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'Zynga overpromised and significantly underdelivered' - analyst
'Zynga overpromised and significantly underdelivered' - analyst
July 26, 2012 | By Mike Rose

Analysts have been reeling in shock from Zynga's most recent fiscal quarter results, as multiple firms react to the social game giant's "significant" revenue shortfall.

Zynga saw revenues of $332.5 million for the last quarter -- while that's still an increase of 19 percent year over year, the figure disappointed investors, and Zynga's stock plummeted roughly 40 percent in after hours trading.

Ben Schachter and John Merrick of Macquarie Securities Research admitted that the "shocking results and guidance raise our worst fears about the stability of the company’s business model and competitive positioning," questioning what exactly Zynga's sustainable competitive advantage is in the social games space.

The pair added that in the mobile space, which Zynga is currently still trying to break into, the company "looks little different to us than a myriad of other casual game companies.

"...At its core, [Zynga] is a marketing company, and it needs to prove that it can acquire and monetize users more efficiently than others if its casual games business is to grow profitably.

"The bottom line is that Zynga over promised and significantly under delivered," they concluded.

Colin Sebastian of Baird Equity Research noted that Zynga's revenues for the quarter were $10 million below the analyst firm's consensus. Zynga's active and unique users count did increase year-over-year, but largely due to the acquisition of Omgpop, suggested Sebastian.

However, he added that, while Zynga's shares are now "in the penalty box," they should benefit soon from the expanding social and mobile games market.

Cowen & Company's Doug Creutz noted that the results, which were "significantly below our street expectations," were due to deteriorating engagement levels for Zynga's games.

In particular, Creutz cited the "underperformance" of Pictionary-like Draw Something as one of the main factors in the lower-than-expected results.

"Given that Zynga earns 80 percent of its bookings through the Facebook platform, we believe at this point it is impossible to have any certainty on when growth in bookings might resume," he continued.

He also questioned whether many of Zynga's problems come down to the fact that many browser gamers are simply moving over to mobile games, and hence leaving Zynga behind.

"We are skeptical that Zynga's monetizing player bases on titles like FarmVille and CityVille, which have been around for years, simply forgot to play without proper prompting via their news feed," he said. "Rather, we think reduced engagement is due to a shift from PC-based social gaming to mobile gaming. We think this shift is likely permanent and ongoing, threatening Zynga's largest business segment."

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Tadhg Kelly
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The bottom line is that all they essentially have is a marketing engine, but their product strategy has stalled. Even among the relatively muggle audience that is Facebook, Zynga-esque games are not exciting any more. It is, as I predicted three years ago on Gamasutra, a classic illustration of what happens when game publishers start to believe that they have a secret sauce.

Stephen Dick
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In this industry, any 'Secret Sauce' has a short shelf life, especially as your core audience matures.

Muir Freeland
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I just read your linked article for the first time. It's excellent -- thank you for writing it.

Jonathan Jou
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Do this a few more times, and then go explain to the really well-paid analysts who tell investors where to put their money that you deserve their job!

If game industry analysts showed deep business savvy and historically relevant industry trends, I would find them a lot more convincing than some guy who is about as outlandish as a gossip and about as reliable as a coin toss.

...not that I'm saying the industry has hired a bunch of people who don't know how the industry really works to predict and direct its futures through faulty predictions, or anything.

Bob Charone
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if they closes below $4 today, i'm going to have a bottle of wine tonight.

Zynga, feel free to steal my idea!

Gerald Belman
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I'm glad to say I told you so. You can't have a company without an ability to generate positive earnings. The really sad thing is that Zynga stock was hyped so much by the media - Pincus made a ton of money off a company that was dramatically over-valued. Once again a dolt gets rich and a bunch of stupid people get screwed.

The same thing will happen to Facebook if they don't find some way to make real money. Either way they are already rich from all the alexander dumases who bought overpriced facebook stock.

Interestingly enough - what does this say about mainstream game companies like EA and Activision Blizzard? They're not losing to Zynga. Are they losing to mobile? They are becoming mobile. Or are they even losing to anyone at all?

