Zynga 4Q Earnings Preview: Existing Titles Continue To Underperform As Company Struggles With Transition To Online Gambling

Company struggles with transition to online gambling

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Zynga Q4 Earnings Preview: Existing Titles Continue To Underperform As Company Struggles With Transition To Online Gambling
Zynga

Social game developer Zynga Inc. (Nasdaq:ZNGA) is expected to swing to a loss in the fourth quarter because fewer people are playing the company's games.

The San Francisco-based company, which reports Tuesday after the market closes, is likely to report a $21.87 million loss, or 3 cents a share, on revenue of $212.1 million, compared with earnings of $37.15 million, or 5 cents a share, on revenue of $306.5 million a year earlier, according to analysts surveyed by Thomson Reuters.

For all of 2012 analysts expect Zynga to report net income of $26.54 million, or 3 cents per share, on revenue of $1.1 billion compared with $182.48 million, or 24 cents per share, on revenue of $1.16 billion.

This will be the company’s second consecutive quarterly loss, which sent its stock tumbling along with that of its close relative Facebook (Nasdaq:FB). If the struggling casual game developer’s performance is as poor as the consensus estimates anticipate, the report would show a 30.8 percent decline in revenue.

Zynga’s continued losses are consistent with the diminished outlook that CEO Mark Pincus gave last October shortly before the company’s weak third-quarter earnings report. The company has seen a massive dropout of its user base across the board for some of its most popular social game titles, including “Draw Something,” “Words with Friends” and “FarmVille 2.”

While Zynga remained the largest Facebook app developer throughout the end of 2012 and into 2013 by a substantial margin, its monthly active user (MAU) count fell by more than 65 million plays throughought the fourth quarter.  When Zynga reported its third-quarter earnings, it had well over 315 million MAUs, 58 million of them playing “FarmVille 2,” according to estimates from AppData. By the end of December, that number had fallen to 250 million. And the drop in active Zynga players on Facebook has continued to decline well into 2013. As of this writing, AppData shows Zynga having just 137 million MAUs overall on Facebook. "FarmVille 2" alone has lost close to 50 million MAUs, now showing just 10 million active players.

These figures, however, also represent a precipitous drop in overall users throughout Zynga's fourth quarter. 

In response, the company made a number of aggressive moves in the fourth quarter o restructure its corporate and creative strategy and position itself for growth. The company cut costs throughout the fourth quarter by shutting down a number of its regional studios, and it continued to lose high-profile executives such as Dave Wehner, who left the company for Facebook in November. 

Also, hoping to increase user engagement by appealing to a more "hardcore" gaming crowd than the average "FarmVille" player, Zynga acquired the independent studio November Software to begin producing "midcore" games. 

It also revisited a two-year old contract held with its close partner Facebook, which had given Zynga near exclusive access to the social network's billion-plus users. In the fourth quarter the contract was revised -- effective next month -- to remove Zynga's preferential placement on Facebook's app store. That is expected to give rival developers such as King.com and Kabam a chance to make their own plays for the casual gaming market.

After recruiting online gambling executive Maytal Ginzburg Osha and partnering with the British gambling company bwin.party over the third quarter, Zynga began the application process in the fourth quarter to become an online gambling company in select U.S. states such as Nevada.

The upshot is that Zynga has all but rebranded itself as an online gambling platform for mobile gamers, the only problem being the imperfect transition between attracting casual “Draw Something” players and the type of user that would play poker on their smartphone.

Whether or not Zynga has also turned itself into a profit enterprise remains to be seen: Establishing alternative sources of revenue such as mobile gambling and transitioning to a new business model to match takes longer than a single fiscal quarter. 

Shares surged 19 cents, or 7.23 percent, to $2.74 in Tuesday midday trading.

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