ZNGA: LOOKING BRIGHTER, CASH FLOWS INCREASING
CSR2 helped the company with the bookings. This shows that the management can turn a new game into a cash cow
Zynga is still a hold but the prospects are looking much brighter right now.
Zynga: I Am Becoming Optimistic
Nov.24.16 | About: Zynga (ZNGA)
Orthodox Investor
Summary
There has been an improvement in some key metrics.
Share buyback plan will not affect the overall cash position of the company.
The uptick in these metrics will result in improved cash flows.
Zynga's (NASDAQ:ZNGA) price movement over the last few months has been uninspiring. The shareholders have been waiting for a rally, which has failed to materialize. There has been a lot of changes in the management. These changes brought some optimism but the performance of business has not improved considerably. There has been some improvement in one or two metrics but the overall performance still falls short of expectations.
It looks like the management is still experimenting with different approaches. There are also a few positives for the company. The balance sheet remains strong and it might sound a little surprising for a technology company, but most of Zynga's value comes from its balance sheet. Cash balances are still strong and account for most of the total value of its business.
The company announced its third quarter earnings at the start of the month. Some of the metrics were poor. These metrics are usually used as standard in the sector. While daily and monthly active users declined, the more important metrics likemonthly unique users showed considerable growth.
Source: Quarterly Earnings Presentation
One of the key concerns that I have talked about in the past was the low monetization rate. Zynga had more than 66 million monthly active users but the paying customers were just 1% of the total users. This resulted in low revenues and cash flows. On this metric, the management has been able to make some serious progress. For the third quarter, the monthly unique payer (MUP) has gone over 1.3 million. This is the highest figures in the last five quarters, as can be seen from the above diagram. This was instrumental in driving operating cash flows for the quarter.
Source: Quarterly Earnings Presentation
This figure shows two of the most important metrics when it comes to gauging the money-making ability of a tech company. Again, Average bookings per daily active user and payer conversion are at the highest in the last five quarters. Payer conversion has gone up by a considerable margin of 50 basis points. This is a clear sign that the company is extracting more out of its user base. This is what I have said before that the payer conversion should be higher in order for the company to enhance its profitability. It looks like the management is finally working on a model which will allow it to generate more cash from its new and existing users.
Due to these developments, Zynga was able to generate more than $21 million in operating cash flows and over $18 million in free cash flows. Superior cash flow accretion resulted in over $32 million in nine-month operating cash flows and over $25.6 million in free cash flows. This goes on to further strengthen the cash position which is now over $870 million. At this moment, Zynga has per share cash of just below 98 cents. That accounts for more than 34% of the total value of the company. Zynga's R&D cash requirements are low and can be covered by the cash generated from its operations.
So, the best use of these reserves is to return some of the cash to shareholders. $200 million in share buybacks in the next two years seems a little conservative, in my opinion. If the uptick in payer conversion and average booking per daily active user continues, then the company will still have more than $700 million in cash at the end of this program. Assuming the stock price does not take off too quickly, there will be a considerable reduction in shares outstanding. I think the management will be opportunistic in executing this buyback program. However they do it, shareholders are going to benefit.
I am a bit optimistic about the future. My key concern about monetization is being addressed and the new games like CSR2 are doing well. There are more games in the pipeline. CSR2 helped the company with the bookings. This shows that the management can turn a new game into a cash cow. This bodes well for the future and there is more hope for the upcoming releases. I agree with the management about the turnaround getting momentum.
However, this is based on my optimism about Zynga being able to consistently monetize its user base and further improvement in key metrics such as payer conversion and ABPU. If these metrics are growing that means the company is able to increase bookings from its user base and the cash flows are increasing. Once the market sees a trend developing in these metrics, it will translate into stock price. Zynga is still a hold but the prospects are looking much brighter right now.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it(other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Source:
seekingalpha.com/article/4026128-zynga-becoming-optimistic
