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Zynga sinks after pulling bet on gambling and wide loss forecast

As interest wanes in Zynga's (NASDAQ:ZNGA) once fanatically-popular Farmville and Words With Friends online games, so does investor appetite for its stock. Even though Zynga actually reported a second quarter loss that was better than the forecast it revised last month, the stock is bleeding about 18 per cent of its value from the start of trading on Friday. 

 

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As interest wanes in Zynga's (NASDAQ:ZNGA) once fanatically-popular Farmville and Words With Friends online games, so does investor appetite for its stock.

Even though Zynga actually reported a second quarter loss that was better than the forecast it revised last month, the stock is bleeding about 18 per cent of its value from the start of trading on Friday. 

What riled the market was not just a projected loss for the July to September period that is even wider than the actual loss in the quarter before it. Attention now turns to what Zynga has up its sleeve after its highly-anticipated experiment with online gambling fizzled. 

Zynga said in its quarterly statement that it is abandoning a plan to get a license to produce gambling games in the U.S. and tap a highly lucrative market. The bet, however, remains on the table in the U.K., but domestically Zynga will focus on free social games, including casino-style simulations where the stakes are nil. 

In its third-quarter outlook, Zynga said it will lose between $43 million to $14 million, or five cents to two cents a share, which could mean the company will fall as much as three cents short of the mean analyst estimate. 

Zynga predicts its revenue will be in the $175 million to $200 million range, while analysts are seeking $193 million.

Even though this is a fresh quarter for new chief executive Don Mattrick, who is not even a month into the job after being lured away from a post at Microsoft (NASDAQ:MSFT) as the head of games, his situation is much like a relief pitcher who inherits a jam as he takes over a transitional plan started by founder Mark Pincus, who left the proverbial mound once Mattrick took over. 

"As we reset, we expect to see more volatility in our business than we would like over the next two to four quarters," said Mattrick in the company statement.

Part of the plan was to attract users away from playing games on Facebook (NASDAQ:FB) and direct them to its own website. It may be too early at this point to fairly evaluate if that shift is happening. Zynga's website recorded 4.2 million monthly active users in the second quarter, the first full three-month period since the site's relaunch that includes standalone player logins.

In the second quarter, daily active users dropped 45 per cent to 39 million versus 72 million for the same period last year. Monthly active users dropped 39 per cent to 187 million from 306 million. Bookings, or the amount of virtual goods sold, like a tractor in Farmville, declined 38 per cent to $188 million. 

Zynga's second quarter revenue dropped 31 per cent to $231 million, which included a 30 per cent year-over-year drop in online game revenue and a 33 per cent slide in advertising revenue. The company had expected revenue between $225 million to $235 million, while the analyst consenus was $232.1 million. 

The San Francisco, Calif.-based company's net loss was $16 million, compared to a net loss of $23 million for the second quarter of 2012 and the forecast, revised in June, of a $39 million to $28.5 million loss.

On an adjusted basis, Zynga's net loss was $6 million or a penny per share versus a $5 million or one cent per share profit in last year's second quarter, even with the street estimate but better than its $0.03 to $0.04 per share guidance.

Zynga announced in June it would save $70 to $80 million by cutting 18 per cent of its workforce, which amounts to 520 employees.

Prior to today's trading, investors had boosted Zynga's market value a third this year. 

Quick facts: Zynga Inc

Price: 9.72 USD

NASDAQ:ZNGA
Market: NASDAQ
Market Cap: $10.45 billion
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