MSN)

Facebook's S-1 filing on its revenue from Zynga:

"In 2011 and the first quarter of 2012, we estimate that up to 19% and 15% of our revenue, respectively, was derived from Payments processing fees from Zynga, direct advertising from Zynga, and revenue from third parties for ads shown on pages generated by Zynga apps. If Zynga does not maintain its level of engagement with our users or if we are unable to successfully maintain our relationship with Zynga, our financial results could be harmed.

In 2011 and the first quarter of 2012, Zynga directly accounted for approximately 12% and 11%, respectively, of our revenue, which was comprised of revenue derived from Payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate pages on which we display ads from other advertisers; for 2011 and the first quarter of 2012, we estimate that an additional approximately 7% and 4%, respectively, of our revenue was generated from the display of these ads. Zynga has recently launched games on its own website and on non-Facebook platforms, and Zynga may choose to try to migrate users from existing Facebook-integrated games to other websites or platforms. We may fail to maintain good relations with Zynga or Zynga may decide to reduce or cease its investments in games on the Facebook Platform. If the use of Zynga games on our Platform declines for these or other reasons, our financial results may be adversely affected."
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