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Facing a Rough Patch, Zynga Shrinks Games Portfolio and Workforce

Posted on Monday, Nov 5th 2012

Transparency Market Research’s report on the social gaming market estimates that more than 200 million people play online games on social networking websites. The researcher believes that the social gaming industry will be worth $5.5 billion by 2015, driven by the increased adoption of smartphones and other mobile devices.

Zynga’s Financials
Online game developer Zynga’s (Nasdaq:ZNGA) Q3 revenues rose 3.2% over the year to $316.6 million, with bookings falling 11% over the year to $255.6 million. This was a break-even quarter compared with a profit of $0.04 per share reported a year ago. The Street was looking for bookings of $256.4 million with revenues of $291 million and a break-even quarter.

By segment, advertising revenues grew 64% over the year to $31.0 million and online game revenues remained flat at $285.6 million. Daily active users for the period grew 10% to 60 million.

Zynga is looking at full-year bookings of $1.09 billion-$1.1 billion, compared with analyst forecasts of $1.1 billion.

Zynga’s Cost Control Efforts
Zynga was hurt severely by the expensive acquisition of OMGPOP. It paid $180 million to acquire the maker of DrawSomething and was counting on the success of that game, but it provided to be just a passing fad. According to analysts, the user base for the game has fallen since the acquisition. Zynga’s increased spending on product development is also hurting its bottom line. Last quarter, R&D expenses grew 36% over the year.

To manage earnings, Zynga announced plans to cut down its workforce by 5% and close its Boston, Japan, and U.K. studios. It is also ending 13 of its games and reducing investment in The Ville. The Ville series of games has performed well for Zynga and accounts for 17.1 million monthly users. But the games are losing their popularity and are underperforming. The company’s cost-savings plans are expected to result in annualized savings of $60 million-$80 million.

Zynga Expands Into Online Gambling
Zynga’s performance and dependence on Facebook are also becoming a bigger concern. In Facebook’s recent earnings announcement, Facebook reported that payments revenue from Zynga fell 20% over the year in the previous quarter. Facebook mentioned that other gaming publishers were doing better, and the weakened performance was limited to Zynga’s gaming offerings. Analysts believe that other game publishers are offering a better gaming experience by delivering real-time, player-against-player gaming.

Zynga realizes that the falling revenues from Facebook need to be compensated from other sources, and it is looking at gambling games as an option. Last quarter, it hired a new COO, Maytal Ginzburg, who was an executive at 888 Holdings, a real-money gambling site.

It also entered into an exclusive partnership with bwin.party, a Gibraltar-based real-money gaming operator. Because online gambling is still illegal in the U.S., the relationship will focus on the U.K market. U.K. users will be able to join bwin.party’s online liquidity pool and will be able to playing on the largest regulated poker network. Zynga plans to launch these games in the U.K. in the first half of the next year.

Mobile Focus for Zynga
In terms of time spent by mobile device players in the U.S., Zynga’s mobile apps account for the fourth-largest network in the U.S. The company has three of the five most popular mobile games in the U.S. and claims that its network reaches 30% of all U.S. smartphone users, spending more than 10 billion minutes a month. Mobile games account for 20% of its total bookings. But Zynga is working to increase this user base. It is developing better games focused on increased engagement and monetization. It has reorganized its game teams so that all new game launches come with a mobile or a tablet offering.

Despite these efforts, Zynga’s stock isn’t faring well. It is trading at $2.33 with a market capitalization of $1.82 billion. It touched a high of $15.91 soon after listing a year ago.

 

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