(Photo Credit: Nguyen Hung Vu)

After the close today Zynga (ZNGA) and King Digital (KING) are both slated to release 3rd quarter earnings. So far this earnings season has been a lucrative one for many of the traditional gaming companies like Electronic Arts (EA) and Activision Blizzard (ATVI).

But King and Zynga come from a slightly different breed than their triumphant console based competitors. The biggest difference between newcomers King and Zynga and the industry incumbents is that the young gaming studios are focusing on freemium mobile games rather than $50+ titles for traditional gaming platforms such as Xbox and Playstation. 

The business model entails getting a user to download a game for free, then up selling them on frequent inexpensive micro-transactions. Over the past few years King and Zynga’s respective flagship franchises, Candy Crush and FarmVille, have been monstrously successful employing this strategy. However, taking a small games studio public on the wings of a single hit carries an underlying risk. Content in general is an industry of blockbuster hits and Zynga and King will need to find ways to expand and diversify their revenue sources as the popularity of their hit games inevitably declines.

Diversification of Revenues

King Digital

Last quarter sales from Candy Crush Saga made up 59% of King’s total revenue. As Candy Crush Saga’s popularity wanes analysts will be looking for other titles to pick up the slack. Games like Farm Heroes and Bubble Witch 2 have taken on more responsibility to delivery revenue for King in recent months. Investors will also be counting on the freshly released Candy Crush Soda Saga, the sequel to Candy Crush Saga, to be a smash hit over the next quarter. 

King Digital also made its first significant acquisition as a public company this quarter buying Singapore based studio Nonstop Games. Nonstop is working on a mobile strategy title similar to Supercell’s Clash of Clans. According to the Google Play store, Clash of Clans is the highest grossing game on Android right now. King is making a bet that they can cash in on Clash of Clan’s popularity by releasing a similar game.

Zynga

Unlike King Digital which was a mobile first company, Zynga’s origins lie in making games which lived on top of the Facebook platform on desktop. This year Zynga has invested significant resources to focus on mobile. In the second quarter of the year 50% of its bookings came from mobile, up from the 36% recorded in the first quarter of 2014. 

In the second quarter Zynga released the latest game in its flagship franchise, FarmVille2: Country Escape. Last quarter revenue at Zynga came up short of expectations, but the company did add 7 million additional monthly users and saw a small increase in the average bookings per user, a key monetization metric. This quarter Zynga has shifted its strategic focus to making games that leverage recognizable brands. Zynga has released titles that license rights from the NFL, Tiger Woods, and Loony Tunes. This looks to be an attempt at imitating the fashionable Kim Kardashian: Hollywood game made by competitor Glu Mobile (GLUU).

Fundamentals

This quarter analysts on Estimize are expecting King Digital to miss the Wall Street consensus on the bottom line by 2 cents per share and come in marginally ahead of revenue expectations. King has only been a publically traded company since late March of this year, and we’re seeing a very wide range of profit expectations for the report today. A wide range of expectations could signal volatility after earnings as there is disagreement among investors on what to expect. 

Zynga on the other hand has been on the public market since December of 2011. The game studio’s revenues have been on decline for 6 consecutive quarters as the company has downsized its workforce and axed unpopular games. Since a peak in early 2012 the stock has sank from over $14 per share to its current price of just $2.38. Investors have been unhappy with the lack of progress and another disappointing quarter could be a disaster. 

The silver lining here is that expectations are very low. Contributing analysts on Estimize are looking for Zynga to report in-line with the Wall Street EPS consensus and report revenue of $175 million, down 13% from the same quarter of last year. If you compare to 2 years back the sales outlook gets even more bleak. Investors are expecting Zynga’s revenue to come in at just 55% of what it was in the third quarter of 2012.