By Gerry Shih
SAN FRANCISCO (Reuters) - Zynga Inc laid off 5 percent of its full-time workforce and shut its Boston office on Tuesday as it embarked on a sweeping cost-cutting campaign that may eventually see the "FarmVille" game creator close its Japanese and British studios as well.
The company, which is trying to arrest a steep decline in earnings as users gradually migrate onto mobile devices or rival games, plans to "sunset" 13 unspecified older titles, Chief Executive Mark Pincus said in a staff memo on Tuesday that was published on the company blog.
"This is the most painful part of an overall cost reduction plan that also includes significant cuts in spending on data hosting, advertising and outside services, primarily contractors," Pincus wrote in his memo.
Pincus said the cuts would accompany a regime of "more stringent budget and resource allocation around new games and partner projects," hinting at a fundamental change for a company that was known for expanding aggressively through hires and acquisition deals before it went public to fanfare last December.
In March, Pincus made a gamble to acquire game studio OMGPOP for $180 million before acknowledging this month that the deal didn't pan out, leading to a $90 million writedown.
The memo came on the eve of Zynga's earnings report on Wednesday, when Pincus and Chief Financial Officer David Wehner are expected to provide Wall Street with more comprehensive details about the company's overhaul strategy.
Tuesday's cuts were presaged on October 4, when Zynga slashed its 2012 outlook and warned investors that it would record a steep drop in sequential quarterly revenues for the first time since its December initial public offering. At the time, Pincus said the company would examine how to proceed with cuts.
As the first step of Zynga's reduction plan unfolded Tuesday, Pincus said that Zynga would significantly pull back its investment in "The Ville" game - a major recent initiative - and scale back on its Austin, Texas studio as it sought to cut costs. He also said the company was "proposing" to close its Japanese and British offices.
Rumors of the layoffs in Austin and Boston had spread on gaming blogs and over social networks during the day, and the company's shares closed down more than 5 percent, at $2.20. But they bounced back 4.5 percent to $2.30 in after-hours trade, following news of the cost-cutting initiatives.
"It's good to see them be realistic, but the real question is not a matter of profitability, it's 'can you get revenue going the right direction?'" said Ben Schachter, a senior analyst at Macquarie Securities. "The Street doesn't want to see cost-cutting for what was supposed to be a growth company."
Pincus, who grew the company behind such ageing Facebook hits as "CityVille" "and Mafia Wars", will face employees at a quarterly gathering next week at the company's San Francisco headquarters.
Employees say morale is in steep decline, with Zynga forced this month to slash its 2012 results outlook for the second time.
Since going public at $10 a share, Zynga has lost over three-quarters of its market value. It has been hit by delays in its game pipeline as older titles fade, while it has struggled to come up with new hits for mobile devices.
Tuesday's layoffs amounted to roughly 150 out of Zynga's 2,900 workers.
Pincus said on Wednesday the company's management did not make the decision to cut employees "lightly" and that it recognized the "impact to our colleagues and friends."
But with the company's top line stagnant, analysts warned they expected news of further cuts on Wednesday's earnings call.
"They probably need to cut more people, and they probably will," said Michael Pachter of Wedbush Securities.
(Reporting By Gerry Shih; Editing by Leslie Adler, Tim Dobbyn and Richard Pullin)