Zynga Turns In Lackluster Quarter, But Points to Growing Ad Business

Ad Revenue Is Now 12.3% of Zynga's Business

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Zynga's stock fell hard, down 37% in after-hours trading after reporting lackluster second-quarter numbers, but CEO Mark Pincus pointed to two glimmers of light: real-money gaming starting in 2013 and a still-tiny but fast-growing ad business.

Mark Pincus
Mark Pincus

Neither of these will make a difference if Zynga can't retain users to its stable of popular games like Zynga Poker, Farmville and Bubble Safari. The company reported a loss of $22 .8 million on total revenue of $332.5 million, up 19% from a year ago.

In an earnings call this afternoon, Mr. Pincus attributed declines in engagement and bookings (an internal term referring to the value of virtual goods sold) in the second quarter in part to changes on the Facebook platform that diminished the visibility of active games relative to new games, the late debut of The Ville and the significant drop-off in daily active users of Draw Something (which Zynga bought, along with OMGPOP, the company that created it, for $180 million in March.)

Daily active users had actually declined over the course of the quarter, which Chief Financial Officer Dave Wehner attributed to the Facebook changes on the web side and to the user exodus from Draw Something on the mobile side.

As a result of the lackluster quarter, Zynga changed its 2012 projected bookings (or value of virtual goods sold) to $1.15 billion to $1.225 billion, sharply down from earlier projections of $1.425 billion to $1.5 billion.

In a quarter where Mr. Pincus was looking for a growth story, he singled out advertising. Zynga's advertising revenue for the quarter ending June 30 was $40.9 million, up 45% from $28.2 million the previous quarter and up 170% year over year, and the kinds of ads players see vary wildly from game to game. In CityVille, it's meant allowing players to integrate a virtual Best Buy into their city with the promise of virtual goods in return, while on Words With Friends, it looks more like traditional (spammy) pop-up ads.

On Draw Something, it means inserting advertisers' paid terms into the game for users to draw. (The National Hockey League was among the first advertisers to buy terms related to hockey, like puck and Zamboni.)

Making up 12.3% of Zynga's revenue this past quarter (compared to 9% in the first quarter), advertising will likely become a crucial revenue stream for the company, which still relies on the sale of virtual goods, a business that investors have shown ambivalence toward amid questions about Zynga being able to hold on to its user base.

However, Mr. Pincus expressed optimism for the long-term prospects of Zynga With Friends, a cross-platform experience that the company announced in June that will enable users to play games across platforms including Facebook, iOS, Android and Zynga.com (which would presumably reduce the company's co-dependence on Facebook). He said it would become available in beta for players and third-party developers this year, and that Zynga intends to roll out real-money gaming in international marketing in the first half of 2013, subject to licensing.

In the mid-term, Mr. Pincus said he hopes for mobile monetization to improve, pointing to the success of Zynga's No. 1 game, Zynga Poker on mobile.

"We see no structural reason for why [Zynga] can't monetize as well on mobile as it does on the web in the long term," Mr. Pincus said.

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