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Zynga hits earnings targets and stays profitable in Q1

Embattled social-game publisher Zynga reported better-than-expected earnings for the first quarter ended March 31 and managed to stay profitable. Zynga’s results are closely watched as a bellwether for digital gaming, since Zynga is a huge player in social games on Facebook and it has a big — and growing — presence in mobile games.

Zynga said it had GAAP net income of $4.1 million, or break-even results per share, compared to a loss of $85 million, or 12 cents a share a year ago. Non GAAP net income was $9.1 million, or 1 cent a share, compared with non-GAAP net income of $47 million, or 6 cents a share, a year ago. Revenues were $263.5 million, compared with $320.9 million on a GAAP basis a year ago. Non-GAAP bookings were $229.8 million, compared with $329.1 million a year ago.

Analysts were expecting the company to report a loss of 7 cents a share on bookings of $209 million. Still, Zynga’s stock is tanking in after-hours trading, down 11 percent at the moment, erasing much of the run-up the stock had in the closing of today’s trading. The stock may be down since all of Zynga’s core metrics are down in the first quarter compared to the fourth quarter.

“We are encouraged by the strong execution from our teams and the breakout hit performance of FarmVille 2, which captures the imagination of nearly 40 million players every month,” said Mark Pincus, the CEO and founder of Zynga, in a statement. “2013 will continue to be a transition year as we face the challenging environment on the web and invest in developing the leading franchises and network across web and mobile platforms and offer our 253 million monthly players a connected experience that can follow them from work to school to home and anywhere in between.”

For the full fiscal year, analysts expect a loss of 17 cents a share on revenue of $949.7 million. In the previous quarter ended Dec. 31, Zynga reported a profit of 1 cent a share on revenues of $311 million and bookings of $261 million, down 15 percent from a year ago.

Worth noting: Zynga repaid its long-term debt of $100 million in April and it currently has no debt outstanding.

Zynga grew dramatically on Facebook from 2008 to 2012, and it raised a billion dollars in an initial public offering in late 2011. But the stock cratered in August after the company reported weaker-than-expected earnings and a slowdown in casual simulation games on Facebook. Zynga has been struggling to come back ever since.

For the past six months or so, Zynga’s world seemed to fall apart. Zynga’s No. 2 executive John Schappert, the former No. 2 executive at Electronic Arts, resigned on Aug. 8, and a bunch of other executives followed, including chief marketing officer Jeff Karp, chief creative officer Mike Verdu, chief security officer Nils Puhlmann, chief technical officer of infrastructure Allan Leinwand, OMGPOP chief revenue officer Wilson Griegel, Words With Friends co-creators David and Paul Bettner, and Zynga chief financial officer David Wehner. And in February, Zynga’s chief game designer, Brian Reynolds, also left the company.

In the meantime, chief executive Mark Pincus reorganized the management team and laid off employees. David Ko, chief operations officer, has stepped up to fill the management gap. It shut down “nonperforming” games and cut about 5 percent of the company’s staff, which is still about 3,000 employees. Starting in January, Ko said that the majority of Zynga’s teams are focused on mobile gaming. Ko said in an interview in February that the company had put up more “guard rails” to keep costs under control and to cut weaker games earlier. Among the casualties so far are studios in Austin, Japan, and Boston as well as games like CityVille 2, The Friend Game, and Party Place.

Zynga’s rival, Electronic Arts, recently shuttered three of its once-big social games: The Sims Social, SimCity Social, and Pet Society. It cited a declining interest in those games, and this is a sign to analysts such as Arvind Bhatia of Sterne Agee of across-the-board weakness.

One big hope is Zynga’s move into real-money gambling in the United Kingdom. The company has partnered with Bwin.Party to launch online gambling games in the U.K. market, and it is hopeful that regulators in the U.S. will permit similar online gambling at some point in the future. But the legalization of online gambling is expected to take a long time.

Zynga’s stock price rose in the latter half of trading today before the sell-off. Zynga said that combined bookings for FarmVille and FarmVille 2 grew compared to a year ago. FarmVille 2 is a “breakout hit,” and its daily audience engagement and bookings are exceeding expectations. Zynga’s cross-promotion is working well for its third-party developer, Playdemic, whose Village Life game has grown to 6.5 million monthly active users.

During the quarter, daily active users were 52 million, down from 65 million a year ago and down 8 percent from 56 million in the fourth quarter. Monthly active users were 253 million, down 13 percent from 292 million a year ago and down 15 percent from 298 million in Q4.

Daily average books per average DAU were $0.049, compared with $0.055 a year ago and $0.051 in the fourth quarter. Zynga’s monthly unique payers were 2.5 million, down 30 percent from 3.5 million a year earlier and down 14 percent from 2.9 million in Q4.

For the second quarter, Zynga projects revenues will be $225 million to $235 million. Net loss is expected to be $36.5 million to $26.5 million. Loss per share is expected to be 5 cents to 3 cents a share. Bookings are expected to be $180 million to $190 million. Non-GAAP loss per share are expected to be 4 cents to 3 cents.


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