(BN) Zynga Shares Decline on Report of Growth in Users Seen as Less Lucrative

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Zynga Earnings Beat Estimates as Game Site Lures Users

April 27 (Bloomberg) -- Zynga Inc. had its biggest decline in two months after reporting that most of the growth in virtual goods sales is coming from mobile players -- who, according to analysts, tend to spend less on online games.

The majority of the growth in first-quarter bookings, or the total value of virtual goods sold, came from mobile games, San Francisco-based Zynga said in a statement yesterday. The company also reported a net loss, compared with profit a year earlier, amid rising expenses.

People who play Zynga's games on their handsets rather than traditional computers are less likely to splurge on so-called virtual goods, such as crops and tractor equipment in "FarmVille," said Arvind Bhatia, analyst at Sterne Agee & Leach Inc. in Dallas.

"Mobile is fine, but it doesn't monetize as well," Bhatia, who recommends selling Zynga shares and doesn't own them.

Mobile games generate about one-half to three-quarters as much revenue per daily user as Web-based social games, according to Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco, who rates Zynga "neutral."

Zynga fell 9.6 percent to $8.52 at the close in New York, for the largest decline since Feb. 15. The stock has dropped 15 percent since it began trading on Dec. 16.

Zynga, which raised $1 billion in a December initial public offering, has spent money expanding into new areas, such as mobile games, including its $180 million purchase of OMGPop Inc. in March. Operating costs almost doubled, surging 97 percent, to $406.6 million.

Swinging to Loss

That helps explain why the company swung to a net loss of $85.4 million, or 12 cents a share, from profit of $1.34 million, or break even, a year earlier.

Concerns over growth in mobile users outweighed evidence that the company is exceeding analysts' predictions in other areas. Sales rose 32 percent to $321 million, topping the average $315.9 million analyst estimate, according to data compiled by Bloomberg. Profit excluding some items was 6 cents a share, more than the 5-cent estimate.

Players who pay money increased 21 percent to 2.9 million from the fourth quarter, Zynga said.

"Only a small fraction of their user base pays them," said Rich Greenfield, analyst at BTIG LLC in New York, who recommends buying Zynga shares. This level of increase "in paying players is pretty significant."

Bookings were $329.2 million, up 15 percent from the first quarter of 2011.

Mobile's 'Early Days'

Zynga's mobile games, which include "Dream Heights" and "Words With Friends" were responsible for "the majority of bookings growth." Zynga said in the statement.

"I wouldn't say mobile is more difficult to monetize," Zynga Chief Operating Officer John Schappert said in an interview. "I would say that we're early days in mobile, and it's reminiscent of the early days of social gaming on the Web."

Six new games were offered in the first quarter, helping Zynga grow to 182 million monthly users, up 25 percent from the first quarter of last year.

Zynga raised its full-year 2012 bookings forecast to $1.43 billion to $1.5 billion, up from a February projection of $1.35 billion to $1.45 billion. Zynga also said it expects 2012 earnings, excluding some items of 23 cents to 29 cents a share, compared with a prior range of 24 cents to 28 cents.

Zynga said on a conference call that it increased the forecast because of the OMGPop acquisition.

Dependent on Facebook

Earlier this week, Facebook said 11 percent of its $1.06 billion in first-quarter revenue came from Zynga. Facebook, which takes a 30 percent cut from purchases of virtual goods within Zynga games, is expected to hold an IPO this year.

Zynga owns the six most popular games played on Facebook, according to AppData. CityVille, with 41.6 million monthly users and Texas HoldEm Poker, with 37.3 million users, top the social gaming charts. Draw Something, which Zynga acquired through its March purchase of OMGPop, is in third with 36 million users.

The company expects to spend hundreds of millions of dollars acquiring game developers over the next three to five years, Chief Executive Officer Mark Pincus told Bloomberg in an interview this month.

Zynga sold 49.5 million shares in a secondary offering of its shares on April 3. The terms of the share sale required the sellers, including Pincus, to agree to a longer lockup period that keeps them from unloading additional shares until as late as August, according to a filing.

To contact the reporter on this story: Douglas Macmillan in New York at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Eugene.