On Wednesday, April 3, 2013, Zynga launched its online poker and casino games in the United Kingdom, the first proof that the company’s previously announced pivot away from social gaming and toward “real-money” gaming is for real.
Zynga now offers online poker, slot machines, blackjack, and other games. The company is partnering with bwin.party, the world’s largest publicly traded online gambling company, which reported a profit of over $32 million in 2012 and is based in Gibraltar, a British exclave bordering Spain.
Barry Cottle, the company’s chief revenue officer, on a company blog on Tuesday evening wrote.
“Launching the download and web versions of Zynga’s real money games for play in the UK is an exciting move to bring players the real money games they have been asking us for. We look forward to launching our social versions of real money games for players on Facebook and mobile in the UK throughout 2013.”
Shareholders responded very positively: Zynga’s stock is up about 15 percent on the day. This new announcement and stock surge are some much-need positive news for the beleaguered social gaming company.
Zynga's roller coaster ride
Since August 2012, we’ve been tracking Zynga’s rapid fall. The company lost top managerial talent and its stock price plummeted,it acknowledged that it overpaid for OMGPOP (paid $200 million in March 2012), and it racked up quarterly losses to the tune of $52 million. In February 2013, the San Francisco startup announced it lost more than $200 million in 2012.
Analysts told Ars that the new British scheme would likely not impact Zynga’s bottom line in the immediate future, but it could set the stage for eventual expansion to the United States. Various states are moving ever-closer to legalizing and launching online gambling within state borders—New Jersey and Nevada are expected to be the first, with California, Illinois, and Delaware not far behind.
Sean McGowan, an analyst with Needham & Co., told Ars.
“It is a test, they know going in that there are a lot of reasons for it to work and a lot of reasons for it not to work.”
“How many [Facebook users] will convert [to gambling online]? How sticky is it? How much testing is there? Those are the things you might be able to extrapolate to other markets.”
After all, as we reported in February, Zynga filed a “preliminary finding of suitability” late last year with the Nevada Gaming Control Board, the first step toward offering real-money gambling in the US.
The company's Chief Operating Officer, David Ko, told investors in February 2013.
"These are all steps that are moving us toward our long-term vision in real money games."
Still could be a couple of years before this bet pays out
Given the company’s recent setbacks, Zynga really needs a win—and if that comes via real people gambling real money, then all the better.
Brian Blau, an industry analyst with Gartner Research, told Ars.
“There is still a stigma attached to gambling where some users are more prone to spend more real (or virtual) money so some caution is needed from Zynga and users to make sure users don't get into situations beyond their control.”
“But for users that just want to enjoy a few simple games of slots or poker, real money gaming is a way to get your fix, and with Zynga's games you can share your results, play with friends, and have a more social experience similar to what you would find a real world casino.”
James Cakmak, a financial analyst at the Telsey Advisory Group, generally agreed—and he was overall bullish on Zynga’s prospects over the longer-term. He told Ars.
“I think you're probably looking at 2014 or 2015 before [this move is] reflected in [Zynga's] bottom line.”
“I think it's a really good story right now, but I don't expect the bwin.party partnership to provide any meaningful contribution to the company's finances over near-term. The most important takeaway is going to be the knowledge that Zynga can leverage [online gambling] for the US.”
Zynga Q1 2013 Earnings Report
On April 24, 2013, Zynga reported it made $263.5 million in revenue, with $229.8 million in bookings for Q1 2013. In terms of revenue, that’s flat year-over-year while bookings were roughly by 30 percent year-over-year.
Zynga’s earnings report shows it had a net income gain of $4.1 million; up from Q1 2012′s loss of $85.4 million, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $29 million. The diluted net income per share was $0.00, up year-over-year from a net income loss of $(0.12).
Daily active users (DAU) decreased from 65 million in the first quarter of 2012 to 52 million in the first quarter of 2013, down 21 percent year-over-year. DAU were down 8 percent from 56 million in the fourth quarter of 2012. Monthly active users (MAU) decreased from 292 million in the first quarter of 2012 to 253 million in the first quarter of 2013, down 13 percent year-over-year. MAU were down 15 percent from 298 million in the fourth quarter of 2012.
Zynga’s revenue for Q1 2013 fall comfortably within its outlook at the end of Q4 2012, and it’s net income of $4.1 million beat it’s prediction of a net loss of between ($32) million and ($12) million. As a result, Zynga says revenue is projected to be in the range of $225 million to $235 million for Q2 2013. Net loss is projected to be in the range of ($36.5) million to ($26.5) million. EPS is projected to be in the range of ($0.05) to ($0.03), based on a share count of approximately 785 million to 795 million shares. Bookings are projected to be in the range of $180 million to $190 million.
CFO and CAO Mark Varnesh said that Zynga’s top earners were Zynga Poker and FarmVille which brough in 22 percent and 16 percent of online revenue. No other Zynga game brought in more than 10 percent.
Zynga has canceled underperforming existing games and shut down studios with games in development in the past year to cut down on operating costs. COO David Ko said Zynga will continue with this strategy, and that it will soon retire The Ville, Empires & Allies, Dream Zoo, and Zynga City on Tencent.
Mark Pincus, CEO and Founder, Zynga said.
