Analyst: Zynga needs another hit to lift stock

AP News
Posted: Jun 04, 2013 10:46 AM

NEW YORK (AP) — Zynga is showing how difficult it is to consistently turn profits in the mobile gaming sector. Industry analysts say steep job cuts will buy more time, but that the key to turning its fortunes around is landing the smash hits that, of late, have eluded the San Francisco company.

Late Monday Zynga — the company behind "Farmville" and "Words With Friends" — announced that it is cutting 520 jobs, about 18 percent of its workforce, in a cost-saving move designed to help it adapt to consumers shifting game play from computers to mobile devices. Its cost-cutting efforts also include some office closures. Zynga expects to save about $70 million to $80 million in annual costs.

Zynga has seen demand for its games on Facebook fade as more people shift to playing games on mobile devices, where revenues have been more elusive.

In April, a surprise first-quarter profit from Zynga was overshadowed by a revenue decline, a drop in the number of users and a lower-than-expected second-quarter forecast.

Company shares have fallen almost 48 percent over the past 12 months and they're down more than 7 percent over the past month.

Jefferies & Co. analyst Brian Pitz says that while the payoff is great, mobile gaming can be brutal on developers because only the top 20 games generate any meaningful revenue.

And often, the time in the spotlight is fleeting.

"Draw Something 2 (DS2) quickly reached the No. 1 most downloaded title after launching on Apr. 25 to mostly positive reviews (82 metacritic)," Pitz wrote. "By May 12, DS2 was the No. 58 top grossing app in the iOS App Store. Today it is No. 88."

Pitz maintained a "Hold" rating on Zynga and $3 price target.

Zynga CEO Mark Pincus said in a blog post that the cost-cutting efforts were proactive.

"By reducing our cost structure today we will offer our teams the runway they need to take risks and develop these breakthrough new social experiences," he said.

Wedbush sees the job cuts at Zynga as necessary, but risky.

"We believe management is correct in focusing on cutting costs," analyst Michael Pachter says. "We think this is the right move given the uncertainty of potential monetization on social networks, mobile, and from RMG; however, Monday's announcement is likely to increase investor skepticism that Zynga's bookings growth can ever rebound."

Zynga declined to comment on the analyst reports.

Shares of Zynga Inc. rose a penny to $3 in morning trading Tuesday. Its shares have traded below $4 since about July 2012, after debuting at $10 in its December 2011 initial public offering.