More Layoffs and Reduced Outlook: Is Zynga Sinking?

On Monday, Zynga (NASDAQ:ZNGA) announced two substantial pieces of news that the markets are still digesting. It’s no secret that the game publisher has struggled since its IPO — shares are down more than 68 percent since they hit the market in December 2011 — but the company hasn’t been totally neglected by investors over the past few months.

Shares are up more than 25 percent this year to date despite a 12 percent sell off on Monday, largely because of enthusiasm for the company’s prospects in real-money online gambling. However, enthusiasm may have built too quickly as the company just announced a massive round of layoffs and reduced its second-quarter 2013 financial outlook.

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“Substantial Cost Reductions”

“We are saying painful goodbyes to about 18 percent of our Zynga brothers and sisters,” CEO Mark Pincus wrote in a statement on Monday. “The scale that served us so well in building and delivering the leading social gaming service on the Web is now making it hard to successfully lead across mobile and multiplatform, which is where social games are going to be played.”

No one likes to see a company reduce its workforce — ideally there are more elegant ways to cut costs — but Zynga doesn’t have very many options on the table. With $1.6 billion in cash and marketable securities on hand and a market cap of about $2.34 billion, investors value the firm at just below $750 million. Financially, the company has its back against a wall.

Reduced Outlook

According to the company’s press release, Zynga’s updated outlook for the second-quarter of 2013 is as follows:

  • Net loss is projected to be in the range of $39 million to $28.5 million.
  • Bookings are projected to be in the lower half of the outlook range provided in our April 24, 2013 first quarter earnings release. While our Farmville Franchise continues to perform well, other games are underperforming.
  • Revenue is projected to be in the range of $225 million to $235 million.
  • Adjusted EBITDA is projected to be in the range of ($10) million to break even.
  • EPS is projected to be in the range of ($0.05) to ($0.03).
  • Non-GAAP EPS is projected to be in the range of ($0.04) to ($0.03).
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The great struggle that the company has faced over the past few years, and what Pincus touched on in his statement, is how to adapt to a mobile and multi-platform gaming environment. To get a handle on just how much the company has struggled, here are its first-quarter 2013 earnings slides:

What does Zynga have to look forward to?

Zynga has been after real-money online gaming for a while. As early as January of 2012 the company announced its intention to build out Zynga Poker into the real-money market, and has since partnered with bwin.party in the United Kingdom. Zynga Poker was the company’s first social game and is currently the most popular free-to-play poker game in the world.

The U.S. commands 25 percent of a global gambling market estimated to be worth $417 billion. Only 3.3 percent of those profits currently come from online gambling, suggesting both room to grow and a tooth-and-nail fight for market share. Zynga is certainly not the only game publisher interested in the space, let alone interest from casino titans like MGM Resorts (NYSE:MGM) and Caesars Entertainment (NASDAQ:CZR).

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Mobile is also a bright spot (mobile poker looks like it could become a theme at some point in the future), but it’s unclear if Zynga has what it takes to return to prosperity. The workforce reduce will cut costs, but it is also a huge blow to moral at a company that has already seen many executives and a lot of talent jump ship.

Zynga has arguably been dead to Facebook (NASDAQ:FB) ever since December. Facebook no longer requires the social gaming company to launch games on Facebook’s platform. Zynga also opted out of Facebook Payments as a way for gamers to make purchases, and and will no longer display ads produced by Facebook on Zynga.com.

To some, the change in status with Facebook marked the beginning of the end for the company. Although the deal allows Zynga to pursue other platforms like Google+ (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO), the company received a substantial share of its revenue from games published on Facebook.

Don’t Miss: Analyst: Zynga Is Right to Cut Costs.

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