Zynga, Survival at Stake, Beats Forecasts

 Zynga is putting all its chips on a game called survival.       
The company, which practically invented the notion of using Facebook as a games platform, is firing employees, shutting games and losing players. It warned that its third-quarter numbers would be a pre-Halloween horror, and so investors naturally started thinking about the apocalypse.
The results, released after the market closed Wednesday, were not quite as bad as that. In addition, the company announced a partnership to offer online casino games in Britain where gamblers can wager real money. Such games, which have been banned in the United States, are promoted as highly profitable.
Third-quarter revenue was $317 million, an improvement over the $300 million to $305 million the company forecast in early October when it warned that tough times were ahead. The number was also significantly higher than the $256 million that downbeat analysts had expected. But revenue was only 3 percent better than 2011.
Still, the stock immediately spiked, rising as much as 30 cents in after-hours trading to $2.42. Zynga shares are down 75 percent from their public offering price last December, and have dropped even more from the level at which executives and early investors cashed out last spring in an unusual $500 million secondary offering.
“In less than 10 months, Zynga has gone from a massive global growth story to a cost-cutting restructuring story,” said Richard Greenfield, an analyst at BTIG Research. “How did the rug get pulled out from under them so fast? It still amazes us.”
Mr. Greenfield pointed to a new Zynga game, the Ville, in which players create the home of their dreams. In an economy in which hardly anyone can afford to do this in real life, Zynga had high hopes some players would spend money to do it virtually. The Ville was introduced in June and had 7.3 million daily users at the end of July. Today: 1.7 million.
“The decay curve, the half-life, is shortening,” Mr. Greenfield said. “It’s staggering how fast some of these games have fallen off.”
For all the downward trend, Zynga is still the most popular social gaming company. It is controlled by its founder and chief executive, Mark Pincus, who now has the opportunity to prove he is worth the fortune Zynga has showered on him.
“Is Zynga doomed?” asked Joost van Dreunen of SuperData Research. “No. Not yet. But the next play they make is going to be Pincus’ most important bet to date.”
Silicon Valley loves to worry about whether it is in a bubble; merely asking the question is proof that it is not true. But for a small group of companies, the bubble has already burst. Groupon, Netflix and, most visibly, Facebook have all been hammered recently as investors began to realign their rosy expectations with cruel reality.
Zynga is by far the most embattled of this select group. Even as its partner Facebook staged a tentative revival Wednesday — Facebook shares rose 19 percent on the heels of better-than-expected third-quarter numbers — Zynga’s own earnings report raised the question of its long-term viability.
“The last several months have obviously been challenging for us,” Mr. Pincus said in a conference call with analysts.
The company lost 7 cents a share last quarter; in 2011, it broke even. As part of its reorganization, the company announced a $200 million share buyback plan.
Zynga began cutbacks this week. It is dismissing 5 percent of its 3,000 employees and turning off 13 games. It is also withdrawing support from the Ville.
All that is unlikely to be enough, said Arvind Bhatia, an analyst at Sterne Agee.
“The Zynga model was flaky to begin with,” Mr. Bhatia said, noting the dependence on Facebook, on a few hit games like FarmVille and CityVille, and on just a few players who were willing to buy virtual tractors to speed their play. “If they could find a hit, maybe things could turn around. But the recent track record doesn’t give you a lot of confidence.”
When Zynga went public in December, the caution of a few skeptics, including Mr. Bhatia, was drowned out by the enthusiasm for getting in on the hot social network scene before shares in Facebook itself were available.
Zynga had a compelling story to offer: In a world starved for time, we would keep in touch with our friends by playing games with them during snatched moments.
“I fundamentally believe that the biggest opportunity is to get people like me to play,” Mr. Pincus said in an interview with Games Industry International. “I’m a latent gamer; it’s there, it’s just in the background because I’m too busy, and I can’t find the time, I can’t justify the time. But if you could get it in front of me and you could distill it down to something that I could get into in five minutes, and I could play it with friends and other people, you would have me.”
After its debut at $10 a share, Zynga was valued at $7 billion. Early investors and company officials, including Mr. Pincus, sold a few months later at $12 a share.
In that era, Zynga and Facebook were closely tied. But on Facebook’s earnings call Tuesday, Mark Zuckerberg distanced his company from Zynga, saying even as revenue from Zynga was down 20 percent annualized, revenue from other gaming companies was up 40 percent.
Translation: a sinking Zynga won’t hurt Facebook. As a headline in the TheStreet.com put it: “Call the Cops, Mark Zuckerberg Just Killed Zynga.”

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