Zynga Sales May Fall Short of Estimates Amid Mobile Shift

April 25 (Bloomberg) -- In today's "Movers & Shakers," Bloomberg's Betty Liu reports on lowered profit and revenue forecasts at Zynga. She speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

Zynga Inc. (ZNGA), the biggest maker of online social games, forecast second-quarter sales that may fall short of some analysts’ estimates as revenue from mobile titles fails to make up for a drop in users playing its games on Facebook Inc. (FB) (FB)’s website.

Revenue in the current period will be $225 million to $235 million, the San Francisco-based company said in a statement yesterday. Analysts on average had predicted sales of $260.1 million, according to data compiled by Bloomberg.

The number of monthly users declined 13 percent to 253 million in the first quarter, Zynga said. Chief Executive Officer Mark Pincus is struggling to restart growth as more users shift their attention away from games on desktop websites such as Facebook, Zynga’s core business, and toward games played on wireless devices, according to Arvind Bhatia, an analyst at Sterne Agee & Leach Inc. in Dallas.

“There isn’t that much going on in mobile,” said Bhatia, who has a neutral rating for the stock. “That’s discouraging. That should be the growth driver. That was one of the key reasons for the upside last quarter.”

Zynga dropped 6.5 percent to $3.13 at the close in New York, the biggest decline since Feb. 12. The stock has advanced 33 percent this year, compared with an 11 percent gain in the Standard & Poor’s 500 Index.

Virtual Goods

Zynga also forecast a second-quarter loss, excluding certain items, of 3 cents to 4 cents a share. Analysts on average had predicted a loss of 1 cent.

Zynga posted first-quarter net income of $4.13 million, which included an $8.77 million tax gain, compared with a loss of $85.4 million a year earlier. During the quarter, Zynga repurchased about 1 million shares of common stock, and in April, it spent $100 million to repay remaining debt.

Sales fell 18 percent to $263.6 million in the first quarter, compared with analysts’ average projection of $263.9 million.

Zynga generates revenue by selling virtual goods within its games -- for example, a gun in “Mafia Wars” or a gazebo in “CastleVille.”

Though the number of Facebook users playing games on the social network is growing, gaming upstarts such as King.com Ltd. and Wooga GmbH have taken share of that audience. Zynga owns just two of the top six games played on Facebook, compared with all six a year earlier, according to researcher AppData.

Facebook Platform

Zynga is looking to attract more gamers to its own website rather than having them play on Facebook. While Zynga has been attracting users to Zynga.com, it’s having difficulty generating revenue from that traffic as effectively as it has on Facebook, according to Bhatia.

“The dependence on Facebook has always been a concern,” Bhatia said. “Facebook has changed terms on them from time to time, and that could happen again.”

Bookings, or the total value of virtual goods sold in the quarter, declined 30 percent to $229.8 million. The company forecast bookings for the second quarter of $180 million to $190 million. Zynga’s reported revenue includes virtual items sold before the quarter and amortized over their expected life.

Mobile represented 22 percent of bookings last quarter, up from 12 percent a year earlier, Mark Vranesh, Zynga’s chief financial officer, said on a conference call.

Earlier this month, Zynga released “ZyngaPlusPoker” and “ZyngaPlusCasino,” its first real-money games, which are available to players in the U.K. who are at least 18 years old. While the company plans to release versions of these games for Facebook and mobile later this year, bookings from these gambling titles are expected to be “modest” and won’t have a significant impact on 2013 results, Vranesh said.

Real-Money Gambling

The U.S. han’t determined whether Zynga or other software makers will be authorized to offer gambling applications in the country. Zynga expects to take the next step in its application process in Nevada sometime in the next 7 to 8 months, Vranesh said.

“Real-money gaming is one of the highest-testing new play opportunities that we’ve seen,” Pincus said on the call. “It eventually could be an exciting business in the U.S.”

Zynga hasn’t released many new games recently. Earlier this year, the company canceled two Web games that were planned for the current quarter because executives believed they didn’t have the potential to turn into major franchises, Barry Cottle, chief revenue officer at Zynga, said in an interview. Zynga reassigned those workers to other projects, which should help the company to accelerate its product-release cycle, he said.

“Draw Something 2,” Zynga’s sequel to its popular “Pictionary”-like mobile game, was released today as a free download in Apple Inc. (AAPL)’s App Store. A version of that game for Google Inc. (GOOG)’s mobile software Android will come later, Cottle said.

To contact the reporters on this story: Mark Milian in San Francisco at mmilian@bloomberg.net; Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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