Zynga's big collapse: Is the social-gaming fun over?

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man-bear-pig on 26 July 2012

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Zynga reported a disappointing second quarter, cut its outlook, and saw its shares plunge after hours. The big question: Is the social-gaming run over?

That's what Zynga's trying to do.

(Credit: Zynga)

The company behind Farmville, Words With Friends, and other games distributed mostly via Facebook reported a second-quarter net loss of $22.8 million, or 3 cents a share, on revenue of $332.5 million. Non-GAAP earnings, which exclude charges, were a penny a share in the second quarter. Wall Street was looking for Zynga to report earnings of 5 cents a share on revenue of $344.1 million.

Zynga's outlook was also disappointing. The company projected 2012 non-GAAP earnings of 4 cents a share to 9 cents a share. Wall Street was looking for earnings of 26 cents a share for 2012. For perspective, Zynga's 2012 earnings outlook would have required a stretch just to hit third-quarter estimates. Investors weren't happy.

Zynga was hammered in after hours trading.

Now it's clear why Zynga has been prodding players to keep games going in their social streams.

Zynga said it has been hurt by delays and a decline in usage. Specifically, the company said:

We are lowering our outlook to reflect delays in launching new games, a faster decline in existing Web games due in part to a more challenging environment on the Facebook Web platform, and reduced expectations for Draw Something.

The most troublesome part of that statement revolves around Facebook usage. After all, Facebook accounts for nearly all of Zynga's revenue. Meanwhile, Zynga generates Facebook Payments revenue. If Zynga is taking its lumps, Facebook may also take a hit.

Zynga CEO Mark Pincus said the company faced "new short-term challenges," but he was "optimistic about the long-term growth prospects on mobile." Pincus noted that Zynga has a window of opportunity to drive the social-gaming revolution.

Engagement in games fell "due in part to changes Facebook made to their platform."
Returns on Draw Something weren't up to expectations.
Facebook is collaborating with Zynga to improve performance.
He added that Zynga is working on its advertising revenue.
"We are optimistic about our near-term prospects on Facebook, medium-term prospects on mobile, and long-term prospects with our network and platform," said Pincus.

From the looks of Zynga's results, Pincus' window of opportunity may be closing. Especially if Zynga can't drive social gamers to its own site, where it controls more of its own distribution destiny and generates hits.