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Should You Buy Zynga Inc (ZNGA) After Its 11% Drop?

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A little over a month ago, I wondered if Zynga Inc (NASDAQ:ZNGA)‘s terrible first-quarter results had marked the beginning of the end for the social-gaming specialist.

After all, the stock had plummeted 9% that day after the company said bookings — their metric for tracking customers’ in-game virtual goods purchases — fell 30% year-over-year to just $229.8 million. What’s more, total revenue had fallen 18% to $261.3 million, and net income came in at meager $0.01 per share.


Worse yet, Zynga not only issued weak second-quarter sales guidance between $225 million and $235 million, but also told investors to expect a Q2 net loss between $36.5 million and $26.5 million, or between $0.05 and $0.03 per share. In addition, Zynga also said second-quarter bookings would likely be in the disappointing range of $180 million to $190 million.

Still, Zynga had managed to remain cash-flow positive for the quarter, with operating cash flow of $26.4 million and free cash flow of $23.2 million, and it still had $1.67 billion in cash remaining with no debt at the end of March.

Here’s why things just got worse
On Monday, Zynga Inc (NASDAQ:ZNGA) issued a press release which caused the stock to drop 11% and investors to wonder whether anyone realizes just how bad things have gotten for the otherwise cash-rich company.

The release, which was awkwardly titled “Zynga Announces Substantial Cost Reductions,” described how Zynga will close some of its various office locations and eliminate 520 employees — or around 18% of its total workforce — “across all functions” by August. As a result, though Zynga will incur restructuring charges of approximately $24 million to $26 million in the second quarter, the move should save the company between $70 and $80 million annually before taxes.

If that weren’t bad enough, Zynga Inc (NASDAQ:ZNGA) simultaneously lowered its Q2 guidance and now expects a net loss anywhere from $39 million to $28.5 million. Meanwhile, a strong showing from Zynga’s FarmVille franchise wasn’t enough to prop up bookings, which are now expected to be in the lower half of the previously supplied range.

Even so, Zynga reaffirmed all other guidance metrics including revenue, earnings per share, adjusted EBITDA, and non-GAAP earnings per share.

Don’t touch this house of cards
While the bulls may still be hanging onto a sliver of hope from the company’s foray into online gambling, I’m going to have to side with fellow Fool Michael Lewis, who pointed out last month plenty of hurdles still need to be overcome for Zynga to succeed in the space.

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