Zynga shares sink after conservative earnings forecast

Zynga Inc. got little love on Valentine's Day from investors as the social gaming company saw its shares sink more than 5% after the release of its first quarterly financial results as a public company.

The San Francisco publisher of CastleVille and Words With Friends, played on Facebook and mobile devices, said Tuesday that revenue grew to $311.2 million in the fourth quarter ended Dec. 31, up 59% from $195.8 million a year earlier.

But because the company paid more than half a billion dollars in stock-based compensation to employees as a result of its Dec. 17 initial public offering of $1 billion, Zynga reported a net loss of $435 million, or $1.22 a share, compared with a $43-million profit, or 5 cents, a year earlier.

Excluding the one-time stock charge and other expenses, Zynga's net income was $37.2 million, or 5 cents a share — handily beating the expectations of Wall Street analysts polled by Thomson Financial, who had on average forecast $25.7 million in net income, or 3 cents a share.

But that was not good enough for investors, who were spooked by the company's conservative forecast for the first half of this year, said Michael Pachter, an analyst with Wedbush Securities.

"They guided to weaker sequential growth in the first half," Pachter said. "People didn't like that."

Zynga shares had surged 93 cents, or 7%, to close at $14.35 on Tuesday. But the stock fell 77 cents, or 5.4%, to $13.58 in extended trading after its earnings announcement.

Still, that's comfortably above Zynga's $10 IPO price. Though its stock market debut raised $1 billion in cash for the company last year, Zynga shares have traded below the initial offering price until Jan. 27, when the stock closed at $10.05. It has remained above the $10 mark ever since.

John Schappert, Zynga's chief operating officer, said in an interview that the company's cautious estimate for the first half of this year comes from how its games tend to make money. Instead of seeing a spike in revenue shortly after launching the way traditional games do, he suggested that Zynga's titles slowly grow their revenue over time as players become more engaged with the games.

"The games we launch now will see better monetization later in the year," Schappert said.

Zynga, which contributed 12% of Facebook's revenue last year, also relies on Facebook for its revenue. To wean itself away, Zynga has focused on growing its business outside of the social network. It recently signed a licensing deal with Hasbro Inc. to create toys based on Zynga's games. It also launched eight games for mobile devices last year, amassing a base of 15 million players who fire up one of its games each day.

Investors should not count Zynga out, said P.J. McNealy, an analyst with Digital World Research.

"They have what no other social gaming company has — a tight relationship and pole position with Facebook," McNealy said, "which likely means they have good sales and marketing leverage."


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