Zynga blames $22.8M Q2 losses on Facebook, pins rebound hopes on mobile

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Zynga (NASDAQ:ZNGA) blamed its second quarter net losses of $22.8 million on recent changes made by social network Facebook as well as diminishing mobile traffic for high-profile acquisition Draw Something.

Zynga's quarterly losses--which also included $95.5 million in stock-based expenses--resulted in shares plunging 40 percent in after-hours trading to $3. The social gaming firm chalked up the disappointing returns to a revamped Facebook algorithm that emphasizes new games over older titles in news feed updates, bookmarks and related communications channels--the changes reduced traffic for existing games (not just Zynga titles like FarmVille and Words with Friends) by 15 percent during the second quarter, Zynga said. In addition, declining engagement translated to reduced sales of virtual in-game goods, driving down gross bookings by 9 percent.

Zynga said it will lower its outlook to reflect the more challenging Facebook environment, delays in launching new games and reduced expectations for Draw Something, which it acquired from creator OMGPOP for $180 million this past March. Research firm AppData reports Draw Something's daily active mobile users have fallen to 3.4 million from 14.6 million at the time of the Zynga deal. Zynga founder and CEO Mark Pincus said the company still believes in Draw Something's "evergreen" potential.

Despite its troubles, Zynga's second quarter revenues reached $332.5 million, up 4 percent over the first quarter of 2012. Game revenues slipped $1.2 million from the first quarter to $291.5 million, however, although advertising revenues grew 45 percent quarter-over-quarter to $40.9 million. "Our games reached record audiences, achieving over 300 million monthly active users," Pincus said. "We grew our mobile footprint five-fold in the year to 33 million daily active users making Zynga the largest mobile gaming network. We're optimistic about the long-term growth prospects on mobile where we have a window of opportunity to drive the same kind of social gaming revolution that we enabled on the Web."

Pincus added that the mobile gaming space still poses significant challenges, citing fragmentation as well as the market dominance of Apple's (NASDAQ:AAPL) iOS operating system and accompanying App Store. "We need to build out the kinds of channels that have been key not just to distribution for us on Facebook, but key to enabling [mobile] to be a highly social experience, which is also key to driving ongoing engagement," Pincus said.

Last month, Zynga unveiled a new multiplayer platform intended to reduce fragmentation and enable gamers to interact across environments including Facebook and iOS as well as Google's (NASDAQ:GOOG) Android, Google+ and the Web.

For more:
-read this release
-read this MarketWatch article
-read this TechCrunch article

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