Zynga abandons plans for US gambling licence

The Farmville and Zynga Poker creator posted a us$15.8m loss in the three months to June 30, as revenues shrank 38pc to us$ 230.7m from the same period last year and the number of people playing Zynga games daily plunged 45pc to 39m.

Although the loss was less than expected, trading as the company said it had made a “focused choice” not to pursue a US gaming licence that would have involved the exchange of real money, which would have provided a potentially lucrative source of revenue.

In his first public comments since replacing founder Mark Pincus as CEO on July 1, Don Mattrick told Wall Street analysts that he needed at least three months to thoroughly review Zynga’s roadmap. Mattrick said the company would continue to “evaluate all of its priorities against the growing market opportunity in free, social gaming, including social casino offerings.”

He intended to take the company “back to basics” with an emphasis on free-to-play games on Apple’s iOS and Google’s Android mobile devices, as well as tried-and-true franchises like FarmVille, Mattrick said.

“It’s clear that the market opportunity around us is growing at an incredible clip,” the former Microsoft Corp Xbox boss said. “It’s also clear that today we are missing out on the platform growth that Apple, Google and Facebook are seeing. In short, we can do better.”

The company said it was still testing a gambling product in the United Kingdom, where it announced a tie-up with London-listed online gambling company bwin.party last October.

Zynga has cut loose unpopular games and has been investing in titles for smartphones and tablets, as well as its own gaming platform at zynga.com.

News that Zynga folded its gambling efforts marks a departure from most of the past year, when Pincus, himself a poker aficionado, assured investors that Zynga could tap into a potentially lucrative new revenue stream by launching real-money casino games around the world even as its key games fell into decline.

The gambling effort kicked off this year in Britain, where such games are highly regulated. But real-money gaming continues to be illegal in many U.S. states, despite signs that state regulators will begin to permit games such as poker. Zynga, whose first game was an online version of poker, could have wound up in a regulatory tangle for months, if not years, while it sought a license.

Analysts, while acknowledging the difficulty in obtaining gambling licenses, were nevertheless puzzled by Zynga’s decision. “It’s not like applying to a driver’s license. They can turn you down, they can stretch you out,” said Sean McGowan, an analyst at Needham & Company. “But it’s not impossible.” By giving up on real money gambling, “they’re capping their upside considerably,” he said.

Zynga’s announcement heightened the scrutiny on the continued performance of core games like FarmVille and its broader corporate strategy.

Zynga’s public market debut in December 2011 was among the most anticipated of the year, but in just the past year or two, its business model has crumbled as it increasingly lost online gamers to rivals more adept at designing for mobile devices or catering to a fickle, younger crowd.

Pincus over the past year has enacted multiple rounds of layoffs to preserve Zynga’s bottom line, but he has failed to arrest its steep decline in revenue. Several months ago, with the encouragement of Kleiner Perkins Caufield & Byers, the venture capital firm and major shareholder, Pincus began preparing to step aside for Mattrick while he turns his focus to games.

Mattrick and other top executives said Thursday they did not intend to aggressively continue cost-cutting under the new regime. While fierce rivals like European-based publisher King.com has overtaken Zynga on the Facebook (FB.O) platform with far fewer employees, Mattrick dismissed the possibility of any imminent layoffs, saying he would examine how the company can turn its size into a competitive advantage in the long term. “I see a lot of opportunity in having the collection of people we’ve assembled,” he said. Zynga’s results Thursday suggested it had at least come to grips with setting appropriately low expectations for investors.

Excluding certain items, Zynga posted a 1 cent per share loss, compared with a 1 cent profit a year ago. That was better than the 4 cent loss analysts expected, according to Thomson Reuters I/B/E/S. Zynga reported us$231 million in quarterly revenue on Thursday, a 31 % decline from a year ago.

The number of active monthly players dropped to 187 million this quarter from 306 million a year ago, its lowest since mid-2010. The company, which has acknowledged fundamental problems with its business model, went public in December 2011 at usus$10 a share.

Zynga reported us$188 million in bookings, which is a measure of the value of virtual goods bought by players during the three-month period ending June 30. That is a 38 % drop from us$302 million a year earlier.