Zynga has learned it is not easy to meet Wall Street’s expectations.

July 25, 2012 • Zynga Inc. posted bruising second quarter financial results that threw into question whether the social games powerhouse now faces declining fortunes ahead. The publisher posted a loss of $22.8 million for the quarter, with $332 million in revenue. Analysts had expected revenue of $343 million for the period. During the same quarter a year ago, Zynga turned a profit of $1.4 million. In worse news, Zynga cut its forcast for 2012 bookings, which is revenue less payments to Facebook, from $1.47 billion to $1.15 billion. During a conference call after the financial announcement, Zynga executives blamed the poor results on a steep drop-off in players for its primary franchises, and less than expected performance by new titles such as Mafia Wars II. Overall monthly paying users would have declined for the quarter were it not for the recent acquisition of Draw Something, whose influx of new players boosted the number of monthly paying customers to 4.1 million. Regardless, Zynga admitted it was earning less revenue per subscriber, with average daily bookings per user dropping about 10% to 4.6 cents during the quarter.

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Impact: In the DFC Intelligence report The Market for Browser and Social Network Games we warned that the current state of the market was unstable and there could very well be a market crash.  At the time, Zynga stock was trading in the $13-14 range and there was all kinds of optimism about growth potential on mobile platforms.  Back then many analysts bullish on Zynga disagreed with this opinion. The problem was that unlike established free-to-play (F2P) companies that have products that build an audience over time and last for years, Zynga was quickly churning its audience. Zynga games tend to hit their peak quickly and decline rapidly in just a few months. That is simply not a long term recipe for success in the F2P market.  Zynga’s IPO occurred at the same time as that of Nexon, a Korean F2P company with similar revenue but a much more established business model.  For several years, DFC has touted Nexon as a prime example of how a company can be built on the F2P model.  While Zynga’s stock has crashed since its late 2011 IPO, Nexon has shown steady growth as Nexon games often continue to grow their audience years after release.  Long term, DFC believes that there will be solid growth for F2P games, but their will be many boom and bust cycles in the process.  Right now failed F2P companies are rushing to mobile platforms and that is the new boom platform that is looking very much like another bubble ready to burst.

For more info on this subject see the DFC Intelligence report The Market for Browser and Social Network Games