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Zynga shores up 2012 view after revenue beat, shares jump

The corporate logo of Zynga Inc, the social network game development company, is shown at its headquarters in San Francisco, California Apri
The corporate logo of Zynga Inc, the social network game development company, is shown at its headquarters in San Francisco, California Apri

By Gerry Shih

SAN FRANCISCO (Reuters) - Zynga Inc raised the lower end of its 2012 earnings outlook after quarterly revenue beat Wall Street's rock-bottom expectations, driving its shares 13 percent higher.

As pressure fell on the embattled "FarmVille" creator to show Wednesday that it has stabilized its spiraling business, the company assuaged investors with a series of minor announcements, from a new deal with British firm bwin.party to offer online real-money gambling in the United Kingdom to a $200 million share buyback plan that would lift its dismal share price.

The company also projected that its cost reduction plan, initiated this week, would yield $15 million to $20 million in pretax savings.

The spate of news proved a rare bright spot for Zynga, which has been trying to stave off user losses that prompted it to slash its 2012 outlook twice in recent months.

"On the margin these are positive things," said Arvind Bhatia, an analyst with Sterne Agee. "But fundamentally they'll still have to turn around the business. I'm not so sure these are necessarily enough to get this stock going much higher."

Even taking into account the after-hours share rally, Zynga would still have lost three-quarters of its market value since debuting last December at $10.

CEO Mark Pincus sounded chastened on a conference call with Wall Street analysts on Wednesday, repeatedly calling Zynga's recent performance "disappointing" while vowing to turn around the company he founded in 2006 by churning out new hits for mobile devices.

"The last couple of months have obviously been challenging for us," said Pincus, who blamed delays and poor execution in the company's game development pipeline. "We didn't create enough new heat for our players. But we know when we launch great games our players engage."

A day after Zynga cut five percent of its workforce and announced it would shutter several game studios around the world, Pincus reiterated his vision of a leaner, more nimble Zynga - a company once known for its aggressive pace of expansion.

For instance, Zynga cut bait this week on "The Ville," a major initiative that never gained traction after its public debut this summer. "That game missed our expectations but we moved quickly to reduce and redeploy that team," Pincus said.

But even with the cost cuts, Zynga has not adequately addressed some fundamental investor concerns over whether the company can thrive, given its stubborn reliance on sales from "FarmVille" and "CityVille," one-time cash cows for Zynga that are both fading fast.

Chief Financial Officer David Wehner blamed those two aging games as reasons why Zynga recorded bookings of $256 million from July through September, the worst quarterly performance since late 2010 when the company was still enjoying a meteoric ascent toward its December, 2011 initial public offering.

Average daily bookings per average daily active user, a metric that roughly measures how much revenue the company squeezes out of each gamer, dropped sharply to $0.047, a decrease of 11 percent from a year prior.

Quarterly revenue rose to $317 million, an increase of 3 percent from a year ago. The company revised its full-year adjusted earnings to between $152 million and $162 million, up from $147 million and $162 million.

NO SURE BET

Zynga's partnership with bwin.party could ultimately prove to be a lucrative new source of revenue, although Wehner cautioned that it was still a fledgling effort.

"We view this as the first step into real money gambling," said Wehner, who declined to give guidance for the deal's financial impact when asked by several analysts.

"It's a good first step but only the first step," he said.

Although profitable, real money gambling operations are seen as the holy grail for online gaming companies. Analysts said the UK deal was guaranteed to be a sure bet for Zynga, while others were skeptical.

"I'm not sure that will automatically be a win for them," Bhatia said. "Most of the players they have want to have a casual experience and not get involved in real money gaming. And those who do are probably already doing that on other platforms."

Pincus and Wehner also said the company would invest more heavily in "mid-core" games, which require more development resources but are more immersive than casual titles like "FarmVille."

To underscore how the company prioritizes mobile games, Zynga now operates on a publishing schedule of two new Web games and four new mobile games per quarter, Pincus added.

That was enough good news to lift the gloom around the game maker, which has been fighting to reverse a dramatic exodus of players. Zynga had cut its 2012 earnings forecast most recently on October 4 when it warned investors its top line would be affected by poor performance in core money-making Internet games.

Zynga's stock was up at $2.41 in extended trade after closing at $2.129 on the Nasdaq.

(Reporting By Gerry Shih; Editing by Bernard Orr)

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