Zynga Inc (NASDAQ:ZNGA) posted better than expected third quarter revenue driven by online game and cost cutting efforts, according to Wedbush analysts Michael Pachter, Nick McKay and Nick Citrin. Analysts are maintaining an Outperform rating on Zynga and have raised the price target to $5 from $4.25, believing “Zynga shares will appreciate once investors have visibility into revenue growth.”zynga

Third quarter performance

For the third quarter, the social game maker locked in revenues of $203 million, which was ahead of analysts’ expectation of $200 million, and guidance of $175-200 million. Total bookings accounted for $152 million compared to Wedbush analysts estimate of $150 million and the consensus estimate of $143 million along with guidance of $125-150 million.

Non-GAAP earnings per share came in at $(0.02) versus analysts’ estimate of $(0.01), consensus of $(0.04) and guidance of $(0.09)-(0.05). Non GAAP operational expenditure came in at $186 million, which was less than analysts’ expectation of $195 million as the workforce is being reduced regularly.

Zynga needs to win back investors’ confidence

Zynga Inc (NASDAQ:ZNGA) maintains its topmost position in the social game segment though it is facing a downturn in revenues. Three of its games that have maintained their dominance are Farmville 2 on Facebook, Zynga Poker “dominating its genre” and Words with Friends in crossover segment.

However, Zynga needs to assure that it can continue on the profit track as the company depends upon “adjusted EBITDA”, adding back a host of non-cash charges and tax benefits to arrive at its target metric.

Investors, on the other hand, will be interested in knowing the sustainability of profits and cash flow. Zynga forecasted non-GAAP loss in the fourth quarter, which implies that it is still expanding massively. According to analysts, the game maker should work upon regaining investor confidence by heading towards sustained profitability.

New CEO, cost cutting analysts

Layoffs, though continuing, have slowed down compared to the last quarter. In the second quarter around 628 employees exited from the company leaving headcount at 2,360, but in the third quarter only 154 employees were slashed. However, analysts have based their EPS number for 2014 on operational expenditure, which is declining 32% year on year. According to analysts, Zynga needs to bring down its total employees by 40% in order to control costs.

The report concludes that Zynga Inc (NASDAQ:ZNGA) has been suffering downturns in 2013 so far, but recently appointed CEO Don Mattrick has the expertise and experience to adopt necessary transformation, and if he narrows down the cost structure of the company along with providing stability to the business then shares can soar beyond the given price target.

Wedbush analysts are maintaining an Outperform rating on Zynga and have raised the price target to $5 from $4.25.