Why Zynga Earnings Are Headed Back Into the Red

Zynga (ZNGA) will release its quarterly report on Thursday, and investors should be prepared for another round of tough results. The company has gone through a lot over the past few years, as big losses almost right out of the gate after its IPO have pressured Zynga to produce better results. Yet at least for now, Zynga earnings look like they'll stay negative for the foreseeable future until the company's turnaround plan has longer to run its course.

Zynga looked like the most promising company in the social-gaming space, and even now, the company still has some lucrative opportunities. Yet the evolution of the social-gaming industry has sapped some of the company's growth prospects, and it's unclear whether Zynga will be able to capitalize on the ones that remain. Let's take an early look at what's been happening with Zynga over the past quarter and what we're likely to see in its report.

Stats on Zynga

Source: Yahoo! Finance.

How much will Zynga earnings fall this quarter?
In recent months, analysts have gotten less excited about Zynga's prospects, quadrupling their loss estimates for the June quarter and marking down their calls for next year from an expected $0.02-per-share profit to break-even. The stock is off its lows, but it hasn't managed to post a meaningful recovery, climbing just 4% since mid-April.

Zynga got off on the wrong foot this quarter, posting extremely weak first-quarter results back in April. Once reliant on Facebook (META -3.20%) for the vast majority of its revenue, Zynga has been transitioning toward other sources of revenue like advertising and in-game sales. Yet those efforts have been slow in producing results, as total sales fell 18%, and the company cut its guidance for future revenue and earnings as well.

Lately, though, shares have zoomed upward in a burst of optimism after former CEO Mark Pincus in stepped down in favor of Microsoft (MSFT -1.47%) alum Don Mattrick. Investors seem to believe that Mattrick can succeed where Pincus failed, yet Pincus still has voting control of the company. Moreover, it's unclear whether Mattrick's experience in helping Microsoft's Xbox gaming console become a significant moneymaker for the tech giant will be helpful in producing results in social and mobile gaming, where the path to monetization and profitability is very different.

Many investors believe that the legalization of online poker is Zynga's best chance at survival, given the 36 million monthly users of its Zynga Poker offering. Again, though, even with legalization efforts taking baby steps forward, it's still a long way off from becoming fully available nationwide. Moreover, established casino players Caesars Entertainment and MGM Resorts will inevitably be big competitors in the space, and Zynga can't count on certain success even if poker does become legal.

In the Zynga earnings report, look to see what the new CEO has to say about the company's strategy going forward. Without dramatic changes, it might take an even longer time than investors currently expect for Zynga to get its earnings back into the black.

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