Zynga folds on U.S. online gambling bet, shares fall
The most notable news in Zynga's earnings release had nothing to do with earnings: The company is no longer pursuing online gambling—a category that Wall Street analysts perceived as having huge potential.
This is a distinct turnaround from the company's prior stance of pursing the potential for real-money gaming in the U.S., applying for various licenses. This news comes 15 days after Don Mattrick took over as CEO from now-chairman Mark Pincus but sources say the decision wasn't entirely up to Mattrick — it was the whole executive team and the board.
Zynga shares fell 14 percent Friday to close at $3.01 on the Nasdaq Stock Market.
On the earnings call, Chief Operating Officer David Ko and Pincus took the lead on the real-money gaming questions—indicating that this decision precedes Mattrick's arrival. They reiterated that the decision not to pursue online gambling was all about one word — focus — a persistent theme on the earnings call. Pincus and Mattrick reiterated that Zynga's focus is free-to-play social games.
(Read More: Can the man behind Xbox save Zynga?)
That focus is on making Zynga a mobile-first company. Instead of making social games for the desktop, Pincus says the challenge is to put mobile first. Mobile represented 27 percent of Zynga's bookings in the second quarter, up from 19 percent a year ago, but that growth still wasn't enough to compensate for overall declines. Mattrick indicated that he has the chops to help Zynga in this shift, saying "I've been involved in dozens of platform transitions."
The other main theme on the earnings call: Zynga's current failure and the fact that it'll take two to four quarters of volatility before the company's back on track. Instead of defending the company's results, Mattrick took the lead in laying out just how much work Zynga has to do. In his opening comments he said that Zynga is missing out on the growth other internet companies are seeing, and said, "we can do better."
COO Ko really hammered home how poor Zynga's track record has been, calling its recent performance "disappointing," and saying "these results are unacceptable." He also talked about just how big the market is, saying "we haven't been executing against this market opportunity."
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Zynga earnings beat expectations, though the number of monthly and daily active users declined more than expected. Earnings per share came in at a loss of one cent, three cents better than the loss Wall Street expected, but still down from the year-ago gain of one penny per share. The revenue number Wall Street focuses on, "bookings," declined 38 percent from the year-earlier quarter.
The game maker reported unexpectedly large declines in users. The number of daily active users declined 45 percent from a year ago to 39 million, nearly 9 million fewer users in the quarter than Wall Street analysts expected. The number of monthly active users declined nearly as much, off 39 percent from a year ago to 187 million—that's 37 million fewer than Wall Street expected.
More bad news: the number of people paying to play decreased 53 percent from a year ago to just 1.9 million. And all of these numbers weren't just down dramatically from a year ago, they are also all significant double digit declines between the first and second quarter. One tiny sliver of good news: The amount that average daily users paid on average increased 14 percent from a year ago.
The problem: many fewer people are playing, and fewer people are paying to play, so the fact that some of those people are paying more to play is not enough to be a game-changer.
Mattrick revealed the heart of the company's failure — it's inability to keep up with competition — in an answer to a question about rival game maker King. When asked why Zynga doesn't slim down to King's size, he said. "They've done a great job, I'll admit I'm a Candy Crush player…. Imagine if we could get the leverage out of our 2,300 people that King's getting out of its 400 people."
It's understandable that Mattrick wants to ramp up productivity, but it's a problem when the most addictive new casual game is made by a competitor. All those engineers can be productive, but they need to turn out that very variety of addictive hit, which can be just as much art and luck as it is productivity.
—By CNBC's Julia Boorstin. Follow her on Twitter: