Zynga Needs a Turnaround

That didn't take long.

Just six months ago, social gamer Zynga (Nasdaq: ZNGA  ) acquired one-hit wonder OMGPOP, whose Draw Something Pictionary knock-off scaled app store charts and quickly caught the market's attention. It was enough to lure a $183.1 million buyout from Zynga, despite the fact that OMGPOP had no other notably successful games.

At the time, Zynga recorded $103.8 million in goodwill and another $33.5 million in "branding intangible assets." Half a year later, the company is eating an impairment charge related to OMGPOP for about $85 million to $95 million. That's about half of the total purchase price and the majority of goodwill and intangibles it recorded.

With last quarter's revelation that Draw Something was underperforming relative to CEO Mark Pincus' "early expectations," this news hardly comes as a surprise, as that highly controversial acquisition drew much criticism.

It gets worse
The gloomy news doesn't end there, as Zynga is also cutting its third-quarter and full-year outlooks. Again. Third-quarter revenue is expected to be in the ballpark of $300 million to $305 million, with bookings of just $250 million to $255 million. By the time investors reach they bottom line, they'll likely be looking at a GAAP net loss of $90 million and $105 million, or a loss of $0.12 to $0.14 per share. On a non-GAAP basis, the third quarter should see a net loss of between $2 million and $5 million, or a loss up to $0.01 per share.

This is the second consecutive quarter that Zynga to slashed its full-year guidance, after boosting it in April. The cut in July was particularly deep, and Zynga opted not to provide a non-GAAP EPS forecast for the year, which it will give when it releases official results on Oct. 24.

2012 Outlook

Feb. 14, 2012

April 26, 2012

July 25, 2012

Oct. 4, 2012

Bookings

$1.35 billion to $1.45 billion

$1.43 billion to $1.5 billion

$1.15 billion to $1.23 billion

$1.09 billion to $1.10 billion

Adjusted EBITDA

$390 million to $440 million

$400 million to $450 million

$180 million to $250 million

$147 million to $162 million

Non-GAAP EPS

$0.24 to $0.28

$0.23 to $0.29

$0.04 to $0.09

Not yet given

Source: SEC filings.

The change is tied to the company's web games underperforming, including The Ville, Zynga's rip-off of Electronic Arts' (Nasdaq: EA  ) The Sims Social and subject of a lawsuit. There are also delays in launching new games that are also holding back results. Pincus expressed his disappointment in the preliminary results and also said that Zynga is looking to implement "target cost reductions," which some analysts think hints at possible massive layoffs among its roughly 3,000-strong employee base.

Zynga has been having a bit of an employee retention problem lately, particularly among the upper echelons of the company. At the end of June, Zynga estimated that nearly 80% of its employee base has been with the company for less than two years, with over half of those joining up less than a year prior, so they likely have less loyalty than more tenured employees might.

A casual fling
With Zynga pitching in a large portion of Facebook's (Nasdaq: FB  ) payments segment revenue, the disappointing news doesn't bode well for the social networker, either. The game maker estimates that deferred revenue will decrease by $50 million in the third quarter, meaning that players are using existing virtual goods faster than they're buying them, causing bookings to fall.

At this point, Zynga is painfully aware of the sad state of its casual gaming business. The revenue potential for that category of games is low because of low player engagement. That's why the company has been moving into more engaging content, acquiring mid-core developer A Bit Lucky last month.

On top of that, Pincus detailed his plan to transform Zynga from a first-party game developer into a multiplatform game network, while pointing out that the company now has 311 million monthly active users.

Let the talks begin
Shares are now down 75% from the IPO less than a year ago, which is a particularly short period of time after going public to already begin talking about turnarounds. Still, let the turnaround talk begin.

I've long been a critic of Zynga's business, warning investors to stay away from the company as early as July, shortly before shares plunged 40% after releasing second-quarter results. Get access to this premium report and receive free updates for a full year. Click here to get started.

 

Evan Niu, CFA, has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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