Sterne Agee analyst, Arvind Bhatia, raises estimates on Zynga Inc (NASDAQ:ZNGA) as 4Q13 results and guidance exceed expectations. Below is an excerpt from the report.

Zynga Inc (NASDAQ:ZNGA) Q4 & Guidance Exceed Expectations; Raising Estimates

Zynga Inc ZNGA
Zynga Inc ZNGA

Our Call

Trends at Zynga Inc (NASDAQ:ZNGA) are stronger than we expected, and we are encouraged by evidence of a turnaround. However, based on historical volatility in this business, we are waiting for proof that recent trends are sustainable. As such, we are reiterating Neutral.

Zynga’s underlying trends stronger than what Appdata would suggest. Historically, Appdata has captured more than 80% of Zynga’s traffic (around 84% on average). In Q4, however, the relationship broke down and Appdata only captured ~71% of the total traffic. Thus, our traffic estimates (based on Appdata) were too low, which impacted our bookings projections.

NaturalMotion Acquisition. Zynga acquired NaturalMotion for a total of $527M ($391M cash + stock), which equates to ~6x bookings and roughly 26x Adjusted EBITDA.

Headcount reduction. Zynga announced plans to reduce headcount by 15% (314 employees) which will result in annual savings of ~$34M.

Q4 Results.  Zynga Inc (NASDAQ:ZNGA) Reported Q4 Bookings / Adjusted EBITDA of $146M / $2.6M versus consensus of $139M / ($16M). DAUs of 27M compared to our estimate of 23M. Looking closer at DAUs, Facebook (FB – $61.08 – Buy) DAUs were 14M versus our estimate of 11M, and mobile DAUs were 13M versus our estimate of 12M. Facebook bookings were $96M, above our estimate of $76M. Mobile bookings were $51M, above our estimate of $46M.

Guidance. Q1 Bookings / Adjusted EBITDA guidance (at the midpoint) of $143M / $7.5M includes a benefit of roughly $8M / $0M, respectively, from NaturalMotion. Excluding NaturalMotion, Bookings / Adjusted EBITDA guidance (at the midpoint) of $135M / $7.5M compares to consensus of $146M / ($3M), or below consensus on bookings but above with respect to Adjusted EBITDA. For the full year, excluding the benefit of the acquisition, bookings / Adjusted EBITDA guidance (at the midpoint) of $710M / $63M compares to consensus of $630M / $36M.

Estimate Changes & Valuation. We are raising our 2014 bookings estimate to $790M to reflect approximately $75M benefit from NaturalMotion and also underlying strength in the core business. We are raising our 2014 Adjusted EBITDA estimate to $83M to reflect the roughly $20M benefit from NaturalMotion, improving margins in the core business, and also some additional benefit for headcount reductions above what we were already modeling. Based on the after hours share price of $4.20, ZNGA trades at roughly 31x 2014 EBITDA guidance.