Zynga Tops Profit, Sales Estimates as It Cuts Costs

Zynga Inc., the biggest maker of online social games, reported fourth-quarter profit and sales that surpassed analysts’ estimates as it cut costs faster than demand fell for virtual goods.

Sales totaled $311.2 million, unchanged from a year earlier, the San Francisco-based company said yesterday in a statement. Analysts on average predicted revenue of $250.2 million, according to data compiled by Bloomberg. Before certain items, the company posted a profit of 1 cent a share, compared with projections for a 3-cent loss.

Zynga Chief Executive Officer Mark Pincus is trimming expenses as users spend less on Web-based games such as “FarmVille 2” and more on mobile titles. His moves to close remote offices, shut more than a dozen games and cut 5 percent of staff has helped the company counter declining revenue from games played on Facebook Inc., said Ken Sena, an analyst at Evercore Partners Inc. in New York.

“It’s shifting a little bit from a top-line story to a bottom-line story -- how well they will be able to manage in the face of some major headwinds,” Sena said in an interview. “Based on this quarter’s results, they seem to be doing a fair job.” Sena rates Zynga shares underweight.

The shares advanced 9.1 percent to $2.99 at the close in New York. The stock has tumbled 70 percent since the company’s initial public offering in December 2011.

Costs were cut by almost two-thirds, dropping to $273.6 million in the fourth quarter from $797.8 million a year earlier.

New Games

Profitability is one of the company’s three strategic objectives for this year, Pincus said yesterday on a call with analysts. Zynga also will focus on building new franchises -- games with two or more installments -- as well as expanding the network of titles made by other developers that it promotes on Zynga.com, he said.

“Zynga’s core strength has been our ability to invest in and sustain leading franchises,” Pincus told analysts.

The company may acquire gaming startups if they help achieve one of these three goals, Chief Operations Officer David Ko said yesterday in an interview.

“Everything that we look at will have to fit in with franchise, network or profitability,” Ko said. “We’re going to take that same discipline with how we utilize acquisitions as well.”

Virtual Goods

Zynga generates revenue by selling virtual goods within its games -- for example, a gun in “Mafia Wars” or a brick oven in “ChefVille.” It owns three of the four most popular games played on Facebook, according to AppData.

Almost one-quarter, or 24 percent, of Zynga’s 298 million users per month are playing games from mobile phones, the company said.

Zynga posted a fourth-quarter net loss of $48.6 million, or 6 cents a share. Analysts predicted a net loss of $58.1 million, or 7 cents a share.

Bookings, or the total value of virtual goods sold in the quarter, were $261.3 million, compared with analysts’ estimates of $222.4 million, according to data compiled by Bloomberg. The company forecast bookings for the first quarter of $200 million to $210 million. Zynga’s reported revenue includes virtual items sold before the quarter and amortized over their expected life.

The company forecast first-quarter revenue of $255 million to $265 million and a net loss of $12 million to $32 million, or 2 cents to 4 cents a share.

Management Shifts

Zynga promoted a group of managers to key roles in November, including Ko, Chief Financial Officer Mark Vranesh, Chief Revenue Officer Barry Cottle and Steven Chiang, who became president of games.

“The key issue is can this management team gain the confidence of investors,” said Benjamin Schachter, an analyst at Macquarie Securities USA Inc. in New York, in an interview before yesterday’s results. Schachter has a neutral rating on Zynga shares.

Ko has tried to bring more discipline to the development of games, in part by combining teams that create similar apps, he said in an interview last week. Engineers and designers who work on more graphically rich programs, referred to as “midcore” games, now work together like a small company within Zynga, Ko said.

Seeking Efficiencies

The game maker is looking for other ways to be more efficient, such as ending projects early when they don’t show enough promise, Ko said.

“If there are games that aren’t going to live up to our expectations, I want to make the call earlier and make the hard call,” he said. “It may not be the most popular decision, but we have to think about how we are going to win in the long run.”

Ko was promoted to replace John Schappert, the former chief operating officer who resigned in August after he was stripped of some responsibilities at the company, people said at the time. Other top managers departing in recent months include Brian Reynolds, the former chief game designer, marketing head Jeff Karp, and former CFO David Wehner.

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