Social games company Zynga (NASDAQ:ZNGA) has released a preliminary financial results statement for the third quarter of FY2012, lowereing their expectations for when the quarterly report actually comes out.
Expectations are for revenue totaling between $300 million and $305 million with bookings—revenue in a period regardless of when they’re recognized—in the range of $250 million to $255 million. Net losses for the company are expected to be between $90 million and $105 million. The report blames underperformance of certain games in the invest-and-express category (e.g. many –Ville games like FarmVille), and an impairment charge1 that is estimated to be between $85 million and $95 million relating to the purchase of Draw Something creator OMGPOP.
CEO Marc Pincus addressed the challenges facing his company.
The third quarter of 2012 continued to be challenging and, while many of our games performed to plan, as a whole we did not execute to our satisfaction… We’re addressing these near-term challenges by implementing targeted cost reductions in the fourth quarter and rationalizing our product R&D pipeline to reflect our strategic priorities.
Pincus also posted a notice to the company’s employees on their blog, addressing many of the same concerns about the invest-and-express category but boosting morale by stressing the company’s future in mobile and increased player numbers.
Let’s not lose sight of the bigger picture. The world is playing games, and is increasingly choosing social games. Zynga has become synonymous with social gaming serving 311 million monthly active users, the largest player network on web and mobile. When we offer our players highly engaging content they respond. FarmVille 2 has been our most successful launch since CastleVille. Our With Friends franchise is defining social play on mobile where Zynga represents 3 of the top 5 most popular mobile games in terms of time spent in the U.S. according to Nielsen. While we’re encouraged by our strong starting position on mobile, developing this new growth market to the scale of our web business will take time.
Zynga’s player numbers are strong. According to AppData, Zynga as a developer has five times as many monthly average users (MAU) as the next company, Microsoft. Five of the top ten applications in MAUs are Zynga’s games, as are the top three, with Zynga being #1 at 43.5 million MAUs. FarmVille 2 has also had a strong start, growing steadily over the past week and currently clocking in at 27 million MAUs. However, engagement has been down; ChefVille, for example, has about 10% of their daily active users (DAUs) as a percentage of their MAUs, meaning that only 10% of the MAU numbers are actively playing on a daily basis. Worse, monetization of their player numbers continues to be a concern. According to a chart by Statista, average bookings per user—i.e. what the average user spends—has been steadily declining since 2010, continuing to trend downward through Q2 of FY2012.
As a response to the report, Zynga was hammered over the stock exchange in after hours trading and continues to fluctuate throughout the day as of this writing. The company is currently hovering at around $2.30, 18% below their starting price of $2.80, and was as low as $2.21 before the market corrected. Worse news is the decrease in the company’s market capacity: it’s currently at about $1.75 billion, which is down from $3.74 billion after their Q2 report, and way down from their $7 billion valuation at the time of their IPO. For comparison’s sake, Electronic Arts has a $4.13 billion market cap.
Zynga’s went public in December of 2011 at an IPO price of $10 a share.
Analysis: Remember how I’ve been saying that Zynga’s stock was toxic all this time and to run screaming? I’m still saying that, only now I’m saying it with a bullhorn, a chartered plane flying above spraying it in smoke, and riding a neon unicorn. If you’re still a Zynga shareholder, or even a Facebook shareholder, run. Stop reading and drop it.
I’ve heard some people speculate that this is a value stock potentially because the price is down. Furthermore, Michael Pachter of Wedbush even states that, while Zynga “sucks at forecasting,” they still have a solid business and a lot of people are playing their games. This is a false assumption. They can’t monetize their players, and if they turn the screws to force monetization, those players will simply leave. The days of Korean-like whales are largely over or are heavily degraded at the very least, and those few gamers—a disproportionate amount of Zynga’s growth—aren’t paying as much as they used to; they’ve found other shiny objects to play with. Zynga’s attempts to get into more “core” games are notably laughable because their reputation with those types of players is exceptionally poor, and they can’t create a game good enough to draw them in. Those players are on Steam, and Zynga is their kryptonite. I’ll flat-out say that this perception among core gamers is unbeatable.
Perception is reality to investors. Zynga’s steady, downward spiral on the NASDAQ, as well as that of other tech companies (did you know that Activision, which is likely going to get spun off of Vivendi, is only trading at under $12?), is going to scare off future investors and cause the ones they have to sell. I don’t see this changing. Games are a volatile, hit-based market, and public ownership by itself is usually hostile to innovation in this sector. Investors want safe bets and don’t like putting money on gambles, and Mark Pincus’s ruthless management style doesn’t help anything. Therefore, Zynga’s stuck between a rock and a hard place: they need to make a unique hit but can’t; their players are getting tired of the same-old, same-old; and both investors and executives are fleeing in droves. The rest of the fiscal year is going to be a bloodbath.
BREAKING: Speaking of Zynga executives, the creators of Words with Friends, Paul and David Bettner, have left Zynga. We’ll have more on this as the story develops and we confirm our facts.
1 – Simply defined, an impairment charge is when a company grossly overstates the value of an asset. In this context, Zynga admitted they overpaid for OMGPOP by about $90 million.