What to Know ahead of Zynga’s Q2 Earnings Results

Zynga (ZNGA) plans to report its second-quarter earnings results on July 31. What’s on its upcoming second-quarter scorecard? First, Zynga’s internal guidance shows that the company expects to report second-quarter revenue of $280 million. It also expects to post a loss of $70 million. Zynga’s results for the second quarter have surpassed internal targets for at least the last two years in a row.

Zynga delivered revenue of $217 million in the second quarter of 2018. To put it another way, it beat is internal revenue guidance for the quarter by $9.0 million. The company posted a loss of $0.9 million in the quarter. Similarly, it beat its internal loss guidance by $14.1 million.

In the second quarter of 2017, Zynga delivered revenue of $209.2 million, which was $9.2 million above its internal guidance. Likewise, the company posted a profit of $5.1 million for the second quarter of 2017 although it had guided for a loss. Wall Street expects Zynga to report revenue of $293.2 million in the second quarter of 2019.

What to Know ahead of Zynga’s Q2 Earnings Results

Zynga anticipates a competitive digital advertising market

Advertising is one of Zynga’s main sources of revenue. In the first quarter, for instance, the company’s advertising revenue increased 45% YoY (year-over-year) to $65 million. Advertising contributed 25% of Zynga’s total revenue in the quarter. Its ad revenue increased 18% YoY to $52 million in the second quarter of 2018, contributing 24% to its total revenue. Generally, advertising has contributed around one-quarter of Zynga’s total revenue.

Zynga’s management said in May that the company would continue to post double-digit growth in advertising revenue. However, its management also pointed out that the digital advertising market remains competitive.

New games to support revenue growth

Zynga continues to develop new games, and its management expects these new products to drive revenue growth. Zynga has lined up several new titles for release in the second half. One of Zynga’s new games is Tiny Royale, a multiplayer shooter that Zynga released in June exclusively on Snap’s (SNAP) new gaming platform, Snap Games. Its partnership with Snap will open another advertising revenue opportunity.

Zynga considering subscriptions

As Zynga’s second-quarter results approach, investors should remember that the company has explored venturing into the paid subscription business. That is, Zynga will require people to make regular ongoing payments to access some of its premium games. Zynga CEO Frank Gibeau told Bloomberg that the company has identified games that it can monetize through subscriptions. Undoubtedly, venturing into paid subscriptions will allow Zynga to broaden its revenue base.

Google’s Stadia and Apple’s Arcade

Google (GOOGL) and Apple are preparing to launch new gaming platforms. Google has named its new gaming platform Stadia and plans to launch it this fall. Stadia will allow people to stream games rather than downloading them to their devices. Therefore, Stadia promises to expand access to games by eliminating the need for high-end gaming devices. Google will offer Stadia as a paid subscription. Apple’s Arcade will also launch this fall as a paid subscription gaming service. Both Google and Apple are looking to subscription services to expand their gaming businesses. Zynga sees the opportunity to sell its games on these platforms.

The global games market generated $138.7 billion in revenue in 2018, and that amount is expected to rise to $152.1 billion revenue in 2019. By 2022, the global games market will be doing $196 billion in annual revenue, according to Newzoo estimates. Currently, Chinese company Tencent dominates the global games market. Tencent generated $19.7 billion in games revenue in 2018 compared to Sony’s $14.2 billion and Microsoft’s $9.8 billion.

Gibeau has said that the global games market continues to expand and is big enough to accommodate multiple successful vendors. Therefore, he doesn’t expect Zynga’s results to suffer as competitors expand their gaming services.