After Disappointing Reports, Zynga Bets on Draw Something 2

The company continues to lose money, employees and gamers, who no longer want to play its games. Analysts soberly warn that Zynga desperately needs a series of new mobile hits to improve its profitability and restore some of the luster of its earlier years. Earnings reports in recent quarters have been dismal.

This quarter was no exception. The company reported that its revenue was down 18 percent from the year-ago quarter, results that prompted shares to slip in after-hours trading. Zynga’s number of daily active users, or people who logged into its games once a day, dropped 21 percent. However, it did report a small profit.

But the company hopes that a new game, which it is releasing Wednesday evening, will be the beginning of a new chapter — one flush with profits and praise from users — that will help it regain some of the footing in the gaming industry that it helped shape.

The new game is a sequel to Draw Something, the popular, turn-based drawing game that has entertained millions of players who sketched images for their friends in a modified, touch-screen version of Pictionary. Last March, Zynga paid $180 million to buy Draw Something, which was created by a New York start-up, Omgpop. Then it watched as players lost interest in the once popular game and took their time elsewhere.

Although the company says the game still has millions of users worldwide, it is betting that the new version will bring back former fans who had become bored.

The success of Draw Something 2 is more about salvaging the remains of an expensive acquisition. It is a crucial test to see whether Zynga can spin any of its former traction on the Web to mobile — essential if the company wants to remain relevant and continue as a competitive gaming company in the future.

Richard Greenfield, an analyst at BTIG, a global trading firm, said it is normal for players to lose interest, especially when there is no shortage of games across an assortment of consoles, phones, tablets and hand-held devices. None of the top games currently charting in the iTunes App Store are games developed by Zynga, he said, but rather by relatively unknown upstarts.

“Why aren’t those Zynga games?” he said. “Why can’t they make great hits on mobile? They are saying they are a mobile-first company and, yet, they haven’t been able to launch a hit mobile game.”

For the new game, Zynga added new drawing tools and accessories as well as features that make Draw Something 2 more closely resemble a social network, with buttons to allow them to share their creation on Facebook, Twitter and Instagram. In addition, users can find and follow other people who are playing the game, browse their shared drawings and “like” and comment on them.

Zynga has also enlisted celebrities on this version of the game, including the pop performers Will.i.am and Carly Rae Jespen, so that their fans can see their drawings through the application as well.

“We want to reactivate people who played and loved Draw Something 1 but lapsed,” Travis Boatman, a senior vice president of mobile at Zynga, said in an interview at the company’s New York headquarters.

Zynga is going all out for the release of the new game, with a partnership with Universal Pictures around the coming animated film “Despicable Me 2” to show related advertisements in the game as well as base drawing challenges around the movie.

Caitlin Turosky, a marketing manager at Zynga, said advertising deals like that one had great potential. Zynga currently makes money by showing ads in the free versions of its games, by selling premium versions of its games and by allowing players to make in-app purchases. But eventually, Ms. Turosky said, the company could even show players advertisements based around the topics and objects they are sketching.

Zynga is also experimenting with games using real money , but those efforts are largely located in the United Kingdom.

In the company’s earnings report, it said it earned just a penny a share, or $263.6 million in revenue. During the same quarter of last year, the company reported revenue of $321 million. Even so, the company beat analysts’ expectations, who estimated that the social gaming giant would report revenue of $203 million and a loss of 4 cents a share. But Wall Street was unimpressed; the stock fell slightly in after-hours trading. The company also posted a modest profit of $4.1 million, compared with a loss of $85 million in the year-ago quarter.

“They’ve been going through a rough couple of quarters,” said Brian Blau, an analyst with Gartner Research who follows the company.

P&G Shares Fall After Forecast Misses Expectations

The news spooked investors who do not want to wait until 2014 for better sales increases. Shares of the world's largest household products maker fell as much as 6 percent after closing at an all-time high of $82.54 on Tuesday.

"There's a lot of frustration that they've been talking about a lot of actions they've been taking but we haven't really seen an acceleration in the sales growth," said David Blount, co-portfolio manager of the Growth & Income Fund at Eagle Asset Management, which includes P&G shares.

