Beset by Losses, Zynga Takes a Gamble - WSJ.com

Beset by Losses, Zynga Takes a Gamble - WSJ.com

By JOHN LETZING And EVELYN M. RUSLI

Zynga Inc. ZNGA -3.33% announced its first major step toward real-money gambling, grasping for new growth amid turmoil that includes losses and layoffs for the social games specialist.

The San Francisco company said it will partner with bwin.party Digital Entertainment PLC to offer real-money poker and hundreds of casino-style games in the U.K. during the first half of next year.

After Zynga Inc. posted an expected loss for the third quarter and announced an online gambling deal in the U.K. Wednesday the gaming company's downtrodden shares were up in after-hours trades. MarketWatch's Dan Gallagher and David Weidner discuss whether the new deal could help Zynga get back its mojo. (Photo: AP)

Zynga, as expected, on Wednesday also posted a loss for its third quarter, which included a large write-down of a recent acquisition. But Zynga's gambling partnership, and a move to authorize up to $200 million in share repurchases, sent the company's shares up sharply in after-hours trading.

The company's stock had fallen more than 77% in the year to date as of 4 p.m. Wednesday, when it traded at $2.13, off seven cents. But the shares jumped nearly 12% after its announcements.

Zynga, of San Francisco, is known for simple, online games like "Farmville" that are often played by users of Facebook Inc.'s FB +16.06% social network. It also offers games like poker in which players can buy in with real money, but only obtain virtual chips in return.

Online gambling is legal in some countries. The U.S., however, represents a potential legal quagmire, since each state has different laws and taxes for the gambling industry. As the popularity of its Facebook games has dimmed, however, Zynga has pushed more resources into trying to understand the heavily regulated real-money gambling market.

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Stephen Lam/Reuters

Zynga CEO Mark Pincus

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Over the past year, senior executives, such as David Ko, Zynga's head of mobile, and Reginald Davis, the company's general counsel, have met with executives from gambling companies, such as Wynn ResortsWYNN -1.82% and MGM Resorts International, MGM -0.93% according to former employees with knowledge of the matter.

In August, Zynga hired Maytal Ginzburg, an executive at 888 Holdings,888.LN -0.37% a real-money gambling site, to be its chief operating officer of "New Markets."

Barry Cottle, the company's vice president of corporate and business development, said working with "an established leader like bwin.party is a strategic and prudent way for us to enter a key [real-money gambling] market."

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Many investors and analysts covering the company have long anticipated a move by Zynga into real-money gambling.

"Now we have information that this is real, and they should be generating some meaningful revenues from it hopefully by the second half of next year," said Colin Sebastian, a R.W. Baird analyst, who called bwin.party "a legitimate player."

But Ben Schachter, an analyst with Macquarie Securities, said it will take time for Zynga to prove it can translate its user base of poker players into real-money gamblers.

Zynga's move in the U.K. comes as the company struggles to continue generating the buzz for its social games it had in its early days. New titles like "FarmVille 2," a sequel to its flagship "FarmVille" game, have garnered millions of daily users but failed to instill much confidence.

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Bloomberg News

New games like Zynga's sequel to its flagship 'FarmVille' have garnered millions of daily users but failed to instill much confidence.

That's because even as more users try Zynga games, they are generally spending less on the virtual goods available within those games. On Wednesday, Zynga posted third-quarter results showing that its average daily bookings, or revenue, per daily user fell 19% in the period from the same quarter last year.

Zynga reported a loss for the third quarter of $52.7 million, or seven cents a share, compared with a year-earlier profit of $12.5 million, or less than a penny a share. The latest period included a write-down of about $95.5 million related to the $183 million acquisition of OMGPOP in March.

Excluding stock-based compensation costs and other items, the per-share loss was less than a penny a share.

Revenue bookings, or the actual value of virtual goods Zynga sells in games, fell 11% to $255.6 million. The company earlier this month predicted per-share adjusted results between break-even and a loss of a penny and bookings to be between $250 million and $255 million.

—Ben Fox Rubin contributed to this article.

Write to John Letzing at john.letzing@dowjones.com and Evelyn M. Rusli atevelyn.rusli@wsj.com

A version of this article appeared October 25, 2012, on page B7 in the U.S. edition of The Wall Street Journal, with the headline: Beset by Losses, Zynga Gambles.