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Zynga pleas for time on turnaround as loss forecast knocks shares

The corporate logo of Zynga Inc, the social network game development company, is shown at its headquarters in San Francisco, California Apri
The corporate logo of Zynga Inc, the social network game development company, is shown at its headquarters in San Francisco, California Apri

By Gerry Shih

SAN FRANCISCO (Reuters) - Zynga Inc's management on Wednesday pleaded for more time for its turnaround effort after the online game maker forecast a steeper-than-expected loss for the current quarter, sending its shares lower.

The embattled publisher behind games such as "FarmVille" and "Words With Friends" reported a surprise profit for its latest quarter through steep cost-cutting, but Chief Executive Mark Pincus said Zynga's business, although stabilized, may not pick up until the latter half of the year.

The company also reported a 13 percent slide in monthly figures for the number of people playing its games.

"We know that 2013 is a year of transition," Pincus told analysts on a conference call. "We continue to expect non-linear, uneven results."

On an adjusted basis, Zynga reported earnings of 1 cent per share, beating analyst expectations of a loss of 4 cents per share. But the company also projected a second-quarter loss between 3 and 5 cents per share, exceeding the 1 cent per share loss analysts had expected.

The results and Zynga's forecast sent its shares 9 percent lower to $3.05 in extended trading.

Over the past 12 months, Zynga's shares have shed two-thirds of their value while investors have watched the company struggle to keep hold of gamers who once flocked to its games on Facebook Inc's website.

"While we recognize the decline in the user base on a macro level, we have the pipeline coming down," Barry Cottle, the company's chief revenue officer, said in an interview. "That's going to happen over a period of time, not something that happens in a quarter."

The company aims to build up its business with gamers on smartphones as it loses users on PCs, but doubts remain over whether this can sustain its revenues and profits.

In recent months, Zynga and Facebook have revised their business partnership, as the game company sought to establish a more independent network even at the risk of getting less visitor traffic from the social media giant.

Over the past year, Zynga's monthly players have fallen to 253 million from 292 million, while its number of monthly paying users shrank to 2.5 million from 3.5 million, the company said.

"The stock is down because of the guidance," said Sterne Agee analyst Arvind Bhatia.

But in the long term, he added: "We continue to think that any hope for real growth for this nebulous company really depends on what it can do in real-money gaming."

REAL-MONEY POTENTIAL

In past quarters, Zynga has promised investors that it could tap into a potentially lucrative new revenue stream by launching real-money casino games around the world. The effort kicked off in the last quarter in Britain, where such games are highly regulated.

But executives on Wednesday stayed largely mum about the progress of its real-money inroads in other markets, saying that it could be at least months before Zynga could begin any meaningful operations in the United States, where real-money gambling is illegal in many states.

"We can't tell you when the regulatory environment will let us test that audience," Pincus said.

Other analysts said it was unrealistic to consider the talk about real-money gaming as anything but a long-shot for the coming years.

"They're kind of in dream mode here as they go through the process of trying to materialize the business," said Mike Hickey, an analyst at National Alliance Capital Markets.

"They started with partnering in the UK market, which is probably at least a year from ever being material."

Zynga executives blamed their eroding user base on gamers abandoning computers for mobile devices, but pledged to recapture the market once it releases its slate of mobile games due out later this year.

In the meantime, the company will continue to rely on its brand-name franchises, such as its aging but still-robust "FarmVille" series, to generate sales from both mobile and desktop users.

Executives argued that Zynga, which has been the most popular game publisher for Apple Inc's iPhone, would be better placed than rivals with its independent gaming network to generate game downloads.

"Discoverability becomes such an important factor in how apps are found," Cottle said. "If you look at challenges in mobile, it gives us a distribution advantage in the marketplace."

Still, it was unclear if the company would be able to wring as much revenue from mobile users as it had from desktop gamers, analysts said.

"The majority of their games are lower-monetizing experiences on mobile platforms," Hickey said. "Certainly they've attracted a large audience but it's hard to get much money from that audience."

The company now derives 22 percent of its revenue from its mobile platform, compared with 12 percent a year ago, but that share remains modest compared with similarly sized technology companies such as Twitter Inc, which gets more than half of its revenue from mobile users.

On Wednesday, Zynga reported revenue of $263.6 million, down 18 percent from the year-ago quarter.

For the full year, the company projected that it could be narrowly profitable.

"If we launch the right games and get the right sort of engagement, there's an opportunity that revenues will go up as well," Chief Financial Officer Mark Vranesh said. "2013 is going to be bumpy. It's going to be hard to predict."

(Reporting By Gerry Shih and Malathi Nayak; Editing by Leslie Adler, David Gregorio and Edmund Klamann)

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