Earnings Preview: How low can Zynga go?

Zynga expects to post a 3rd-quarter loss as investors worry about its ability to keep growing

Associated Press

NEW YORK (AP) -- Investors, already expecting a third-quarter loss for online game company Zynga Inc. on Wednesday, will be looking for steps the company is taking to revive growth and cut costs.

WHAT TO WATCH FOR: Once a rising social media star with games such as "FarmVille" and "Texas HoldEm Poker," Zynga's stock has lost more than 82 percent of its value since the end of March. Investors are worried about the company's ability to keep growing.

Zynga recently cut its bookings guidance for the full year. Because its third-quarter guidance is roughly in line with analyst expectations, this suggests a big fourth-quarter miss. The magnitude of the potential gap between Zynga's fourth-quarter results and what analysts were expecting has deepened Bair analyst Colin Sebastian's concern that the company will take a long time to transition away from Facebook to its own gaming platform and to mobile devices.

Sterne Agee analyst Arvind Bhatia thinks Zynga needs to lower its expenses and preserve cash as it looks for its next big hit game. He noted that "FarmVille 2," a recently launched Facebook game, is doing slightly better than other recent titles, at least when it comes to daily active users. But it's still well behind the original "FarmVille."

Zynga executives are also expected to explain how the company will trim costs, said Wedbush analyst Michael Pachter. He said that if Zynga cuts employees and develops fewer games, it could improve profitability.

WHY IT MATTERS: Despite its troubles, Zynga is still by far the No. 1 gaming company on Facebook. It makes five of the 10 most popular games on the site, including the top two, according to researcher Appdata. It accounts for about 12 percent of Facebook's total revenue, so the two companies' fortunes are somewhat tied together. Born as Web-based companies, both face challenges as their users turn increasingly to mobile devices.

WHAT'S EXPECTED: The San Francisco-based company has predicted a loss of 12 to 14 cents per share. Excluding a large charge marking down the value of OMGPop, a mobile game maker Zynga acquired for $183 million in March, the company expects to break even or post a loss of 1 cent per share.

Zynga also forecast revenue of $300 million to $305 million.

Analysts, on average, are expecting break-even earnings on revenue of $291 million, according to a poll by FactSet.

LAST YEAR'S QUARTER: Still a privately held company, Zynga had net income of $12.5 million and revenue of $306.8 million in the third quarter of 2011.

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