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Is Zynga’s Advertising Business a Cause for Concern?

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Rising overall revenue

Zynga (ZNGA) has been experiencing headwinds in its advertising business, and softness in the segment is limiting revenue and earnings improvements. Advertising is a small but crucial part of Zynga’s business. The company booked 21.0% of its overall revenue in 1Q17 from advertising. Zynga reported overall revenue of $194.3 million for that quarter, which was 4.0% higher YoY (year-over-year) and above the consensus estimate of $191.5 million.

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Advertising revenue down 18%

Zynga’s advertising and other revenue in 1Q17 came to $40.1 million, implying a YoY decline of 18.0% and a 19.0% sequential decline. Advertising and other bookings of $41.9 million slipped 10.0% and 20.0%, respectively, YoY and 17.0% sequentially.

Zynga’s management acknowledges that there’s a problem in its advertising segment. To spark advertising business growth, the management recently said that it would continue looking for more ways to join up with key partners. Zynga expects its fiscal 2017 advertising sales to grow modestly going forward.

Opportunity in advertising market

Gaming advertising could become a lucrative industry for Zynga and other video game publishers. Digital video advertising spending is on the rise, as marketers shift to online advertising from traditional television. This trend explains why Alphabet’s (GOOGL) Google, Facebook (FB), Twitter (TWTR), and Snap (SNAP) are seeking to increase the video content on their social platforms.

As advertising budgets continue to shift to online, Zynga’s partnership with Facebook means its advertising business could benefit immensely from the trend. To be sure, Facebook is one of the biggest digital advertising powerhouses in the world.

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