4 Key Takeaways From This Game Company's Q2

Brandy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Zynga (NASDAQ: ZNGA) fell over 14% after hours Thursday following its second quarter report. The company has earned bad press since its IPO in 2011. But CEO Mark Pincus stepped aside this month to allow Microsoft's Don A. Mattrick to take over the reins

Mattrick has a long battle in front of him that will require a lot of reconstruction. Here are four key takeaways from Zynga's second quarter report that display the company's current rockiness. 

1. Active users, bookings took hits

Daily active users, or DAUs, fell a whopping 45% year-over-year, down to 39 million. Monthly active users decreased 39% to 187 million. And monthly unique users were down 36% to 123 million.

Bookings are how Zynga counts its in-game revenues, which are how the company makes most of its money. The second quarter featured a bookings drop of 38% year-over-year, down to $188 million.

These numbers fuel Zynga’s most important metric -- ABPU.

2. ABPU rose 14%

I’ve previously detailed the importance of Zynga’s average bookings per user. ABPU declined for five consecutive quarters starting with the third quarter of 2011. But a slight rebound began in the fourth quarter last year. The newly reported second quarter ABPU was up 14% year-over-year and 6% on the quarter.

ABPU rose despite the fact that bookings and active users took double-digit percentage hits in this quarter. Zynga may have fewer players, but more seem willing to make in-game purchases. The ABPU still needs a growth spurt to truly help Zynga, but this is definitely a good start.

2. No plans for U.S. “real money” games

The potential to launch real money casino-style games was once a buoying possibility for Zynga. U.S. legislation stood in the way, but there was a chance that would reverse with time. But Zynga announced this quarter that it’s abandoning plans to pursue that route domestically, but will continue to explore its options overseas. 

The U.S. abandonment is particularly surprising considering that Zynga finalized the acquisition of Spooky Cool Labs this quarter. Spooky Cool’s team is full of real money gaming experience, though it’s true that Zynga will also get access to some Wizard of Oz based titles in the deal. But cost likely fueled Zynga’s change in plans. The company is on a major cost-cutting mission that trimmed over 500 jobs and closed several offices this quarter. Abandoning the real money route also allows the company to focus more on developing better free-to-play games that will attract more users.

3. Zynga platform’s low usage

Zynga and Facebook (NASDAQ: FB) have close enough ties that one stock’s movement usually triggers the other. Facebook receives a cut of the in-game money Zynga earns through the Facebook platform. Zynga decided to create its own platform to try to cut out that middleman. The project was troubled from the start considering new platform’s games still required a Facebook login and used the social network’s proprietary Credits payment, which have since phased out.

The Zynga.com platform relaunched in May and allowed users to create logins there instead of rerouting through Facebook. But member numbers are still low. The second quarter marked the first full quarter since the relaunch, and MAUs totaled a mere 4.2 million. It doesn’t look like users want to play Zynga games away from Facebook.

4. Mixed bag of game launches

Hidden Shadows is a Facebook game that continues Zynga’s habit of creating new, slightly altered versions of existing games. Shadows is a take on Pretty Simple’s Criminal Case -- a hidden objects game that’s currently the second most popular Facebook game, behind only King’s Candy Crush Saga.

The remaining games were launched on mobile platforms. These include a Draw Something sequel, running game Running with Friends, card battle game War of the Fallen, multiplayer online battle arena Solstice Arena and Arcade action game Battlestone.

It’ll take another quarter to see how players take to these new titles. But the second quarter membership drops indicate that Zynga hasn’t had enough games attracting solid user bases. The company can’t survive on the popularity of FarmVille 2 and the six-year-old Texas Hold ‘Em.

Zynga can’t afford to release middling games right now. Candy Crush Saga has over 45 million MAUs according to AppData, compared to over 27 million for FarmVille 2. One of the fastest rising Facebook games is Plants vs. Zombie Adventures from Electronic Arts (NASDAQ: EA). That title added nearly 2 million MAUS this past week alone and is a spin-off from a wildly popular PC game that’s inspired merchandising. Zynga needs more games driving that level of player excitement. 

Foolish final thoughts

The only good news for Zynga this month was the change in leadership and the second quarter rise in ABPU. Game development needs an overhaul to titles that have a better chance at wide popularity. It’s possible that the company can spend the year in construction and emerge next year washed clean. But it’ll take a while to make investors believers.

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