Zynga Beats Expectations, But Investors Still aren’t Happy

On Thursday, Zynga (NASDAQ:ZNGA) reported its first quarterly results since new Chief Executive Officer Don Mattrick took the reigns. “The next few years will be a time of phenomenal growth in our space and Zynga has incredible assets to take advantage of the market opportunity,” he said, prefacing the company’s second quarter earnings release. But, he acknowledged that “to do that, we need to get back to basics and take a longer term view on our products and business, develop more efficient processes and tighten up execution all across the company.”

“We have a lot of hard work in front of us and as we reset, we expect to see more volatility in our business than we would like over the next two to four quarters,” he concluded.

Zynga’s results beat analyst estimates; second quarter revenue came in at $230.7 million, topping predictions for $183 million, while the $15.8 million loss in net income the company posted was smaller than the $27.2 million loss expected by analysts. But the company did say it expected a shortfall in bookings during the current quarter.

Shares plummeted 13.71 percent in after-hours trading after the results were released.

In order to overcome consumers’ waning interest in its online games, which has held back revenue growth, Zynga has been trying to remake its business. However, the online game creator said in the earnings release that it would not pursue an application for real-money gambling in the United States, an area that analysts believe could have done much to transform its business. This news likely contributed to the after-hours drop in Zynga’s stock price. Partly on the hope that Zynga would expand into real-money gambling, shares have advanced slightly more than 48 percent this year to date, and closed at $3.50 Thursday.

“Zynga believes its biggest opportunity is to focus on free to play social games,” said the company in the earnings release.  While the Company continues to evaluate its real money gaming products in the United Kingdom test, Zynga is making the focused choice not to pursue a license for real money gaming in the United States. Zynga will continue to evaluate all of its priorities against the growing market opportunity in free, social gaming, including social casino offerings.”

While investors did not seem to be happy to hear this announcement, breaking into the real-money gambling industry in the United States would be very difficult given the strength of the incumbent casinos.

Zynga’s top-line and bottom-line results beat estimates despite a 45 percent decrease in daily active users, which fell from 72 million to 39 million in the three-month period. Of the 39 million users, 23 million were from the Web and 16 million were from mobile. Monthly active users also dropped 39 percent to 187 million from the year-ago quarter.

As for guidance, Zynga forecast third-quarter revenue to come in at $175 million to $200 million and an earnings-per-share loss of 2 to 5 cents.

Follow Meghan on Twitter @MFoley_WSCS

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