Tested by Mobile, Zynga Aims to Rebuild Its Network

SAN FRANCISCO — Zynga has been on a monumental losing streak. Hits have been rare, profits nonexistent and crucial employees are fleeing.

The story of the company, which developed the notion of social gaming and persuaded tens of millions of people to try it out on Facebook, illustrates how suddenly the fortunes of hot Internet companies can shift. Two years ago, as Zynga was first being talked about for a public offering, it was said to be worth $20 billion.

By the time the offering took place, a little over a year ago, it was for about $7 billion. And Zynga has spent most of the time since then sliding downhill. The value of the company Tuesday, as it released mediocre but nevertheless better-than-expected fourth-quarter results, was about $2 billion.

In the next few months, Zynga faces a critical test that will determine if even that sum is excessive: can it successfully put its most popular Web games, starting with Farmville, on mobile devices?

“Do I wish that we would have gone all-in on mobile and made a bigger commitment to it earlier?” Mark Pincus, Zynga’s founder and chief executive, said in an interview after the earnings release. “Yes.”

Mr. Pincus called 2013 “a year of investment and transition.”

“While we are excited about the long-term growth opportunity on mobile, and the opportunity to make games even more accessible to people in more parts of their day, we need to build a compelling network around it,” he said.

That is because social gaming on mobile is not necessarily social.

“It’s kind of ironic, isn’t it?” Mr. Pincus said. “You’re holding a phone, an inherently social device. Yet the experience we have is a more fragmented one.”

The pain accompanying Zynga’s transition to mobile was evident in the earnings report. Revenue was $311 million, flat with the year before. Daily users of the games were down 6 percent from the third quarter, a clear measure of flagging interest. More casual users dropped as well.

Earnings per share were a penny, better than the 3-cent loss that analysts had been expecting on an adjusted basis. And Zynga’s cash hoard of $1.65 billion was untouched from the third quarter.

For the full year, revenue was $1.28 billion, up 12 percent from 2011. Not exactly what you would expect from a growth company.

Nor were its immediate prospects cheerful. Zynga warned that it would release few new games in the first quarter and that its revenue would drop from 2012.

Weak as the results were, however, they were not as bad as some feared. Zynga shares immediately rose in after-hours trading by 7 percent. In regular trading they were also up 7 percent to $2.74. That jump was fueled by an analyst upgrade from Merrill Lynch, which said the stock was so beaten down that it now accurately reflected the company’s prospects.

Many online stock sites, by contrast, have been portraying the company as going the way of Pets.com or Myspace. “Zynga’s Earnings May Reveal Its Impending Demise” read the headline at one.

Michael Pachter, a managing director of Wedbush Securities, wrote in an e-mail that Zynga management was “definitely saying the right things, now all they have to do is execute.”

Aside from Mr. Pincus, it has been a team in flux. Just last week, Zynga suffered another defection when its chief game designer, Brian Reynolds, quit, saying he wanted to experiment “more than might be appropriate for a publicly traded company.”

As recently as two years ago, Zynga had only 20 people working on mobile issues. Then the team ballooned into the hundreds. In the last few months, the team members have integrated into each game. Zynga has 298 million monthly active users, 72 million of them using mobile devices to play games like Words With Friends and Zynga Poker.

The central issue overshadowing even the mobile transition is whether Zynga became successful only because it was in the right place at the right time, a condition also known as dumb luck. Zynga’s rise was inseparable from Facebook’s, which gave it preferential treatment. That era is over. In March, Facebook will be free to develop its own games.

There are other perils for Zynga, plenty of them. Analysts have been pointing to the rise of King.com’s games, including Candy Crush, which makes the latest version of FarmVille look as complicated as advanced physics.

“Who thought crushing candy would have been popular?” said Brian Blau, a Gartner analyst.

King.com is promoting itself as a new, improved Zynga, which underscores the volatile nature of the business. “This is a hits-driven industry, and Zynga could not sustain their hits,” Mr. Blau said. “Game players are fickle.”

Zynga learned that lesson with Draw Something, which it acquired last March for $180 million at the height of its popularity.

Draw Something had about 15 million daily users. Before the ink on the purchase was dry, nearly a third of them had departed for a newer craze.

Zynga wrote down over half the purchase price even as Draw Something’s audience continued to dwindle. A Zynga spokeswoman declined to say Tuesday how many players it now had.

“The one thing that hasn’t changed is our focus on social,” Mr. Pincus said. “With every platform change over the years, we’ve bet the company on social and accessible.”

Article source: http://www.nytimes.com/2013/02/06/technology/weak-earnings-report-for-zynga-but-stock-rises.html?partner=rss&emc=rss