Zynga Inc. (
plunged 12.03% (41 cents) to $2.99 on June 3, after the social
game maker announced its decision to reduce its workforce by
18.0% (520 people). The workforce reduction exercise will be
implemented across all functions and is expected to be complete
by Aug 2013.
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According to the Wall Street Journal, the current plan will bring
down Zynga's staff level to 2,300 compared to approximately 2,700
at the time of its initial public offering in Dec 2011. Earlier
in Feb 2013, Zynga had announced a cost reduction plan, which
involved workforce reduction by 1%. In Oct 2012, Zynga trimmed
its workforce by 5% (150 people).
Zynga announced that it will incur a charge of $24.0 to $25.0
million in the second quarter and $2.0 to $5.0 million in the
third quarter related to the current plan. Zynga will also record
an estimated $15.0 million reversal of stock-based expense in the
second quarter due to this staff reduction.
Besides lowering staff count, Zynga also announced closure of
various office locations, similar to the February plan, when the
company streamlined its real estate assets and closed its
In February, Zynga closed McKinney, Texas and downtown Austin
offices, while in October it closed down its Boston office. As
per the current plan, Zynga will close down New York, Los Angeles
and Dallas offices. The whole process including 520 layoffs is
expected to save $70.0 to $80.0 million per year.
Zynga now projects net loss to be in the range of $39.0 to $28.5
million (prior guided range $36.5 million to $26.5 million) for
the second quarter. However, the major disappointment lies with
the revised guidance for bookings. Zynga now expects bookings to
be at the lower end of the prior guided range of $180.0 to $190.0
Zynga cited underperformance of games (except the
franchise) behind the lackluster bookings. In the first quarter,
bookings declined 30% from the year-ago quarter and 12.0% from
the previous quarter to $229.8 million. Lower
related bookings, which declined to 76% of total bookings also
negatively impacted results.
We believe that Zynga's sluggish penetration rate in the mobile
gaming segment has been the primary reason behind this lackluster
bookings growth. Although mobile bookings grew 21% in the first
quarter, it was not enough to offset the 37.0% decline in web
bookings, which include the amount of in-game virtual goods
purchases and advertisements sold.
Meanwhile, Zynga's cost-cutting initiatives resulted in a 34.0%
year-over-year decline in costs in the first quarter, which was
positive in our view. However, we believe that cost containment
cannot ensure sustainable profitability for which increase in
both bookings and customers is necessary.
As such we believe that Zynga needs to spend on developing mobile
resources to fend off competition from the likes of
Electronic Arts (
. Zynga's initiatives to expand in real money casino and poker
games across different platforms should act in its favor in the
near term. However, we believe that competition from
International Game Technology (
could be a possible headwind in this sector going forward.
Currently, Zynga has a Zacks Rank #3 (Hold).