Zynga (ZNGA) Stock Plummets After Cutting Outlook, Mark Pincus Hints At Deeper Cuts

Pincus Says Company Will Undergo "Targeted Cost Reductions" In Order To "Reflect Our Strategic Priorities"

 @YannickLeJacq
on October 04 2012 7:14 PM

Shares of Zynga Inc. (Nasdaq: ZNGA) dropped by more than 16 percent Thursday in after-hours trading, once again falling below $3 per share -- a limit it has struggled to maintain since its weak second quarter earnings report sent the newly minted public company’s stock spiraling in July -- to a new low of $2.37.

Zynga, the prominent San Francisco-based game developer that works closely with the social media giant Facebook Inc. (Nasdaq: FB), first went public in December 2011 at $10 per share. Before the stock plunged by 41 percent overnight following July’s quarterly earnings reports, shares were trading for as much as $14.

Thursday’s dip in share prices came after the company released its preliminary third-quarter earnings report. In the statement, Zynga said it expects to report a net loss somewhere between $90 million and $105 million. For the third quarter, the company expects to report revenue in the range of $300 million to $305 million. Bookings, meanwhile, are expected in the range of $250 million to $255 million – a steep drop from the $302 million Zynga reported in the second quarter.  

Writing on the company’s blog following the announcement, Zynga CEO and co-founder Mark Pincus said “the challenges we faced in our web business in Q2 continued in Q3 and while many of our games achieved plan, we still experienced overall weakness in the ‘invest and express’ category.”

As a result, Zynga lowered its full-year bookings forecast to a range of $1.085 billion to $1.1 billion, compared to its originally forecast of $1.15 billion to $1.225 billion. Citing delays in launching some of its planned new titles, the company said the full-year outlook was lowered to reflect “reduced expectations” for “certain web games,” including the recently launched Facebook game “The Ville” -- a game that is now at the center of a tenuous legal battle with Electronic Arts Inc. (Nasdaq: EA) after EA accused Zynga of infringing on the copyright for its Facebook game “The Sims Social.”

Zynga was careful to specify that the diminished expectations were the results of “certain web games,” however. Reiterating the strategy they first announced after their second quarter earnings report, Pincus said that his company will refocus on mobile gaming and casino games in particular -- a strategy its already acted on by hiring an veteran online gambling executive and contributing to gambling lobbying efforts throughout the United States.  

Pincus went on to say that his company will undergo some “targeted cost reductions,” but gave no specific details. Having already lost 12 C-level executives in less than two months following its second quarter earnings report, however, the statement leaves open the possibility of further cuts to underperforming sections, such as Facebook titles that have failed to attract significant user retention. He also added that Zynga will be “focusing our new game pipeline to reflect our strategic priorities,” but nevertheless conceded that several new games “are at risk of launching later than expected.”

Zynga also noted in its Thursday statement that third-quarter results will write-down between $85 million and $95 million for its acquisition of OMGPOP, the mobile game studio Zynga acquired in March for about $180 million. The deal was largely motivated by the massive popularity OMGPOP’s mobile game “Draw Something” was enjoying at the time, a popularity that fell sharply less than two months after the acquisition.

“While we’re encouraged by our strong starting position on mobile, developing this new growth market to the scale of our web business will take time,” Pincus wrote. 

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