Zynga's 2Q Losses Narrow As Company Slashes Costs

SAN FRANCISCO (CBS/AP) — Zynga relied on mass layoffs and other cost-cutting to trim its second-quarter losses as the troubled company struggled to come up with compelling games to play on smartphones and tablet computers.

The results announced Thursday covered Zynga Inc.'s final reporting period before the San Francisco company hired former Microsoft executive Don Mattrick to replace founder Mark Pincus as CEO. Zynga is counting on Mattrick to engineer a turnaround after a highly successful stint in charge of Microsoft Corp.'s Xbox video game operations. The second-quarter review gave Mattrick his first opportunity to publicly assess the challenges facing Zynga since he started the new job just over two weeks ago.

In one of his first acts, Mattrick disappointed Wall Street by scrapping the company's potential U.S. expansion into making casino-style games that involved the wagering of real money. He revealed Thursday that Zynga no longer intends to pursue the U.S. gambling license needed for that kind of expansion. Had Zynga entered online gambling in the U.S., it would have opened up another channel of badly needed revenue. The company is still testing a gambling product in the United Kingdom.

Mattrick, 49, didn't sugarcoat the challenges facing Zynga as the maker of games that were once popular on Facebook's social network tries to figure out how to connect with game players who are increasingly entertaining themselves on mobile devices.

"Over the course of the next few months I will be working with our leadership team to challenge previous assumptions and to focus on business fundamentals, which candidly, we've struggled with over the past year," he told analysts during a Thursday conference call. "We anticipate two to four quarters of volatility as we work through resetting and developing our strategy."

After scrutinizing Zynga's operations during the next 90 days, Mattrick promised to "move quickly and decisively to do what's in the best long-term interest of our players, employees and our shareholders."

As if to underscore the bumpy road ahead, Zynga's financial forecast for the current quarter was worse than analysts anticipated. That disappointment, coupled with the retreat from U.S. gambling, triggered a nearly 14 percent drop in Zynga's already-drooping stock. The shares are down by nearly 70 percent from their December 2011 initial public offering price of $10.

When the company went public, Zynga looked like a winner to many investors because games such as "Farmville" and "Mafia Wars" had gained enthusiastic and addictive followings on Facebook. But things have changed dramatically in the past few years as other digital game makers invaded Facebook and more people migrated to other pastimes on smartphones.

King.com, the maker of the popular "Candy Crush Saga," has since supplanted Zynga as the No. 1 maker of social games. Even Mattrick confessed he is an enthusiastic player of "Candy Crush Saga" during Thursday's conference call.

The latest numbers reflect the diminishing popularity of Zynga's game franchise. An average of 39 million people played Zynga's games on a daily basis during the second quarter, a 45 percent decline from 72 million at the same time last year.

The adversity prompted Zynga to lay off 520 employees, or 18 percent of its workforce, last month. Some analysts believe Mattrick will have slash the payroll even more. The company ended June with 2,360 employees, down from peak of about 3,300 last year.

Mattrick didn't mention any layoff plans Thursday. But he said he intends to "look at how we are deploying people at all levels of the company."

Zynga lost $15.8 million, or 2 cents per share, during the three months ending in June. That compared with a loss of $22.8 million, or 3 cents per share, a year ago.

If not for certain charges, Zynga said it would have lost a penny a share. That figure was better than the loss of 3 cents per share envisioned by analysts surveyed by FactSet.

Zynga's revenue plunged 31 percent from last year to $231 million — about $4 million above analyst estimates.

In the current quarter ending in September, Zynga foresees its adjusted losses ranging 5 cents to 9 cents per share on revenue ranging from $175 million to $200 million. Analysts had been hoping for an adjusted loss of 2 cents per share on revenue of $214 million.

Zynga's stock shed 52 cents, or 14.9 percent, to $2.98 in extended trading.

Mattrick has a huge incentive to boost stock price because Zynga gave him restricted stock and stock options valued at $40 million as part of the compensation package that lured him away from Microsoft. Those awards become increasingly more valuable as Zynga's stock rises.

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