Zynga earnings disappoint, stock tanks

Last updated: 2:40 PM PT

Zynga's second-quarter financial results came in far below analysts' expectations, and the stock nose-dived more than 40 percent in early after hours trading.

The social-gaming company, which raised $1 billion in its December 2011 IPO, reported revenue of $332 million for the quarter ending June 30, up 19 percent year-over-year. The company reported a net loss of more than $22.8 million, a loss of 3 cents per share. For its prior quarter, Zynga reported $321 million in revenue and recorded a net loss of $85.4 million, primarily owing to stock-based expenses.

Analysts polled by Thomson Reuters predicted Q2 earnings of 6 cents per share on revenue of $344.8 million. For its full 2011 fiscal year, Zynga posted a net loss of $404 million on sales of $1.2 billion. 

Zynga CEO Mark Pincus offered his perspective on the miss and lowered outlook during the earnings conference call. He cited reduction in user engagement and revenue bookings due to changes made by Facebook; the late introduction of a new "Ville" game; and the significant loss of daily users on its Draw Something mobile game. Zynga paid $180 million to acquire Draw Something from OMGPOP earlier this year. 

He said Zynga is working with Facebook to "optimize game ecosystem" and pointed to more than 6 million daily users of just introduced "The Ville" on Facebook. Pincus also said the company is investing in the Draw Something brand to build future games. 

Pincus said Zynga is focused on the transition to mobile games, which monetize at a lower rate than Web games, via Zynga with Friends, a unified network and enhanced social lobby, with social streams, group chat, multiplayer games, and social matching. Zynga with Friends is expected to become available for mobile players and third-party developers in beta later this year, Pincus said. 

"In the near term we see positive opportunities to grow in existing categories on Facebook, especially with the pipeline of games coming this year, and to grow bookings on more male-oriented games," he said. "As we look at the macro environment over the next couple of years, we see a bigger, long-term growth opportunity being driven by mobile. We are seeing a lot of users coming back to our network on mobile. Getting beyond the Facebook Web footprint on mobile will give us more growth opportunity." That growth opportunity will depend on scaling distribution, reaching a much bigger audience for its mobile games, he added. 

Zynga also expects to launch real-money wagering games in the first half of 2013. "We have our first products in development and intend to release them in markets that are regulated and open.... We currently don't have plans for the U.S.," he said.

Pincus was asked during the conference call why anyone should buy Zynga's stock now. "We think that we have consistently invested more than any other company in this opportunity and where the opportunity was headed. We have executed in growing the market for social games, and we have leading positions on the Web and mobile.... We are bringing to market the leading network and platform that enables everybody on mobile first to participate in social games at the consumer level and with developers who want to bring their games to market." 

Here are the details from the financial statement:

• Q2 Revenue of $332 million, up 19 percent year-over-year, six months year-to-date revenue of $653 million, up 25 percent year-over-year.
• Q2 Bookings of $302 million, up 10 percent year-over-year, six months year-to-date bookings of $631 million, up 12 percent year-over-year.
• Q2 GAAP EPS of 3 cents, down from zero in the second quarter of 2011, six months year-to-date GAAP EPS of 15 cents, down from zero in the first half of 2011.
• Non-GAAP EPS of 1 cent, down from 5 cents in the second quarter of 2011, six months year-to-date non-GAAP EPS of 6 cents, down from 16 cents in the first half of 2011.
• Zynga is projecting bookings in the range of $1.15 billion to $1.225 billion for the full year, and non-GAAP earnings per share of 4 cents to 9 cents.

While the revenue and profit grandly missed expectations, user activity on Zynga games continues to climb. Daily active (DAUs) increased from 59 million in the second quarter of 2011 to 72 million in the second quarter of 2012, and monthly active users (MAUs) increased from 228 million in the second quarter of 2011 to 306 million in the same quarter 2012. Monthly unique users (MUUs) increased 27 percent year-over-year, from 151 million in the second quarter of 2011 to 192 million in the second quarter of 2012, and monthly Unique Payers (MUPs) increased to 4.1 million in the second quarter of 2012 from 3.5 million in the first quarter of 2012. Zynga also claims to have 7 of the Top 10 games on Facebook.

At its "Zynga Unleashed" event last month, Pincus said the company's games generate 1 million player activities per second and 2.8 billion social interactions per day, with 1.8 trillion minutes of play over the last three years, according to the company.

Zynga's stock has been trading at around half of the $10 IPO price in the last month. Prior to the Q2 earnings report, the stock ended Wednesday trading at $5.09, up 3.56 percent.