Stock Tanking as Zynga Misses Already Low Expectations

Zynga released second-quarter earnings today that fell below what analysts were expecting — and they weren’t expecting much.

In after-hours trading, the stock was tanking, falling more than 39 percent at one point to drop close to $3 a share. Those shares sold in December for $10 a pop.

Today, Zynga reported the disappointing news that it made one cent a share on revenues, excluding some items, on revenue of $332 million. For the second quarter, analysts were expecting revenues of $344 million and non-GAAP earnings per share of six cents.

It also reported a net loss of $22.8 million for the second quarter, compared to net income of $1.4 million for the same quarter in 2011. The net loss included $95.5 million of stock-based expense compared to $33.1 million of stock-based expense in the year-ago period.

This is a pretty big miss for the company’s third quarter as a publicly held company. Undoubtedly, it will bring up questions on today’s earnings call with analyst about the company’s prospects for growth. Admittedly, the San Francisco-based company is expecting the second half of the year to be stronger, but how much stronger?

Not much.

Zynga is also lowering its outlook to reflect delays in launching new games, a faster decline in existing Web games due in part to a more challenging environment on the Facebook side and reduced expectations for Draw Something. The company is now expecting to record a profit, excluding some items, of four to nine cents a share on bookings of $1.15 billion to $1.225 billion.

As another potential sign of a slowdown, the company’s bookings during the quarter totaled $301.6 million, an increase of 10 percent compared to the second quarter of 2011, but a decrease of 8 percent compared to the first quarter of 2012.

Bookings are often considered a better measure of how the company did during the immediate period. Bookings represent what Zynga actually sold in the quarter, versus revenue, which is amortized over multiple quarters.

Earlier:

2:00 pm: The call is kicking off any minute. As a side note, Zynga filed an additional form with the SEC this afternoon, notifying investors that CEO Mark Pincus now owns more than 50 percent of the voting power of the company’s outstanding stock.

Interpreted one way, that means that even if investors don’t like what they are seeing, it will be hard to do anything about it.

2:02 pm: Call kicks off with all the legal formalities. We’ll be hearing from the CEO, COO and CFO.

Call is being turned over to Mark Pincus.

First, he wants to offer some perspective on the quarter, including where the company sees its growth coming from. He cites some good things that have happened:

  • Zynga is now reaching 300 million monthly users.
  • The company’s mobile footprint is now reaching 33 million daily active users, a five-fold increase, to make Zynga the largest mobile game network.

He said three factors led to a disappointing quarter:

  • Declines in engagement and bookings due in part to changes Facebook made to its network, which favored new games.
  • The Ville launched late in the quarter.
  • Draw Something, which they acquired for $210 million, is not meeting expectations and suffered a dramatic decrease in daily active users.

Pincus said they are taking steps to fix these things. They are moving resources from live games to new games to hit launch targets later this year, and working on Draw Something.

Another thing to get investors jazzed about is the company’s plan to launch real-money gaming (a.k.a. gambling) internationally in the first-half of 2013, subject to licensing approval.

COO John Schappert joins the call to go over all the announcements made at its Unleashed event last month, including invigorating its Ville franchise with games, such as The Ville, ChefVille and FarmVille 2.

2:18 pm: Now, Zynga’s CFO David Wehner has joined to go over the numbers.

He is making the point that they have no reason to believe that mobile cannot monetize as well as the Web, and that games like Zynga Poker already do.

Wehner says headcount is now 3,200 employees, with most of the employees joining R&D.

He’s now addressing the outlook, and says they are lowering it because of a delay in games, challenges with the Facebook platform and reduced expectations for the Draw Something acquisition.

Previously, Zynga was projecting non-GAAP earnings of 23 cents to 29 cents a share on bookings in the range of $1.4 billion to $1.5 billion. It is now expecting earnings of four cents to nine cents a share on revenue of $1.15 billion to $1.225 billion.

2:26 pm: The call is now open to questions. This should be interesting.

Question is about the more challenging Facebook environment, and whether Zynga should find other platforms, and insights into real-money gaming prospects.

Pincus: In the near term, we are positive about the ability for growth in our current categories, but also see more opportunities in male-targeted games. But the opportunity is more and more on mobile.

Getting beyond the Facebook Web footprint through mobile will give us more growth opportunities, and for games that we are bringing out that are multiplatform across Web, Facebook and mobile, there’s a bigger opportunity for network effects.

On real-money gaming: Our first products are in development and we intend on releasing them in markets that are regulated and open. The U.S. is an attractive market, but it’s not regulated or open today, so we don’t have immediate plans in the U.S.

