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By: Julia Boorstin CNBC Correspondent
Zynga stock is plummeting to new lows on news that its core social games are underperforming, which means dismal results in the second half of the year. This is yet another nail in social gaming’s coffin — it follows a number of executive departures and disappointing second-quarter results that have brought the stock down.
After the bell Thursday the social game maker lowered its outlook and announced preliminary third-quarter results, to soften the blow of the earnings announcement scheduled on Oct. 24.
Zynga lowered its projections for the second half of 2012, cutting its estimated bookings by about $100 million, to a range of $1.09 billion to $1.1 billion, down from a $1.15 billion to $1.23 billion range. The company said it expects to report a net loss between $90 million and $105 million on revenue in the $300 to $305 million range. It is also taking a serious write-off on its acquisition of “Draw Something” maker OMG Pop, taking an $85 to $95 million impairment charge.
This is already hitting Facebook’s stock, and a handful of analysts have issued reports on Facebook warning about the impact. (Read More: Will Facebook’s New Focus on Revenue Boost Its Stock?)
JPMorgan lowered estimates for Facebook’s payments revenue, now expecting it to decline 28 percent. JPMorgan warned that Zynga accounted for about 54 percent of Facebook’s payments in the second quarter — about 9 percent of Facebook’s total revenue. Barclays lowered its payments estimates for Facebook, noting that “social gaming on mobile devices is growing at the expense of desktop, which is where FB derives the majority of its payments revenue.” (Read More: Facebook Hits Milestone, but Real News Is in Mobile.)
What happened? Games that were once Zynga’s bread and butter — such as “FarmVille” (Zygna calls them the “invest and express” category) are performing worse than expected. Why? With the proliferation of mobile games, and people spending more time on smartphones, social games have lost their luster. Even if people are playing social games, Zygna has failed to convince more people to pay to play — paying gamers represent less than 5 percent of Zynga’s user base.
Zynga CEO Mark Pincus posted some color on the company's blog about why the company issued preliminary results and lowered its outlook. He stressed that the company is investing in other genres — like gambling games, where it has the hit “Zynga Poker.” He announced some new metrics, saying each of the company's three new games has achieved top 10 status, with more than 6 million daily players. Within its first five weeks, “ChefVille” has become a mainstay for 45 million monthly players, and “FarmVille 2” became the most popular social game within three days of network launch.
But the problems will add up to a weak fourth quarter. Pincus writes in his blog: “The reduced performance of some of our live web games is continuing to impact results and we have several new games which are at risk of launching later than expected.” It also sounds like Pincus is getting ready to do some layoffs, saying, “We’re addressing these near-term challenges by targeted cost reductions and focusing our new game pipeline to reflect our strategic priorities.”
Zynga sees its future in mobile. More from the blog: “At the same time, we are continuing to invest in our mobile business where we have one of the strongest positions in the industry. These actions support our strategy to transition from being a first-party web game developer to a multi-platform game network.”
He added: “Let’s not lose sight of the bigger picture. The world is playing games, and is increasingly choosing social games. Zynga has become synonymous with social gaming, serving 311 million monthly active users — the largest player network on web and mobile. When we offer our players highly engaging content they respond. ‘FarmVille 2’ has been our most successful launch since ‘CastleVille.’ Our ‘With Friends’ franchise is defining social play on mobile where Zynga represents 3 of the top 5 most popular mobile games in terms of time spent in the U.S. according to Nielsen. While we’re encouraged by our strong starting position on mobile, developing this new growth market to the scale of our web business will take time.”
image: © Sabrina Dent