FarmVille Maker Zynga Closes the Barn Door Too Late on Escaping Money
Zynga (ZNGA) hit investors with bad news from both sides on Tuesday.
First it was a grim memo announcing that the social gaming leader would be laying off 5% of its employees, closing down an office, scaling back its investments in The Ville, and suspending the development of 13 older titles.
The memo from CEO Mark Pincus to his employees came just around the time that Facebook (FB) was reporting better than expected results.
Zynga investors would typically be cheering a strong showing by the social networking website operator that hosts many of Zynga's most popular games. But peering under the Facebook hood doesn't show a lot of Zynga in the engine.
Facebook impressed investors with a 36% year-over-year surge in advertising revenue, and that's great news for Facebook since online ads make up 86% of its revenue. However, the "payments and other fees revenue" where Zynga factors heavily only grew by 13% over the past year, suffering a 9% sequential decline.
A Farewell to Farms
Pincus didn't single out the baker's dozen of older online games that will be put out to pasture, and that could be a problem for both players and employees.
Morale will take a hit until the dust settles. Gamers may be reluctant to invest time and possibly money in a Zynga game on Facebook or on a smartphone app that will be going away soon.
"This is the most painful part of an overall cost reduction plan that also includes significant cuts in spending on data hosting, advertising and outside services, primarily contractors," Pincus writes, alluding to other areas where the company will be shaving overhead.
Real Cash is Greater Than Virtual Cash
Zynga hasn't been doing well in recent months. Executives have been leaving. Sequels haven't shown the drawing power of their predecessors. Some titles are peaking too soon in popularity.
However, the one thing that Zynga investors can point to as a silver lining is that most of that money that the company raised by going public at $10 is still there. Seeing its stock shed roughly 75% of its value is rough, but now the company isn't trading for much more than the cash and equivalents on its balance sheet.
Coming off a rough few quarters and writing down half of the value of an ill-advised acquisition earlier this year are disappointing and humbling moves. But at least Zynga can say that it has the greenbacks to keep its social gaming dreams alive.
It may not be much, but for now it's about all that Zynga has to play with.
Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article. The Motley Fool owns shares of Facebook.
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