The company, maker of Pampers diapers, Gillette razors and many other products, has been under greater scrutiny to improve after cutting profit expectations in the past and learning that activist investor Bill Ackman invested in the stock.

Cincinnati-based P&G also posted a fiscal third-quarter profit on Wednesday that topped estimates despite sales that were weaker than both the company and analysts had anticipated.

Chief Executive Bob McDonald was roasted by analysts on a conference call a year ago when P&G gave a profit warning. While Wednesday's call was not as tense, analysts wanted to know why the company has not yet posted better sales growth more than a year into its turnaround.

P&G, which announced a $10 billion restructuring in February 2012, said that its push for more innovation means that several products such as new Iams pet foods and Olay skin creams will soon hit stores. After cutting billions of dollars in costs, along with eliminating hundreds of more jobs than anticipated, it will now spend more to promote those new goods and even to build the plants to produce them around the world.

FOURTH-QUARTER FORECAST

For the current fourth quarter ending in June, P&G said profit should fall to 69 cents to 77 cents per share, while analysts expected it to earn 81 cents per share, according to Thomson Reuters I/B/E/S. P&G earned 82 cents per share in the fourth quarter of fiscal 2012.

The company cited factors including weak market growth, higher marketing and other costs and volatility in Venezuela, Argentina, Egypt, Syria and South Korea.

Wednesday's fiscal third-quarter results were a sharp departure from the fiscal second quarter, when P&G raised its annual profit forecast and its shares jumped. On Wednesday, on the heels of the better-than-expected third quarter profit, it raised only the bottom end of its annual forecast range by 2 cents per share.

"They're still making progress, they're still on the right track, it is just going to be a little more slowly than what people expected," said Edward Jones analyst Jack Russo.

P&G insists that its forecast is "realistic, not conservative," especially given the headwinds it faces such as volatility in Venezuela and elsewhere, Chief Financial Officer Jon Moeller told analysts.

Along with spending on marketing to promote its new products, P&G is dealing with what it calls a "choppy" economic recovery, and sees a 1 to 2 percent impact on its sales this year from foreign exchange rates.

Its shares slid as low as $77.48 on Wednesday and were last trading down 4.7 percent at $78.05, wiping out nearly all of this month's gains. Shares of rivals such as Colgate-Palmolive Co and Kimberly-Clark Corp were down less than 2 percent.

JOB CUTS EXCEED GOAL

While products such as single-dose Tide Pods laundry detergent have boosted U.S. sales, P&G said it still needs to figure out the formula for getting products such as Pantene shampoo and Olay skin creams to stand out among competitors. Net sales decreased in the hair care and skin care business in the latest quarter.

P&G is taking the right steps by cutting costs, bringing out new products and growing in developing markets, but it is important for it to show progress in the beauty unit in the next quarter or two, said Russo.

P&G said it earned 99 cents per share on a core basis in the quarter ended in March, topping analysts' target of 96 cents. Core earnings exclude items such as restructuring charges.

Overall sales rose 2 percent to $20.598 billion while analysts were looking for sales of $20.73 billion. The company had forecast 3 to 4 percent in sales growth.

P&G's organic sales, which strip out the impact of divestitures and foreign exchange changes, grew 3 percent - at the low end of its forecast of 3 to 4 percent.

On a net basis, the company earned $2.57 billion, or 88 cents per share, in the fiscal third quarter. That was up from $2.41 billion, or 82 cents per share, a year earlier.

McDonald declined to comment on any discussions he may have been having with Ackman, who is known to push for change at companies in which he invests. Ackman's Pershing Square had a 1.02 percent stake in P&G, or 27.95 million shares, as of December, making it P&G's eighth-largest shareholder, according to Thomson Reuters data.

P&G said it now plans to repurchase $6 billion of its stock this year, at the high end of its prior forecast for $5 billion to $6 billion in buybacks. Last June, P&G decided to hold off on buybacks, but in August quickly reverted back to its usual plan.

P&G also said it had cut 6,250 jobs as of March 31, ahead of its goal to cut 5,700 jobs by the end of June.

