ZYNGA Q2 2012 EARNINGS MISS FORECAST; REPORTS $332 MIL IN REVS WITH A $22.8 MIL LOSS, STOCK PLUMMETS BY NEARLY 40%

Social gaming company Zynga posted second quarter 2012 revenues and earnings that missed expectations, sending its stock cratering after hours.

In its July 26, 2012 press release, Zynga Inc. (Nasdaq:ZNGA), the world's leading provider of social game services, announced financial results for the second quarter ended June 30, 2012. Here are some of the highlights:

• Revenues:  $332 million, up 19% year-over-year, six months year-to-date revenue of $653 million, up 25% year-over-year
• Bookings: $302 million, up 10% year-over-year, six months year-to-date bookings of $631 million, up 12% year-over-year
• Net Income:  $22.8 million net loss, down 1,728.57% year-over-year, six months year-to-date loss of $108.162 million , down 659% year-over year.  The net loss for the second quarter of 2012 included $95.5 million of stock-based expense compared to $33.1 million of stock-based expense included in the second quarter of 2011. 
• GAAP EPS:  ($0.03), down from $0.00 in the second quarter of 2011, six months year-to-date GAAP EPS of ($0.15), down from$0.00 in the first half of 2011
• Non-GAAP EPS: $0.01, down from $0.05 in the second quarter of 2011, six months year-to-date non-GAAP EPS of $0.06, down from$0.16 in the first half of 2011

Zynga CEO Mark Pincus had this to say:  

"The company achieved some significant milestones in the quarter including the launch of Bubble Safari, which is now the number one arcade game on Facebook, and the launch of The Ville, now the number two game behind Zynga Poker. Our advertising business continued to show strong growth with revenue up 170% year-over-year. Our games reached record audiences, achieving over 300 million monthly active users. We grew our mobile footprint five-fold in the year to 33 million daily active users making Zynga the largest mobile gaming network.  We also faced new short-term challenges which led to a sequential decline in bookings. Despite this, 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." 

UPDATE:  Zynga's (NASDAQ:ZNGA) stock plummeted on the bad news by $1.90 or 37.48% to $3.17 per share at the end of trading, Thursday, July 26, 2012.

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Zynga also is lowering its guidance for 2012, because of delays in launching new games and faster than expected decline in existing games and because of Draw Something. The company said:

“We are lowering our outlook to reflect delays in launching new games, a faster decline in existing web games due in part to a more challenging environment on the Facebook web platform, and reduced expectations for Draw Something.”

For full year 2012, the company now expects bookings in the range of $1.15 billion to $1.225 billion and non-GAAP earnings per share of 4 to 9 cents. That’s down from Zynga’s guidance of $1.425 billion to $1.5 billion and non-GAAP EPS of $0.23 to $0.29. For comparison, analysts had expected 6 cents in just the second quarter of 2012 alone.

Revenues breakdown as follows:

• Game revenue - $291.5 million, up 10% from the year-ago period but notably was a decrease of $1.2 million from the first quarter of 2012. 
• Advertising revenue - $40.9 million, up 170% from a year ago and up 45% from the first quarter of 2012.

Zynga, which has titles such as CityVille, FarmVille, Zynga Poker and Words With Friends, last month rolled out more developments for its own gaming platform as it seeks to diversify from Facebook. Some of Zynga’s existing longstanding titles have been dropping in users so the company is seeking to crank out new hits. The company recently launched new titles such as The Ville and ChefVille.

One area to watch is mobile, where Zynga has been seeking to gain an edge as more and more users play games on mobile devices. Zynga recently paid $180 million to acquire OMGPOP, maker of mobile drawing game Draw Something.

Zynga priced its initial public offering at $10 per share in December 2011. The stock hit a peak of about $16 per share in March during the run-up to Facebook’s IPO, but since then the stock has languished. The stock closed the regular session at $5.08, up $0.18 or 3.56%, in trading on the NASDAQ Wednesday.

