Canaccord Genuity on Zynga (ZNGA): Next stop: Disasterville

July 27, 2012 1:47 PM EDT
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Canaccord Genuity on Zynga (Nasdaq: ZNGA): Next stop: Disasterville.

Shares of Zynga slumped to an all-time low after it cut full-year 2012 guidance due to weak Q2 results across most metrics, driven by steep declines in the most profitable users that were partially offset by gains in less profitable users. Zynga reported quarterly revenues of $332.4 million, below the average estimate of $344.12 million. Its net loss was $22.8 million, or $0.03 a share, compared with a profit of $1.4 million a year ago. Excluding certain items, it reported a profit of $0.01 a share, below the $0.05 that Wall Street had expected. Zynga slashed its 2012 earnings outlook to $0.04-0.09 cents a share, down from a previously projected $0.23-0.29. The company blamed the poor performance of its established, moneymaking games on changes to Facebook’s algorithm, which apparently spurred users to discover new games rather than repeatedly play existing Zynga offerings. Zynga’s daily active users rose by 23% to 72 million in the second quarter, but the company earned less revenue per subscriber. Average daily bookings per user dwindled to $0.04 in the quarter, down about 10%. Zynga's miss also dragged down shares of Facebook (Nasdaq: FB), which relies on the social gaming company for 15% of its revenue. Zynga cut its full-year 2012 guidance significantly, from $1.425-1.500 billion to $1.150-1.225 billion as a result. Canaccord Genuity Technology Analyst Michael Graham sees significant hurdles that Zynga must overcome before its stock finds any support: Facebook gaming shrinkage, Facebook platform changes, “Draw Something” user declines, slower game launch schedule, and faster mobile growth with lower mobile monetization. Graham lowered his estimates to the low end of management guidance, and notes significant uncertainty to his forecast. For 2012, his estimates go from $1.50 billion to $1.14 billion and his adjusted EBITDA estimate goes from $436 million to $199 million.

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