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Zynga’s Focus Shifts From Social to Mobile

Posted on Thursday, May 2nd 2013

According to market reports, online gaming through social networks may have been a fad and is on a decline. Recent results reported by social gaming player, Zynga (Nasdaq:ZNGA) support this realization. In view of the declining loyalty to social games, other games publishers are also shutting down games. Players like Electronic Arts are shutting down three social games: The Sims Social, SimCity Social, and Pet Society. But while the importance of social networks to gaming may be reducing, the impact of mobile devices on the gaming industry is improving. Researchers estimate mobile gaming to be worth $9 billion this year and Zynga is trying hard to make inroads into that market as it struggles to survive.

Zynga’s Financials
Zynga’s Q1 performance was disappointing. While they were able to deliver profits of $4.1 million during the quarter compared with a loss of $85.4 million a year ago, operating metrics were not as impressive. Revenues fell 18% over the year to $263.6 million as revenues from core online game segment fell 22% over the year. The 21% increase in advertising revenues was not able to compensate for the decline. The Street was looking for revenues of $264.8 million for the quarter. EPS of $0.01 was ahead of the Street’s projections of a loss of $0.03 per share.

Zynga’s daily active user metrics fell from 56 million a quarter ago to 52 million. Monthly unique users also declined from 167 million to 150 million while monthly active users fell from 298 million to 253 million.

For the current quarter, Zynga expects revenues of $225 million-$235 million with a net loss per share of $0.05- $0.03. The Street was looking for revenues of $261.7 million with a loss of $0.01 per share. Zynga claims that the market conditions are hurting their revenue growth and the increased investment in the development of mobile gaming apps is keeping their margins low.

Zynga Reduces Dependence on Facebook
Some of Zynga’s troubles are attributed to their efforts to move away from their dependence on Facebook. Zynga used to earn nearly 90% of their bookings from Facebook earlier. But that has changed significantly over the past few quarters. During the last quarter, Zynga saw 76% bookings through Facebook. Zynga is shifting to a mobile-based business to reduce their dependence on Facebook. Last quarter, they earned 22% of their revenues from mobile devices compared with 12% reported a year ago.

Analysts believe that the mobile gaming market is driven by growth in low-end smartphones. Given that Google’s Android OS helps power most of these low-end devices, Zynga is expected to focus on games for Google Play. Developing games for Google will enable them to expand their market reach.

Zynga’s New Games

Zynga is counting on the legalization of online gambling to help them get out of their woes. As they wait for that to happen, they continue to release sequels of some of their successful games. Recently, they released Farmville 2, which has been received positively according to initial reviews. After a disastrous performance by Draw Something, which they purchased with the acquisition of OMGPOP, they are now counting on its sequel, Draw Something 2, to perform better. The new version will feature social tools letting players connect and share their scores, drawings, and comments with each other. They have also tied up with celebrities such as pop performers will.i.am and Carly Rae Jepsen so that fans can see their drawings through the game.

But many of these games are fads, and interest in them may just wash out if something newer comes along and whether these games will deliver will remain to be seen. Meanwhile, their stock is trading at $3.19 with a market capitalization of $2.49 billion. It touched a high of $9.24 in May last year.

 

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