“We are encouraged by the strong execution from our teams and the breakout hit performance of FarmVille 2, which captures the imagination of nearly 40 million players every month. 2013 will continue to be a transition year as we face the challenging environment on the web and invest in developing the leading franchises and network across web and mobile platforms and offer our 253 million monthly players a connected experience that can follow them from work to school to home and anywhere in between.”
On the earnings call today, Pincus said that Zynga will “measure [its] success next quarter by its ability to bring existing users and games to mobile.”
As has been the case in past quarters, Zynga still has a lot of cash, cash equivalents and marketable securities on hand. Currently, the company has $1.67 billion in these, up from the $1.65 billion it had in Q4 2012. After it paid its long-term debt in April 2013, Zynga also doesn’t have any short term or long term debt. Cash flow from operations in Q1 2013 was $26.4 million compared to$78.8 million for the first quarter of 2012. Free cash flow was $23.2 million for the first quarter of 2013 compared to $43.8 million for the first quarter of 2012.
Zynga Has 'Farmville' And Little Else
Zynga Inc has one asset in the form of Farmville, but apart from that, the company is struggling for a consistent revenue stream.
Although Zynga Inc (NASDAQ:ZNGA) beat market expectations in its Q1 2013 earnings report, investors are still worried about the company’s future. The social gaming firm's principal revenue generator is "Farmville 2," according to a report from Reuters, but there is little else on the horizon in the form of social games for the company to rely on, and that puts its future in the balance.
Farmville was one of the most successful games that Zynga has ever created, and its sequel Farmville 2, is still one of the most important assets for the company. The problem is that outside of the brand, there is little else for Zynga Inc to rely on, and that is one of the firm’s biggest problems going forward.
Zynga also announced on April 24, 2013 during its earnings call it would be shutting down four underperforming game titles —The Ville, Dream Zoo, Empires & Allies, and Dream Zoo, a game on China's popular Tencent web portal. The company also canceled two other unreleased game titles it said weren't good for its longterm strategy.
Q1 2013 earnings did manage to beat Wall Street analysts' low, low expectations, but that's not saying much, especially since the fourth quarter of 2012 saw alarmingly bad earnings, too.
But perhaps most worrisome of all for Zynga, and its investors and supporters, are the latest metrics on users (see above graph). Daily active users have continued their slide to 52 million, the lowest amount in the past nine quarters.
It now appears that Zynga's CEO Mark Pincus is betting the farm on real-time online money gambling, hence the launch of Zynga Poker Plus and Zynga Casino Plus in the United Kingdom.
Executives Leaving In Mass
Since August 2012, over a dozen key executives and key middle managers have left Zynga for greener pastures at other digital destinations like Twitter, Facebook, and Yahoo, to name a few. Here is a list of those executives and middle managers and the date they left:
- Bill Mooney, GM Farmville - August 2012
- Brian Birtwistle, V.P. Marketing - August 2012
- Mike Verdue, Chief Creative Officer - August 2012
- John Schappert, Chief Operating Officer - August 2012
- Allan Patmore, Studio General Manager - August 2012
- Nils Puhlmann, Chief Security Officer - September 2012
- Jeff Karp, Chief Revenue Officer - September 2012
- Wilson Riegel, Chief Revenue Officer - September 2012
- Allan Leinwald, CTO of Infrastructure - September 2012
- Lawrence "Lo" Toney, Zynga Poker, GM - October 2012
- Jonathan Flesher, V.P. of Business Development - November 2012
- David Wehmer, CFO - November 2012
- Roy Schgal, V.P. - November 2012
- Steve Shreck, General Manager - November 2012
- Mike Gupta, Treasurer - Noember 2012
- Dan Porter, GM N.Y. Office (former CEO OMGPop) - April 2013
If you are counting, that's 16 key executives or middle managers leaving Zynga over the last nine months. Although most of these individuals have been replaced, it makes you wonder if Zynga has the management depth and experience to manage the company through this crisis period.
If you have been following my blog posts, you know by now that Zynga has never been one of my favorite companies. I enjoy making fun of and criticizing Zynga CEO Mark Pincus, and I make no bones about it. Unfortunately, unlike Groupon founder Andrew Mason, who was fired in March 2013, Pincus has insured he can never be fired because he holds a controlling interest of all voting shares.
In spite of a very successful IPO in 2011, Zynga's stock has lost -78.69% of its market cap valuation since Zynga's stock hit a high of 14.69 on March 2, 2012. Zynga's stock has lost -67.05% of is market cap valuation since Zynga's IPO on December 2011 when the stock ended first day trading at $9.50 per share.
Zynga is going to have a much tougher competitive environment in the U.S. real-time money-making gambling space. Although the Feds have hinted that they will legalize online gambling, no bills legalizing online gambling have been passed. Gambling laws also differ from state-to-state. It will be severa years before online games is legalized throughout the 50 U.S. states.
Most of Zynga's users live in the U.S., and getting them to play money-making gambling games is a whole lot different that buying virtual goods. We are talking serious cash, and only about 3% of Zynga users actually pay for Zynga games. Zynga may learn how many U.S. users will pay to gamble online once the data from the U.K. is in. That will take at least a year, before you can draw any conclusions.
Courtesy of an article dated April 3, 2013 appearing in ArsTechnica.com and an article dated April 3, 2013 appearing in TechCrunch and an article dated September 21, 2012 appearing in Inside Social Games and an article dated April 24, 2013 appearing in The Verge