GameViewPoint Developer
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The last sentence holds the answer to all of this

"Rather, we think reduced engagement is due to a shift from PC-based social gaming to mobile gaming. We think this shift is likely permanent and ongoing, threatening Zynga's largest business segment."

It's all about mobile, Zynga and Facebook are just not in that sphere as they should be, and as such their influence is waning. There might well be another zynga/facebook appearing on mobile at some point over the next 5 years. Having said all that, Zynga/Facebook have so much money to throw around that the next Zynga/Facebook might actually come from them via a startup either of them might buy.

Maria Jayne
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Lot's possible reasons for this, however I'm hoping it's because people on facebook are finally getting tired of what is laughingly reffered to as "games" and players actually want something better.

Adam Bishop
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It wasn't too long ago that we were being told that Zynga was the future and anyone who disagreed and said that the whole thing was a bubble waiting to burst was told they were just dinosaurs who couldn't keep up with the pace of change.

E McNeill
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Be fair, though: they still make a boatload of money. This is far from bankruptcy. Their hype curve has peaked, but Zynga has been unquestionably successful from a commercial perspective.

Gerald Belman
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Well they have lots of revenue - but if your spending more than your taking in - that's not a good sign. So the quesiton is - will they be successful for their new stockholders? Or were they just cashing out?

Kevin Reilly
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@E McNeill: "Successful" for whom? ZNGA went IPO in January at $10/share, hit a high of $15.9/share in March and now trades around $3/share just 4 months later. They acquired OMGPOP for $200M and have announced a slew of new titles, but still miss earnings and get hammered in after hours trading. So they are 70% off IPO price and even farther off their high from only 4 months ago. Glad you see a silver lining because this is about as bad as it can get for a publicly traded company that raised so much pre-IPO cash and now has a much smaller market cap than only 6 months ago. I'd argue the investors got hosed on this stock by the hype masters.

Alternate Procellous
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A lot of investment in disentangling themselves from Facebook and the acquisition of mobile properties has affected earnings more than expected. The impact on their earnings is from this investment activity, not some bubble bursting. A basic premise in business is that you make money by investing in areas of growth. Their sin is in not properly anticipating or communicating the impact of this activity to investors. That does not mean they don't have a viable business model.

Frankly, some of the editorializing from Gamasutra, in the form of an image of the Titanic in Draw Something, is a disservice to the industry. It exaggerates the situation and does not contribute to the discussion in a meaningful way.

E McNeill
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Kevin: "Successful" for those who invested before the IPO. Until it actually hits bottom, this is just a matter of too-high expectations, not a scam or a fad or a pyramid scheme. Yeah, the investors got hosed. I'm just saying that Zynga is still ultimately a successful venture.

Kevin Reilly
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@ E. McNeill: Maybe some of the early angel, Series A and B investors made out like bandits, but there were some later VC rounds of well over $100M raised and I am pretty damn sure they had lock-up periods that lasted past the IPO. Look, Pincus was the largest seller of shares in April ($200M of $516M) and I'm not suggesting it is illegal, but as some have pointed out that is simply diluting the initial IPO shares without raising fresh cash for the company to invest. BTW - most of the employees are locked in to vesting periods for their stock that go well beyond the IPO, which has really gotta hurt when it collapses so precipitously. Believe me I'm rooting for them to pull through this beating and figure out how to increase profits again.

The real losers will be start-up devs looking for equity financing. Uninformed investors will probably look at Zynga and decide to invest elsewhere. Not that I can blame them.

R. Hunter Gough
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nice image choice. :)

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Like em or hate em, this story isn't really about Zynga.

Analysts make predictions about future earnings and stock prices as if they know what they're talking about. In the case of Zynga they don't. The company grew revenue 19% YOY, that's a huge win usually only delivered by businesses like Apple.

It comes down to this - analysts made a buy recommendation to their clients based on something they didn't understand. They were close, but not accurate, so now they have to call up their clients and explain to probably a 30/40 something broker/fund manager why the company that makes games about farming made $10 million less than the number the analysts pulled out of thin air. You can understand why that isn't a conversation either side wants to have, and hence they reaction dump stock.