(Reporting by Jessica Wohl; in Chicago; editing by Jeffrey Benkoe and Matthew Lewis)

P&G Shares Fall After Forecast Misses Expectations

The news spooked investors who do not want to wait until 2014 for better sales increases. Shares of the world's largest household products maker fell as much as 6 percent after closing at an all-time high of $82.54 on Tuesday.

"There's a lot of frustration that they've been talking about a lot of actions they've been taking but we haven't really seen an acceleration in the sales growth," said David Blount, co-portfolio manager of the Growth & Income Fund at Eagle Asset Management, which includes P&G shares.

The company, maker of Pampers diapers, Gillette razors and many other products, has been under greater scrutiny to improve after cutting profit expectations in the past and learning that activist investor Bill Ackman invested in the stock.

Cincinnati-based P&G also posted a fiscal third-quarter profit on Wednesday that topped estimates despite sales that were weaker than both the company and analysts had anticipated.

Chief Executive Bob McDonald was roasted by analysts on a conference call a year ago when P&G gave a profit warning. While Wednesday's call was not as tense, analysts wanted to know why the company has not yet posted better sales growth more than a year into its turnaround.

P&G, which announced a $10 billion restructuring in February 2012, said that its push for more innovation means that several products such as new Iams pet foods and Olay skin creams will soon hit stores. After cutting billions of dollars in costs, along with eliminating hundreds of more jobs than anticipated, it will now spend more to promote those new goods and even to build the plants to produce them around the world.

FOURTH-QUARTER FORECAST

For the current fourth quarter ending in June, P&G said profit should fall to 69 cents to 77 cents per share, while analysts expected it to earn 81 cents per share, according to Thomson Reuters I/B/E/S. P&G earned 82 cents per share in the fourth quarter of fiscal 2012.

The company cited factors including weak market growth, higher marketing and other costs and volatility in Venezuela, Argentina, Egypt, Syria and South Korea.

Wednesday's fiscal third-quarter results were a sharp departure from the fiscal second quarter, when P&G raised its annual profit forecast and its shares jumped. On Wednesday, on the heels of the better-than-expected third quarter profit, it raised only the bottom end of its annual forecast range by 2 cents per share.

"They're still making progress, they're still on the right track, it is just going to be a little more slowly than what people expected," said Edward Jones analyst Jack Russo.

P&G insists that its forecast is "realistic, not conservative," especially given the headwinds it faces such as volatility in Venezuela and elsewhere, Chief Financial Officer Jon Moeller told analysts.

Along with spending on marketing to promote its new products, P&G is dealing with what it calls a "choppy" economic recovery, and sees a 1 to 2 percent impact on its sales this year from foreign exchange rates.

Its shares slid as low as $77.48 on Wednesday and were last trading down 4.7 percent at $78.05, wiping out nearly all of this month's gains. Shares of rivals such as Colgate-Palmolive Co and Kimberly-Clark Corp were down less than 2 percent.

JOB CUTS EXCEED GOAL

While products such as single-dose Tide Pods laundry detergent have boosted U.S. sales, P&G said it still needs to figure out the formula for getting products such as Pantene shampoo and Olay skin creams to stand out among competitors. Net sales decreased in the hair care and skin care business in the latest quarter.

P&G is taking the right steps by cutting costs, bringing out new products and growing in developing markets, but it is important for it to show progress in the beauty unit in the next quarter or two, said Russo.

P&G said it earned 99 cents per share on a core basis in the quarter ended in March, topping analysts' target of 96 cents. Core earnings exclude items such as restructuring charges.

Overall sales rose 2 percent to $20.598 billion while analysts were looking for sales of $20.73 billion. The company had forecast 3 to 4 percent in sales growth.

P&G's organic sales, which strip out the impact of divestitures and foreign exchange changes, grew 3 percent - at the low end of its forecast of 3 to 4 percent.

On a net basis, the company earned $2.57 billion, or 88 cents per share, in the fiscal third quarter. That was up from $2.41 billion, or 82 cents per share, a year earlier.

McDonald declined to comment on any discussions he may have been having with Ackman, who is known to push for change at companies in which he invests. Ackman's Pershing Square had a 1.02 percent stake in P&G, or 27.95 million shares, as of December, making it P&G's eighth-largest shareholder, according to Thomson Reuters data.

