Zynga Likely to Stay ‘Challenged’ in Near Term, Analyst Predicts

The company has “encountered significant challenges recently and appears likely to remain challenged in the near term,” said BMO Capital Markets analyst Edward Williams. Zynga has about $2 a share in cash and cash equivalents that he predicted “should provide some support for the stock.” But “we expect the stock to remain under pressure until we gain some clarity on the steps that the company is taking to reduce costs, improve quality and execution, and deliver on mobile platforms,” he said.

There will be “significant” layoffs at Zynga “in the coming months,” predicted Sterne Agee analyst Arvind Bhatia. Zynga didn’t immediately comment on whether it plans to cut jobs. Q3 “continued to be challenging and, while many of our games performed to plan, as a whole we did not execute to our satisfaction,” CEO Mark Pincus said in a news release Thursday. Zynga is “addressing these near-term challenges by implementing targeted cost reductions” in Q4 and “rationalizing our product R&D pipeline to reflect our strategic priorities,” he said, without specifying what the cost reductions will be. More details regarding Zynga’s expense reductions will be available Oct. 24, when it reports final Q3 results, it said.

Zynga expects to report revenue of $300 million to $305 million and contracted bookings of $250 million to $255 million for Q3, it said. It also expects to report a loss between $90 million and $105 million, or 12-14 cents a share. The “preliminary” Q3 results reported Thursday “primarily reflect weakness” of certain games in Zynga’s Web “invest and express” category, which includes The Ville for Facebook and other Ville-branded titles, it said. The results also included an estimated impairment charge of $85 million to $95 million related to intangible assets acquired in connection with Zynga’s purchase of game maker OMGPop early this year (WID March 22 p8).

The company lowered its outlook for the year this time “to reflect” the weak preliminary Q3 results and its “revised expectations for the remainder” of 2012, including “delays in launching several new games,” it said. Zynga didn’t specify which games were delayed. Bookings for the year are projected to be about $1.1 billion, down from its prior forecast of about $1.2 billion, it said.

Zynga is continuing to invest in its mobile business, said Pincus, to “support our strategy to transition” from being a first-party Web game developer to a multiplatform game network. “We remain optimistic about the opportunity for social gaming and the power of our player network of 311 million monthly active users,” he said. FarmVille 2 has been Zynga’s “most successful launch” since CastleVille in daily bookings, and the company now offers three of the top five most popular mobile games in the U.S. in terms of time spent, he said, citing Nielsen data.

The game maker previously lowered its results outlook for the year in July, when it reported weaker-than-expected results for Q2 ended June 30 (WID July 27 p7). Several law firms said they were investigating whether Zynga was guilty of securities violations after the Q2 results were reported. Since then, several of them filed suits (WID Aug 7 p7). Electronic Arts also sued Zynga, in U.S. District Court, San Francisco, claiming The Ville infringed the copyrights for EA’s Facebook game The Sims Social (WID Aug 6 p12). Several executives have left Zynga in recent weeks.