Facebook Inc (FB) Changes Could Be Challenging For Zynga Inc (ZNGA)

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Zynga Inc (NASDAQ:ZNGA), which still heavily depends on Facebook Inc (NASDAQ:FB) for its revenues, announced its fourth quarter earnings on Tuesday. The company posted a revenue of $311 million in the October-December quarter, and profits of 1 cent per share. Its revenues were above Wall Street estimates of $250 million. The company had incurred a loss of $435 million, or $1.22 per share in the same period a year ago.

Facebook Inc (FB) Changes Could Be Challenging For Zynga Inc (ZNGA)

Despite the upside in the fourth quarter, Sterne Agee, senior analyst Arvind Bhatia, says 2013 will be a tough year for Zynga, especially due to change in business terms with Facebook. The company management is focusing on increasing free cash flow that would prevent decline in the stock. However, sustainable growth in stock prices would come only if the company can prove it can create blockbuster games, even after losing it’s favored status on Facebook Inc (NASDAQ:FB).

Stern Agee said the improvement in the fourth quarter results were due to three reasons. One, Farmville 2 exceeded the company’s expectations by about 100 percent. Two, revenues from mobile increased from $51 million in 3Q, to $55 million in the fourth quarter. Three, cost savings were better than planned.

Zynga Inc (NASDAQ:ZNGA) share prices have declined about 75 percent in 2012. The company chief executive, Mark Pincus, said 2013 will be a “pivotal transition year” for Zynga as it seeks to broaden revenue sources and cut costs further. Zynga reported 298 million active monthly users during the fourth quarter, up 24 percent from last year’s 240 million users per month. However, the number of users declined 4 percent on sequential basis from 311 million users per month during the third quarter of 2012.

Zynga Inc (NASDAQ:ZNGA) issued a first quarter guidance that was below expectations. Stern Agee has raised its 2013 revenue guidance for Zynga from the previous estimate of $855.3 million to $905.1 million. The company has been aggressively partnering with other studios to release mobile games. Sterne Agee said mobile strength witnessed in the fourth quarter was mainly because of contribution from these partners.

Since inception, Zynga had an advantage over other social gaming companies as it benefited from the special terms in its agreement with Facebook Inc (NASDAQ:FB). However, Facebook recently amended the terms which will be effective in March. The Menlo Park-based social networking giant has leveled the field for all gaming companies. So, Sterne Agee thinks that the discoverability of Zynga games will not be as high as before. Expect Zynga Inc.’s customer acquisition costs to go up over time.

Sterne Agee has Neutral rating on Zynga Inc (NASDAQ:ZNGA), which jumped 9.49 percent to $3 per share at 11:21 AM EST.

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