Zynga Rises as Game Maker Annouces Buyback, Gambling Deal

Zynga Sales Top Estimates as “FarmVille 2” Bolsters Game Maker
Zynga Inc. owns the five most popular games played on Facebook, led by “FarmVille 2” with 61.3 million monthly users, according to AppData. Photographer: David Paul Morris/Bloomberg

Zynga Inc., the biggest maker of social games, surged after posting third-quarter sales that topped analysts’ estimates and unveiling plans to buy back stock and move into real-money gambling.

Sales rose 3.2 percent to $316.6 million, Zynga said yesterday in a statement. Analysts on average predicted $291.5 million, according to data compiled by Bloomberg. Zynga also announced a partnership with a U.K. real-money gaming operator and said it will buy back as much as $200 million in stock.

Faced with slowing sales and a sagging stock price, Chief Executive Officer Mark Pincus has embarked on a reorganization aimed at reviving growth. His plan to cut costs, focus on mobile and expand into gambling may reassure investors that the company is pursuing new opportunities for growth, said Michael Pachter, an analyst at Wedbush Securities Inc.

“Every single thing that they are doing is what you would want them to do,” said Pachter, who has an outperform rating on the stock. “They really do intend to grow revenues.”

Zynga’s shares rose 12 percent to $2.39 at the close in New York, for the biggest gain since February. The stock has tumbled 76 percent since the company’s initial public offering in December.

Mobile Shift

The restructuring, which also includes shutting offices and phasing out more than a dozen games, will generate pretax savings of $15 million to $20 million in the fourth quarter, excluding a charge of about $8 million to $12 million, Zynga said.

The game maker failed to meet its expectations for growth in part because of the shift to mobile and in part because it didn’t develop enough compelling programs, Pincus said on a conference call.

“We didn’t create enough new heat for our players by innovating on content and features,” the CEO said.

The company said it signed a partnership with Gibraltar-based Bwin.Party Digital Entertainment Plc to offer real-money gambling in the U.K., including online poker and a suite of 180 casino games next year. The two companies will share revenue from gambling, Zynga Chief Financial Officer David Wehner said yesterday on the call.

Regulations Easing

Zynga is optimistic that the easing of regulations in the U.S. and abroad will let it expand in online gambling, a market that researcher H2 Gambling Capital estimates may be worth $30 billion next year. The game developer last month hired Maytal Olsha, a former online-gambling executive, as its chief operating officer of new markets.

The stock repurchase program is Zynga’s first. The buybacks will help management signal its confidence to investors, said Arvind Bhatia, an analyst at Sterne Agee & Leach Inc. in Dallas.

“The stock has no buyers out there -- it’s in sort of a free-fall,” he said. “To have the company buy back some of the stock will help to at least support it somewhat.”

The company generates revenue by selling virtual goods within its games -- for example, a gun in “Mafia Wars” or a brick oven in “ChefVille.” It owns the five most popular games played on Facebook Inc., led by “FarmVille 2” with 61.3 million monthly users, according to AppData.

Still, Facebook, which takes a portion of the revenue from virtual goods sold on its site, has become less reliant on Zynga for revenue. Including its advertising spending, the game maker contributed 7 percent of Facebook’s revenue in the third quarter, down from 12 percent a year earlier, the social network said earlier this week.

Third Quarter

Before certain items, Zynga broke even on a per-share basis in the third quarter, compared with projections for a 1-cent loss. The game maker posted a net loss of $52.7 million, or 7 cents a share. Earlier this month, it predicted a net loss of $90 million to $105 million.

For the full year, Zynga reiterated an earlier forecast for bookings, a predictor of future sales, of $1.09 billion to $1.1 billion. The company said 2012 per-share profit, excluding some costs, will be 2 cents to 3 cents, not including the effect of the share repurchase plan.


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