OCT. 24, 2012 • Zynga chief executive Mark Pincus distributed an internal memo throughout the company announcing strategic cuts ahead of reporting third-quarter financial results. The measures undertaken include sunsetting 13 older games that were significantly reducing investment in The Ville; closing the Zynga Boston studio and the proposed closures of the Japan and U.K. studios; reducing staffing levels in the Austin studio, plus reducing the number of partner teams; significant cuts in spending on data hosting, advertising and outside services; plus tighter budget and resource allocation to new games and partner projects. In all, Pincus set a goal of reducing total staff by 5%, as part of an overall goal of driving $60 million to $80 million in annualized savings.

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Despite the negative message such measures telegraph, Zynga’s third-quarter results were actually better than expected. Instead of the $300 million to $305 million in revenue that the company forecasted earlier in the month, revenue for the period came in at $317 million, a 3% increase over the quarter a year earlier. Monthly unique payers were 3 million, up 15% year-over-year, but down 28% quarter-over-quarter. Payer conversion was 1.7%, down from the 2.1% in the prior quarter. Zynga said sequential declines in monthly unique payers and payer conversion were largely driven by fewer Draw Something payers. Average bookings per daily average user was $0.047, down 19% year-over-year. Third quarter bookings were $256 million down 11% year-over-year and 15% quarter-over-quarter. The year-over-year declines were driven primarily by declines in FarmVille and CityVille on Facebook. When looking at quarter-over-quarter, the most serious declines were again on Facebook with CastleVille, CityVille and FarmVille. In related news, during a conference call after Facebook announced its third-quarter results on Oct. 23, the social network’s CEO Mark Zuckerberg revealed that revenue from Zynga games was down 20% for the period compared to the same quarter in 2011.

Impact: DFC Intelligence has done a great deal of analysis on Zynga over the past three years.  In one of our most recent pieces we questioned the long-term growth potential of Zynga.  The third quarter earning statement does not really change our position.  Zynga points to the rise of mobile platforms as the primary culprit in its declining revenues on Facebook. We concur that consumers embracing mobile platforms is a major factor, as Nintendo can well attest. Yet we are not so quick to accept this factor alone. In Facebook’s Q3 report they noted that Zynga revenue was down 20% at the same time that non-Zynga game revenue was up 40%.  That suggests a different plot is at work. Faced with more competition, and an ecosystem that now promotes competitors more evenly, Zynga games on Facebook are suffering declines. Our position for a long time has been that Zynga’s games are fun, accessible, well designed for monetization, but nothing special. Having opened up the social network platform to gaming, Zynga reaped the financial rewards. The conclusion we have to draw is that Zynga’s games are not special enough to draw the same lofty revenue in a situation where consumers have abundant choices. If that is true on Zynga’s Facebook home turf, can we expect much different on Google Play? This is an important question as the company directs substantial resources to shifting content to mobile platforms. Zynga will benefit on mobile by bringing a trusted brand name to the mix that will make it easier to draw attention to its titles. We expect Zynga will likely carve out respectable market share on mobile platforms. We do not, however, see a scenario where Zynga replaces the revenue cash cow it once had on Facebook. That won’t change until Zynga steps up with a title that can wow consumers inundated in a flood of competing games. However, from an investor’s standpoint Zynga is now looking like a possible bargain.  At $2 to $3 a share we can see a lot of people jumping in and hoping to double their money if it goes to $4 to $6.  Of course, the problem is this situation more often draws speculators, and it means the investment community will be closely counting Zynga’s pennies.  That is not a good position to be in for a company looking to enter new markets.

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