Zynga Isn’t Blaming Anybody for Its Problems (Not Even Facebook)

It’s been awhile since Zynga has had a hit game, and in today’s third-quarter conference call Mark Pincus recognized that shortcoming. ”We believe that our position on Facebook has been driven by our own execution,” he said. “We haven’t been happy about our execution.”

The founder’s comments during the call were much different from just three months ago when he blamed some of its decline on Facebook. But today, he took the brunt of the responsibility, and even praised Facebook at times. “The Ville missed our expectations, but FarmVille 2 and ChefVille did a great job. We see a lot of growth for us on Facebook by innovating in genres that have grown a lot this year.”

Why Pincus decided to dial back his previous statements is not clear. But given that the two companies are connected at the hip, it’s probably a good move. Zynga said today that 20 percent of its bookings are coming from mobile, which means the remainder still comes from the social network. Just yesterday, Facebook’s Mark Zuckerberg made a point to call out Zynga’s serious underperformance, which resulted in a 20 percent decrease in payment revenue coming from Zynga compared to a year-earlier. “Gaming on Facebook isn’t doing as well as I’d like,” he said.

But perhaps the only reason for Pincus’ more conciliatory tone was that the company did slightly better today than its worst projections, provided in a warning earlier this month. Investors were soothed by the results and its plans, which included cost-cutting measures and investments in mobile, third-party publishing, advertising and real-money gaming. The stock is up 14 percent in after hours to trade at $2.42 a share after hitting a new low yesterday.

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A lot was already known about how Zynga was going to do in the third quarter since it released preliminary results earlier this month, warning that things wouldn’t be good.

But here’s the official report anyway, which is largely in line with what it was expecting — although a tad bit rosier than the ranges it provided.

In the third quarter, Zynga lost $52.7 million, or 7 cents a share, on revenue of $316.6 million. The loss was compounded by a $95.5 million impairment charge related to the purchase of OMGPOP, and charges related to stock-based compensation. Excluding those charges, the company would have made $400,000 and broken even on a per share basis.

Zynga had said it was expecting third-quarter revenue in the range of $300 million to $305 million and a net loss of between $90 million and $105 million, or roughly a 12 cent to 14 cent per share drop. Investors reacted positively to the better-than-expected results, pushing the stock up 15 percent, or 30 cents, to $2.45 a share.

“While the last several months have been challenging for us, Zynga remains well positioned to capitalize on the growth of social gaming,” said CEO Mark Pincus, in a release. “We’re implementing a number of steps to drive long-term growth and profitability.

The trend that worries investors is the declines that the company is seeing on a sequential basis. Compared to the second quarter, revenue dropped 5 percent. The drop was driven by a 2 percent decrease in virtual goods spending and a 24 percent decrease in advertising. The company is currently building a platform to boost advertising revenues across a variety of first- and third-party titles.

Yesterday, Zynga announced a resturcturing plan that included laying off 5 percent of its staff, or about 150 employees, and other cost-cutting measures. In the release today, Zynga said the plan is expected to generate savings in the fourth quarter of up to $20 million, excluding a restructuring charge of up to $12 million. It also said the board has asked the company to repurchase up to $200 million in shares.

Stay tuned for updates from the company’s Q3 earnings call at 2 pm PT

2:01 pm: Hey folks, the call is about to start.

Welcome! Mark Pincus, CEO, and Dave Wehner, CFO, are on the call. Things sure do change quick. Just last quarter, John Schappert was one of the key presenters, and now he’s gone. Lots of things to cover: real-money gaming partnership, layoffs, stock buy-back, employee retention plans, etc.

2:05 pm: Mark is up now, talking about the struggles Zynga is facing.

He says that social gaming is comprised of 235 million players of the 1 billion people on Facebook. Despite this, we didn’t meet our growth expectations. Why?

1. We experienced faster decline in bookings, we didn’t innovate on content and features, and we weren’t able to bring new games to market fast enough to offset these declines.

2. The faster-than-expected adoption of smartphones, which was distracting to its core social game players.

2:07 pm: He said FarmVille 2 and ChefVille are No. 1 and No. 3 on Facebook. Pincus said FarmVille 2 hit a new first: $950,000 in purchase volume in a single day, including the 30 percent it still has to pay to Facebook.

For some perspective, he said 70 percent of its daily active users engage with each other on Zynga’s network, “they generate 700 million social interactions, that’s more than the total ad clicks on Google in a single day.”

The Restructuring plan: This includes a reduction in data hosting spending, labor and outside services. “We also announced several studio closures, and a 5 percent reduction in staff.” They are also cutting 13 underperforming games (no details on which ones), and have a more stringent budget for games. “The Ville missed expectations, but we moved quickly to reduce and redeploy that team.”

On to mobile: Pincus said it has become the fastest growing platform for gaming. And, social games are the most engaging. “We have three of the top five most popular mobile games,” he says. “In the past year, we’ve generated a large audience and a business that represents 20 percent of our bookings.”

