The social gaming company pre-announced some ugly third-quarter earnings late Thursday and significantly reduced its financial guidance for the year. Now, Wall Street analysts are beginning to wonder aloud if the company will ever be able to turn things around.
"We don't see a floor on the horizon," said Macquarie Securities analyst Ben Schacter. "Our concern has been and remains that while Zynga executed against its first mover advantage on the Facebook platform, off of the platform they are just one of many."
No one really expected Zynga to hit its earlier projections given how badly the company has performed lately, but the extent of the shortfall is astonishing. For the second half of 2012, Zynga reduced its estimated bookings by about $100 million. It now expects to report a net loss between $90 million and $105 million.
The company also seemingly had a moment of clarity, essentially admitting that it paid way, WAY too much for Draw Something creator OMGPOP earlier this year. In March, the company paid $210 million for the studio. Yesterday, it announced plans to take an $85 to $95 million "impairment charge" — the corporate equivalent of a "whoopsie."
The problems boil down to one thing: People aren't playing the company's games as much as they used to. The number of daily average users (DAUs) in the third quarter "were down 15-20 percent sequentially as traffic from new titles was not enough to offset the declines in existing games," notes Sterne Agee's Arvind Bhatia.
The troubles at Zynga were somewhat forecast by the staggering number of executives who have jumped ship from the company in the past few months. At least seven C-level bosses have left the company since the beginning of August, and now it appears the creators of smash hit Words with Friends have also bailed out.
Unsurprisingly, the company's stock is down 20% to about $2.30 in early trading on Friday, a whopping 75% decline since its IPO in December of 2011. But some analysts say they're not giving up hope yet.
"It is not clear that Zynga will turn this around quickly," says Wedbush Securities' Michael Pachter. "Management has whiffed two out of the last three quarters … [but] if management reins in costs and focuses on fewer, bigger games, we think that the company has the potential to grow revenues. … While it is sorely tempting for us to jump on the Zynga-hater bandwagon, we are strangely fascinated by the company's business model, and believe that there is great potential to turn things around."
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