Zynga Has Been a Losing Game for Investors, but Will New Real-Money Partnership Be a Winner?
2012/10/25A recently crushed Zynga (ZNGA), which saw its stock hit all-time lows of $2.10 in Wednesday's trading, is getting a 13% after-hours boost following its 3Q earnings release, which came with the announcement of its first real-money gaming partnership, with London operator Bwin.party.
CEO Mark Pincus has previously discussed real-money gambling as an enormous opportunity for the social-gaming site, which until now has had a "funny-money" games model (which includes buying items such as game tokens and fake "Farmville" animals with real dollars). The company also announced a stock buyback of up to $200 million. Its earnings came in at breakeven, largely hitting many analyst estimates, and revenue was up to $316.6 million from $306.8 million at this time last year, beating analyst estimates of $256 million, according to Thomson Reuters.
For Zynga, this cheerier news is a rare bright spot amid what has been a truly dismal year. Just yesterday, as tech titan Apple's (AAPL) iPad unveiling was happening in San Jose, Calif., Zynga employees were receiving pink slips. Zynga cut 5% of its workforce -- or 150 people -- in a move that was hardly a surprising one for the beleaguered social gaming company, especially following the slashing of its 2012 outlook earlier this month.
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The San Francisco-based company, which apparently was looking to get a slew of bad news out of the way before reporting, also said it would be putting 13 older games to rest and will pull back on the investment in its latest game, "The Ville." It also shut its Boston office and may be looking toward shuttering operations in Japan and the U.K. (the company outright owns its San Francisco headquarters, having purchased the building for $220 million earlier this year). This speaks to a much different strategy for Zynga than what it came out of the gate with -- expansion, acquisition, spending. But its OMGPOP buy, which led to an approximately $90 million writedown that erased almost half the deal's value, helps point to the need for a new plan. And the move into real-money gaming definitely brings in the "new" for a company that has shed a whopping 78% of its $10 offer price since December's IPO.
No Fun and Games
Yes, this year's harvest has been poor for the folks of "Farmville," and even Facebook (FB) was sounding disenchanted on Tuesday after reporting much better than expected earnings. On the earnings call, CEO Mark Zuckerberg was decidedly negative on Zynga, which still remains the No. 1 gaming company it associates with, noting that gaming as a whole was not doing as well on the site as he would like and pointing to a steady decline in Zynga-generated revenue: "Including its ad spend, Zynga comprised 7% of our total revenue this quarter, down from 10% in Q2 and 12% in Q3 last year." So even though Zynga still might have plenty of gamers (the latest report said daily active users actually increased 10% from last year to 60 million but are down from 72 million in the previous quarter), these users may be less willing to shell out real money to buy fake game elements. And this was reflected in the latest release, which saw revenue bookings -- the value of virtual goods sold -- down 11% from last year to $256 million, which is the worst quarterly performance since before the company went public.
It will be very interesting to see how Zynga's move into the real-money gambling space plays out; along with a real boost for profits, it could also come with a host of legal-compliance headaches. Because of regulations, the U.S. market could also be largely kept out of the market. A leaner operation might help Zynga's performance, but social-gaming fatigue may continue to increase among a formerly "Mafia Wars"-obsessed populace. With a $1.7 billion market cap and cash on hand almost equal to that, some have said the time might be right for a takeover of Zynga, but Pincus has been quoted as saying he would never consider a sale, and early-summer buzz about Facebook possibly snapping it up has yielded nothing of the kind so far.
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Meanwhile, Zynga currently stands as No. 2 on the list of the worst IPOs of the past year, topped only by Digital Domain (DDMGQ), the special-effects outfit that emerged from Chapter 11 bankruptcy at the end of September. Here is our updated list of the worst -- and best -- IPOs of the past year, by return on offer price.
