Zynga presses pause on game launches as sales outlook drops
The gaming company cuts outlook after its says revamps of hit games, including Words With Friends, will take longer. But, it says, new efforts should prove fruitful.
What's going on at Zynga?
That's the question investors are likely asking after the gaming company on Thursday slashed its projected financial performance for the coming year, highlighted by falling sales and uncertain profits, even after various financial measurement adjustments.
The company's shares plummeted 12 percent in after-hours trading following the announcement, after closing up nearly 5 percent to $2.92. The company's shares have fallen nearly 24 percent so far this year.
Don Mattrick, Zynga's chief executive, isn't happy about it either. "We aspire to do better and improve execution across our business," he said in a statement.
As it has in the past, the game company had explanations for the disappointing news, as well as ideas for how to get its proverbial car out of the mud and back on the road.
The why: Zynga says it delayed several key games, including a revamp of Words With Friends and Zynga Poker for a couple months. It also delayed new titles from NaturalMotion, the company's recent and large acquisition which was said to introduce new gameplay styles and technology that would help Zynga compete more effectively.
So how does this get fixed?
Zynga said it's going to expand into a new product category: sports games. It has signed deals with the National Football League and players association to build a new title in time for the upcoming season. Zynga has also worked out a deal with pro golfer Tiger Woods. None of the terms were disclosed, but Mattrick said he made sure the deal would be mutually beneficial to the company. As part of the effort, Zynga's building a new franchise called "Zynga Sports 365."
The company has also signed a deal with Warner Bros. to bring a Looney Tunes-inspired game to mobile devices as well. The genre: An endless running game.
We've been here before
Colin Sebastian, an analyst at RW Baird, asked to describe Zynga as a company, sums it up as being "caught between a rock and a hard place."
But perhaps the mud-stuck car analogy is more appropriate. "It's not about what's in the rear-view mirror, but what's looming ahead," he said. "Where is this company going to be in a year, or even six months?"
Zynga rose to prominence on the back of an addictive game called FarmVille. Nothing short of an international sensation, the San Francisco game company named after co-founder Mark Pincus's bulldog, made millions convincing users of Facebook's social network to click different items in succession to slowly build their version of a cartoonish farm.
The company introduced the West to a highly profitable new business model as well: free games. Players can start for free, but can pay for certain items, like a special translucent fish, or to speed through the game more quickly.
As the Wall Street Journal explained in 2011, Zynga watched players's actions, responding as fast as it could to their whims and wants. The company had plenty of competitors in the newly crowned and fast-growing "social games" industry, but what made Zynga successful was a keen understanding of what kept people playing, and a mastery of the analytical data that came from each player's actions. Employees fled giant companies like Electronic Arts, and acquisitions began to heat up.
When Zynga filed to go public three years ago, its value was estimated to be as high as $20 billion. Their rate of growth is amazing," said Michael Pachter, an analyst at Wedbush Securities, at the time. Today, he sees things differently.
"Social is a dead business and will never will grow," he said. "FarmVille is like playing with dolls and everybody wins." He wants Zynga to move into more competitive types of games where players attack one another. Why? "People spend money on revenge."
The past three years have not been kind to Zynga. It has lost users, navigated layoffs, and attempted to acquire its way to success. At its peak, Zynga spent $180 million for OMGPop, a company behind the hit game Draw Something, which displayed a word, prompting players to draw images on the screen in response. The game's rocket growth sputtered soon after the acquisition, and the studio was shut down a year later.
Last July, Zynga replaced Pincus, the company's founding CEO, with Mattrick, a seasoned game executive who turned around Microsoft's Xbox business and before that helped launch industry-defining titles at Electronic Arts. Under his leadership, Zynga has cut loose its less promising projects, and refocused on the hot market of mobile video games.
In January, he agreed to acquire NaturalMotion for $525 million in cash and stock, promising it would bring new technology and a portfolio of successful games under Zynga's roof.
But analysts, and investors, still aren't convinced. "They continue to really lack a generally innovative portfolio of games," said Adam Krejcik, managing director at Eilers Research.
Back to Earth
Now, Zynga says it will take a little longer till we see the fruits of its latest step in its turnaround effort.
The company said it expects to either break even or post a loss of 1 cent per share after adjustments for stock based compensation and other items, down from earlier projections of as much as 3 cents per share. "Bookings," a measure of sales adjusted for items such as deferred revenue, are now expected to be between $695 million to $725 million down from previously expected $770 million to $810 million, a drop of about 10%.
Earnings before interest, taxes and other items, a measure many struggling companies use to discuss burgeoning profits, are expected to drop to between $40 million and $60 million, down by at least 40 percent from before.
For its fiscal second quarter ended June 30, Zynga said it rung up bookings of $175.1 million, within its guidance but below the $191.2 million analysts had expected, according to surveys by Thomson Reuters. On an adjusted per-share basis, it broke even, which is better than the one-cent loss it recorded the same time last year, and within analyst's estimates as well.
In the immediate future, Zynga says it plans to launch its football game, and prepare to release some new ones by the end of the year.
And it also plans to stay its course.
On a conference call with analysts following the earnings announcement, Mattrick why the company still has so many employees. "Why not have a smaller headcount? Well, it's tied to our aspirations," he said. "We want to build a big successful at-scale company with multiple experiences able to service multiple network partners, being able to be the best in class in multiple disciplines."
UPDATED 3:12pm PT to add comments from the company's conference call.