So, mobile = 20 percent of bookings.

He says they’ll be making more, high-engagement games, like Poker, for mobile. “We’ve reorganized game teams in Q3 to unite Web and mobile development. … That’s a huge change for our company.” Coming up in the mobile pipeline: Four games per quarter, which will cross Ville titles, casino and mid-core games.

Two new divisions that will be making revenue:

  • Advertising: In past quarter, we added 12 new sales team members, and video advertising is a our fastest-growing category with a 142 percent jump from Q2 to Q3, Pincus said. (More info on the platform it is building here.)
  • The second category is real-money gaming, as it announced today with its partnership with Bwin.

2:17 pm: Zynga’s CFO David Wehner is now going through all the financials.

“We aren’t satisfied and we are taking immediate action with a cost reduction plan,” he says. We’ve heard all the actions that they are taking before, so nothing new here.

The good news is that a better than expected Q3 means a slightly better full-year guidance, which I think has now been adjusted four times (so perhaps take it with a grain of salt).

Bookings are projected to be in the range of $1.09 billion to $1.1 billion.

Full-year 2012 non-GAAP EPS is projected to be in the range of two cents to three cents.

2:24 pm: Time for Q&A.

In after-hours trading, the stock is now up 11.8 percent, or 25 cents, to $2.38 a share. It’s worth noting that just yesterday, it hit a new low, closing at $2.20 a share.

Pincus dodges a question about how Zynga’s Q3 results fell despite Facebook reporting an overall increase in revenue yesterday: “We’re focused on building great games that can drive deeper engagement and consumer value. FarmVille 2 is a major breakthrough: We can bring a terrific 3-D game to the browser for free and we are seeing great results. We have a similar game with CityVille 2 coming, but we’ll continue to up the quality and engagement.”

Other categories, he says, that are coming include casino, player-vs.-player and core gaming, which has proven to result in better conversion rates.

The analyst presses again, asking about the algorithm changes that affected Zynga last quarter.

Wehner says: “Facebook makes changes to their algorithms all the time, we navigate those changes. We’ve been focused on operating on the Facebook platform and we continue to do that with FarmVille 2 and ChefVille. We’ve seen some declines in existing express and invest games, but we think we can continue to be successful.”

This is a different tone that Zynga is taking regarding Facebook, which it had blamed for some of its previous quarter’s woes.

2:39 pm: Bwin revenue forecasts, please?

Wehner: “There is a revenue share with Bwin on this, and we aren’t providing specific guidance at this time. We think this is a first step and is a long-term opportunity.”

A mobile question about the overlap of players on Facebook and mobile:

Pincus: “In terms of a carryover of Facebook to mobile, it’s tough to measure, but we’ve definitely seen among the Facebook-connected audience, a huge proportion, well over half, reactivated to our network because of mobile, or are playing on both web and mobile. The biggest example is our Poker game.

“In terms of Facebook driving mobile usage, we are excited about some of the changes it is testing, like new sponsored stories, and we are excited to see what the future brings.”

2:44 pm: Finally a more probing question: Why is Zynga losing share on Facebook, and when can you fix that? And, you have about $2 a share in cash, can you use that to grow?

Pincus: “In terms of our overall marketshare, we believe that our position on Facebook has been driven by our own execution. As we’ve said, we haven’t been happy about our execution. In some places, we are happy, but aren’t consistent. We are encouraged in some of our core areas, we’ve done a great job maintaining our market position. In Poker, we’ve maintained and grown, but in invest and express, we would have liked to have executed better. The Ville missed our expectations, but FarmVille 2 and ChefVille did a great job. We see a lot of growth for us on Facebook by innovating in genres that have grown a lot this year.”

Wehner says on capital, they are still looking at M&A, and that they’ll use it when highly strategic, and we continue to invest in core business on mobile and Web. Plus, the share repurchase program.

2:53 pm: A question about the advertising revenue dipping in the Q3 period vs. Q2.

Things can be seasonal, Wehner says. “Ads on the whole is growing for us and we are monetizing better and better on advertising. We are launching new products in advertising on the video side, that’s been a good growth quarter. In the third quarter, we had a sequential decline in users, which impacts ad revenue, but overall, we see it grow faster than user pay.”

2:55 pm: Question about whether the cost-cutting measures were deep enough, given revenue projections.

Wehner: The actions that we are taking will put it in the right place, and we’ll continue to invest in growth.

Pincus justifies the additional headcount and expenses: “If you compare us today to a couple of years ago, we are investing in more growth businesses than we were then. We’re investing in mobile, and network and platform, and advertising, and real-money gaming.”

3:04 pm: Analyst wants more color on future growth plans. Wehner says he’s got no more to say other than that they are on pace to launch two Web games per quarter and four mobile games per quarter.

3:05 pm: That’s it, call is over.

See ya next time, and thanks for tuning in.


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