Zynga reported a better than anticipated third quarter, indicating that the company may finally have some financial breathing room.
The social gaming studio reported a net loss of $52.7 million for Q3 2012. This is in contrast to Zynga’s earlier forecast of a $90-$105 million net loss for the same quarter.
This above-predictions performance is attributable in part to an increase in both daily and monthly active users. Zynga reported an increase of 6 million daily active users and an increase of 74 million monthly active users over Q3 2011. However, the ratio of purchases to daily active users has gone down since Q3 2011. Additionally, strong releases from ChefVille and FarmVille 2 has helped curb Zynga’s financial freefall.
Despite the more muted than expected losses, Zynga CEO Mark Pincus stated his disappointment in his company’s performance. Transcript provided courtesy of Seeking Alpha.
Despite [the amount of money earned by Facebook games], we fail to meet our own growth expectations. This is primarily due to two factors. First, our game execution, for our live games such as CityVille and CastleVille, we found it more challenging to maintain historical levels of the player engagement and consequently, we experienced faster declines in bookings than we had expected. We didn’t see enough new heat for our players like innovating on content features and we’re able to bring new games and we weren’t able to bring new games to markets fasten up to offset the declines.
The second factor contributing to our web performance was faster than expected player adoption of mobile, smartphones, and tablet. This increased the competition for our players’ time and attention. Despite this weakness, we remain confident that we’ll drive growth and profitability in our core web business. We have great games, a powerful network, and we recently announced the cost reduction program. We know that when we launched great games our players engage.
David M. Wehner, CFO of Zynga, elaborated on how Zynga intends to approach these losses in the same conference call.
We are not satisfied with our recent performance and we’re taking immediate action with a cost reduction plan. This is expected to generate $15 million to $20 million of pre-tax savings in the fourth quarter versus the third quarter. This amount excludes an expected pre-tax restructuring charge in the range of $8 million to $12 million, which will be reflected in our GAAP results for the fourth quarter and the full fiscal year.
As part of the cost reduction plan, we expect to reduce marketing and technology expenditures; complete a reduction in force of approximately 150 people, or 5% of our current workforce; rationalize our product pipeline, including the sunsetting of 13 games; and consolidate certain facilities. While some of these actions are difficult, they are necessary to better align our cost structure to drive long-term growth and profitability.
Analysis: This actually isn’t too surprising. Despite the struggles Zynga has had, it still controls a tremendous portion of the social gaming market. Although Zynga is struggling intensely from a corporate standpoint, it’s still churning out games that do earn weighty profits. As the saying goes, a shorter giant is still a giant.
That said, a $52.7 million net loss is nothing to shrug off. Sure, it’s not the apocalyptic levels of the $105 million net loss that Zynga had anticipated, but it’s still indicative of a company that’s headed down a very dangerous road. Furthermore, when you consider that the company just laid off an entire studio, is evaluating on whether to shutter two more, and that top-level executives are fleeing the company in droves, it becomes obvious that Zynga’s suffering on a much deeper level than just net losses. What’s going wrong at Zynga can’t be measured in just quarterly earnings because it’s the entire social gaming paradigm that’s damaging them.
What will be more telling, I believe, will be the fourth quarter earnings. That report will demonstrate how Zynga is transitioning to the future and will indicate whether Zynga can turn around their recent troubles or if they’re doomed to keep on bleeding money.