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Why Zynga Inc (ZNGA) Earnings Are Headed Back Into the Red

Zynga Inc (NASDAQ:ZNGA) will release its quarterly report on Thursday, and investors should be prepared for another round of tough results. The company has gone through a lot over the past few years, as big losses almost right out of the gate after its IPO have pressured Zynga Inc (NASDAQ:ZNGA) to produce better results. Yet at least for now, Zynga Inc (NASDAQ:ZNGA) earnings look like they’ll stay negative for the foreseeable future until the company’s turnaround plan has longer to run its course.

Zynga Inc (NASDAQ:ZNGA)Zynga Inc (NASDAQ:ZNGA) looked like the most promising company in the social-gaming space, and even now, the company still has some lucrative opportunities. Yet the evolution of the social-gaming industry has sapped some of the company’s growth prospects, and it’s unclear whether Zynga Inc (NASDAQ:ZNGA) will be able to capitalize on the ones that remain. Let’s take an early look at what’s been happening with Zynga Inc (NASDAQ:ZNGA) over the past quarter and what we’re likely to see in its report.

Stats on Zynga

Analyst EPS Estimate ($0.04)
Year-Ago EPS $0.01
Revenue Estimate $185.42 million
Change From Year-Ago Revenue (38.5%)
Earnings Beats in Past 4 Quarters 2

Source: Yahoo! Finance.

How much will Zynga earnings fall this quarter?
In recent months, analysts have gotten less excited about Zynga’s prospects, quadrupling their loss estimates for the June quarter and marking down their calls for next year from an expected $0.02-per-share profit to break-even. The stock is off its lows, but it hasn’t managed to post a meaningful recovery, climbing just 4% since mid-April.

Zynga got off on the wrong foot this quarter, posting extremely weak first-quarter results back in April. Once reliant on Facebook Inc (NASDAQ:FB) for the vast majority of its revenue, Zynga has been transitioning toward other sources of revenue like advertising and in-game sales. Yet those efforts have been slow in producing results, as total sales fell 18%, and the company cut its guidance for future revenue and earnings as well.

Lately, though, shares have zoomed upward in a burst of optimism after former CEO Mark Pincus in stepped down in favor of Microsoft Corporation (NASDAQ:MSFT) alum Don Mattrick. Investors seem to believe that Mattrick can succeed where Pincus failed, yet Pincus still has voting control of the company. Moreover, it’s unclear whether Mattrick’s experience in helping Microsoft Corporation (NASDAQ:MSFT)’s Xbox gaming console become a significant moneymaker for the tech giant will be helpful in producing results in social and mobile gaming, where the path to monetization and profitability is very different.

Many investors believe that the legalization of online poker is Zynga’s best chance at survival, given the 36 million monthly users of its Zynga Poker offering. Again, though, even with legalization efforts taking baby steps forward, it’s still a long way off from becoming fully available nationwide. Moreover, established casino players Caesars Entertainment Corp (NASDAQ:CZR) and MGM Resorts International (NYSE:MGM) will inevitably be big competitors in the space, and Zynga can’t count on certain success even if poker does become legal.

In the Zynga earnings report, look to see what the new CEO has to say about the company’s strategy going forward. Without dramatic changes, it might take an even longer time than investors currently expect for Zynga to get its earnings back into the black.

The article Why Zynga Earnings Are Headed Back Into the Red originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook and Microsoft.

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