Zynga Explains Earnings Drought, Rallies Around Mobile Apps And Virtual Gambling -- With Real Cash

Zynga's logo walked into the boardroom with its tail between its legs today as the company presented its third quarter earnings. On the call, CEO Mark Pincus announced the company's plan to wrap a tight tourniquet around its ongoing losses.

How to turn things around? Pincus said development teams would cut costs even further, ramp up mobile app development, and pursue gaming models with higher engagement and monetization opportunities, namely by expanding into virtual casino games that pit players against eachother with real cash at stake.

In the third quarter, the company surpassed its own standards -- but that isn't saying a lot. Zynga reported $316 million in revenue, and lost $52.7 million, or 7 cents a share, beating out its own intentionally rock-bottom forecast of losing 12 to 14 cents per share on an estimated $305 million. In the same period last year, Zynga raked in $12.5 million in profits on $306 million in revenue.

What's more addictive than virtual farming? Gambling.

Beyond emphasizing mobile app launches, the company will get its hands dirty with "real money gaming." Through its partnership with online gambling company Bwin.Party, Zynga will launch U.K.- exclusive real money gambling games.

Real money gaming is a departure from the company's existing model, but not that much of one, all things considered. The kind of micro-transactions -- think buying virtual garden gnomes to decorate your digital farm with real cash -- that power Zynga's arsenal of casual games are already capitalizing on psychologically addictive models to have users turning their wallets inside out.

Moving into straight-up virtual gambling just subtracts the layer of artifice populated by digital denizens tilling the virtual fields. 

Out With The Old, In With The Profits

On the heels of yesterday's 5% workforce reduction, Zynga also announced that in order to remain afloat it would be "sunsetting 13 underperforming older games" and slowing development of The Ville, Zynga's copycat of publisher EA's endlessly remixed franchise The Sims. Pincus also noted that Zynga's Boston homebase would be shuttered, with tentative plans to follow suit with Zynga's Japan and UK studios.

According to an internal letter sent to the Zynga team yesterday by CEO Mark Pincus, "These reductions, along with our ongoing efforts to implement more stringent budget and resource allocation around new games and partner projects, will improve our profitability and allow us to reinvest in great games and our Zynga network on web and mobile."

Risky Reliance On Facebook

Unsurprisingly, Zynga's symbiotic relationship with Facebook is a noted earnings liability. The company noted its "relationship with Facebook" and potential unforseen "changes in the Facebook platform" as major risk revenue factors. Facebook-related earnings represent a whopping 80% of the company's total bookings, with mobile filling out the remaining 20%, so it's no surprise that Zynga is looking to tip the scales toward the latter. 

It probably doesn't help that Facebook made a distinction between the troubled Zyngaverse and the rest of its online gaming ecosystem in its own earnings call yesterday. As Zuckerberg snarked, "Overall, gaming on Facebook isn't doing as well as I'd like, but the reality is that there are actually two different stories playing out here. On the one hand, our payments revenue from Zynga decreased by 20 percent this quarter compared to last year. But the interesting thing is that the rest of the games ecosystem has actually been growing."

Ouch.

But Zynga doesn't only have Facebook to blame. Pincus admitted to lapses in game execution, mostly failing to innovate to keep players interested in major titles like CityVille and then being too slow to the market with new games to offset those drooping numbers. 

Oddly enough, Zynga's stock popped up a tiny bit after the earnings announcement. Then again, Wall Street now values the company at only $1.6 billion, which is about what it has in cash. Not exactly a vote of confidence.