Other user data from the release:

• Daily active users were 72 million in the second quarter of 2012, up 23% from 59 million a year ago.
• Monthly active users were 306 million in the quarter, up 34% from 228 million a year ago.
• Monthly unique users were 192 million, up 27% increased from 151 million year-over-year.
• Average daily bookings per average DAU $0.046 in the quarter, down 10% year-over-year from $0.051.
• Monthly Unique Payers were 4.1 million in the second quarter of 2012, up 16% sequentially  from 3.5 million in the first quarter of 2012.

In the first quarter of 2012 Zynga had daily active users of 65 million, up 6% from 62 million year-over-year. Monthly actives were 292 million, up 24% year-over-year from 236 million. Monthly unique users (excludes duplicate players and games) were 182 million in the quarter, up 25% year-over-year from 146 million.

COMMENTARY:  Zynga CEO Mark Pincus,  on a conference call with analysts Wednesday, July 25, 2012, gave three main reasons for the earnings.

1. Zynga’s existing web games such as CityVille and CastleVille performed worse than expected.   Pincus blamed Facebook for changing how Facebook promotes games on its platform.  Zynga officials said that Facebook is promoting newer games over older games, which decreased engagement on Zynga’s older titles. This includes things like friend requests, bookmarks and presumably, notifications, in Facebook’s News Feed.  John Schappert, Coo of Zynga said.  “Our users did not remain as engaged and did not come back as often.” However, Zynga said that the Facebook changes weren’t the main reason for its games declines, focusing on its own games as the reason. Schappert added that Facebook’s focus on new games made its new Bubble Safari game quickly popular, with 4.5 million installs in the first day.
2. Zynga launched its new title “The Ville” later in the quarter than it expected, launching in open beta in June. Officials didn’t say why the game launched late.
3. Draw Something, which Zynga recently acquired for $180 million, “underperformed.” In other words, the number of users have been rapidly declining.

As far as future games, Zynga said it will diversify its mix of games with future releases, particularly focusing on male gamers with games in areas such as sports and player versus player (shooters). The implication of that comment being that Zynga has done well among the female demographic but not as well among males.

As far as real-money gambling type games, Pincus said Zynga is actively developing a gambling game that it plans to launch in the first half of 2013. That will be a major change for the company. Pincus would not say where that new game would launch but indicated that it would likely be outside of the U.S., since such games are not allowed in the U.S.

One analyst asked Pincus why people should buy Zynga stock, with its price now at about $3, and this is what he said.    

”We are the most optimistic long-term believers in the opportunity for social gaming and play to be a mass market activity–as it’s already becoming,” Pincus said in part of his response.  We think social gaming is just starting to grow quickly on mobile and we think it has the potential to be the most important part of the experience on mobile and an even bigger business in the future.”

If you've been a regular visitor to my blog, I have regularly commented on Zynga's earnings reports, strategies and performance of its social games since they had their IPO.  Pincus seems to overlook one glaring fact:  Zynga is simply not creating hit games like Farmville and Mafia Wars, and is losing game players in droves.  In a blog posts dated July 18, 2012 and June 12, 2012 I provided a body of evidence that explains Zynga's the above problem as clear as mud.   For the month of June, Zynga placed nine games in the Facebook Top 25 by MAU, the most in a while, but they lost a combined 23.4 million users between June and May 2012.

Analysts also seem to forget that only about 3% of Zynga game players actually pay.  The other 97% are freeriders.  It's difficult to grow revenues when the vast majority of your players are not paying.  

Although advertising revenues for the second quarter 2012 were $40 million, an increase 170% from the prior year's second quarter, advertising just isn't going to pay the bills.  Zynga needs to change its revenue model to reduce the number of freeriders by a significant number of it ever hopes to grow revenues sufficiently to generate a profit.   It's new move into gambling is a possible solutino, but in so doing it is drifting away from its social games business model.  I have never trusted online gambling sites and find them slimey, interested only in taking your money.        

Zynga pays Facebook 30% of all virtual goods sales, the principal way it makes money off of its games.  It can 

Courtesy of an article dated July 25, 2012 appearing in Forbes and a press release dated July 26, 2012 issued by Zynga and an article dated July 25, 2012 appearing in Forbes