Next question is about revenue on mobile vs. Facebook:

Look at our bookings, I mentioned that 80 percent of our bookings are related to the Facebook platform, and then there’s mobile, and then the DAUs are 33 million on mobile and 72 million on the overall business. You’ll see that mobile is less than half of the monetization rate of the Web.

But in some games its comparable, like Poker. Part of our strategy is to come out on mobile with higher monetization of games. We are focused on closing that gap on higher-monetizing games in the near future.

Pincus added that the biggest bookings driver on mobile will be getting to scale and distribution. They’ve found that mobile looks fine in terms of monetization, and sees many of the same players that wthey see on the Web, but “we need to drive distribution to get to the audience sizes that we want.”

2:33 pm: Next question is about the changes Facebook made to its platform.

Schappert: Facebook made a number of changes in the quarter. They favored new game installations, and we saw the 15 percent overall decline, and 34 percent decline for the live games. It impacted the feeds, requests and bookmarks and the like. Our users did not remain as engaged and new games were promoted. On the flipside, we watched Bubble Safari go to the top of the charts. And The Ville set a record for Zynga of having 4.5 million new installs.

Question: Will the Facebook slowdown continue during the second half of the year?

Schappert: I can tell you right now, we just launched The Ville, and are seeing a nice pickup in DAUs. I’ll remind you that they [Facebook] are always making changes to the platform for the better. What we are focused on is delivering a great second half of games, including new Villes. ChefVille is coming soon, FarmVille later this year, and then there’s a third.

2:38 pm: Is Zynga.com meaningful yet?

No color on that. … but as a reminder, it remains in open beta. They are taking feedback from the site to roll out elsewhere, and they haven’t turned on serious cross promotion yet.

Question: Given your experience with OMGPOP and the Draw Something acquisition, does that turn you off on future acquisitions?

Pincus: Our M&A strategy has always been focused on adding entrepreneurial high-performing teams, rather than whole product lines. As we said on the last call, the OMG acquisition is a rare circumstance for us and is the second time we acquired a product line. We are dedicated to growing organically. The two instances — Words With Friends and Draw Something — were an opportunity to expand our product footprint. In terms of other small companies and teams, we stay actively engaged in the market. We’ll continue to look at them and see if any of them are good cultural fits.

John Schappert is jumping in to talk about its mobile publishing platforms, which can be looked at as another way to interact with that entrepreneurial community.

2:47 pm: Question is about Zynga’s relationship with Facebook and the opportunity for FarmVille 2, given the disappointing Mafia Wars 2 sequel.

Pincus: We continue to work closely together on creating a better ecosystem. The launch of Zynga.com was envisioned in the agreement we entered into together. It was an opportunity for us to build a sandbox, where we could build more quickly around the game experience.

In terms of sequels, we were disappointed in Mafia Wars 2, but we think we didn’t bring out a high quality enough game to serve that audience. Our belief is that we have audiences that are interested in genres and styles of play, some are evergreen like Poker, and, we hope, casual arcade games. We think the genre can be evergreen if we do a good job bringing out next-gen sequels, if we bring out new mechanics that excite people.

In terms of FarmVille, we are more excited about bringing a sequel out so that the hundreds of thousands of people who no longer play will pick it back up, in addition to the people who already play.

2:54 pm: Pincus answers analyst question about why investors should invest at $3 a share:

We are the most optimistic believer in social gaming as play, as a mass market opportunity and an even bigger business in the future.

We consistently invested more than any other company. I think we’ve executed well over the past for growing the market for social gaming, and today we have the leading position on social and mobile. We will continue with that strategy in building the best mechanics.

3:01 pm: Longer term, will the changes at Facebook create a net positive?

Schappert: I’m sure they’ve already made changes to the features we are referencing. I think new game discovery is good for us and the whole industry. Part of the reason we saw softness is that we delayed the launch of The Ville.

I think what they are doing to favor new game launches is positive for us and others, but we are also happy we have a network of 72 million daily users and 300 million monthly users. That favors us when we launch a game, like when we launched The Ville and got 4.5 million installs on day one.

That’s all the questions for now folks.

As you can tell, Zynga’s management team is also disappointed in second-quarter results, and from having to revise its outlook. It believes that in the near term the strategy is enough to turn things around, and that its long-term strategy in publishing third-party games and focusing on mobile will be enough to feed its growth and make investors satisfied.

For now, Wall Street is skeptical. The stock is still down, having plunged $2.05, or 40 percent, to $3.03 in after-hours trading.


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