P&G said it now plans to repurchase $6 billion of its stock this year, at the high end of its prior forecast for $5 billion to $6 billion in buybacks. Last June, P&G decided to hold off on buybacks, but in August quickly reverted back to its usual plan.

P&G also said it had cut 6,250 jobs as of March 31, ahead of its goal to cut 5,700 jobs by the end of June.

(Reporting by Jessica Wohl; in Chicago; editing by Jeffrey Benkoe and Matthew Lewis)

After Disappointing Reports, Zynga Bets on Draw Something 2

The company continues to lose money, employees and gamers, who no longer want to play its games. Analysts soberly warn that Zynga desperately needs a series of new mobile hits to improve its profitability and restore some of the luster of its earlier years. Earnings reports in recent quarters have been dismal.

This quarter was no exception. The company reported that its revenue was down 18 percent from the year-ago quarter, results that prompted shares to slip in after-hours trading. Zynga’s number of daily active users, or people who logged into its games once a day, dropped 21 percent. However, it did report a small profit.

But the company hopes that a new game, which it is releasing Wednesday evening, will be the beginning of a new chapter — one flush with profits and praise from users — that will help it regain some of the footing in the gaming industry that it helped shape.

The new game is a sequel to Draw Something, the popular, turn-based drawing game that has entertained millions of players who sketched images for their friends in a modified, touch-screen version of Pictionary. Last March, Zynga paid $180 million to buy Draw Something, which was created by a New York start-up, Omgpop. Then it watched as players lost interest in the once popular game and took their time elsewhere.

Although the company says the game still has millions of users worldwide, it is betting that the new version will bring back former fans who had become bored.

The success of Draw Something 2 is more about salvaging the remains of an expensive acquisition. It is a crucial test to see whether Zynga can spin any of its former traction on the Web to mobile — essential if the company wants to remain relevant and continue as a competitive gaming company in the future.

Richard Greenfield, an analyst at BTIG, a global trading firm, said it is normal for players to lose interest, especially when there is no shortage of games across an assortment of consoles, phones, tablets and hand-held devices. None of the top games currently charting in the iTunes App Store are games developed by Zynga, he said, but rather by relatively unknown upstarts.

“Why aren’t those Zynga games?” he said. “Why can’t they make great hits on mobile? They are saying they are a mobile-first company and, yet, they haven’t been able to launch a hit mobile game.”

For the new game, Zynga added new drawing tools and accessories as well as features that make Draw Something 2 more closely resemble a social network, with buttons to allow them to share their creation on Facebook, Twitter and Instagram. In addition, users can find and follow other people who are playing the game, browse their shared drawings and “like” and comment on them.

Zynga has also enlisted celebrities on this version of the game, including the pop performers Will.i.am and Carly Rae Jespen, so that their fans can see their drawings through the application as well.

“We want to reactivate people who played and loved Draw Something 1 but lapsed,” Travis Boatman, a senior vice president of mobile at Zynga, said in an interview at the company’s New York headquarters.

Zynga is going all out for the release of the new game, with a partnership with Universal Pictures around the coming animated film “Despicable Me 2” to show related advertisements in the game as well as base drawing challenges around the movie.

Caitlin Turosky, a marketing manager at Zynga, said advertising deals like that one had great potential. Zynga currently makes money by showing ads in the free versions of its games, by selling premium versions of its games and by allowing players to make in-app purchases. But eventually, Ms. Turosky said, the company could even show players advertisements based around the topics and objects they are sketching.

Zynga is also experimenting with games using real money , but those efforts are largely located in the United Kingdom.

In the company’s earnings report, it said it earned just a penny a share, or $263.6 million in revenue. During the same quarter of last year, the company reported revenue of $321 million. Even so, the company beat analysts’ expectations, who estimated that the social gaming giant would report revenue of $203 million and a loss of 4 cents a share. But Wall Street was unimpressed; the stock fell slightly in after-hours trading. The company also posted a modest profit of $4.1 million, compared with a loss of $85 million in the year-ago quarter.

“They’ve been going through a rough couple of quarters,” said Brian Blau, an analyst with Gartner Research who follows the company.