The social games maker hailed a year ago as part of a new generation of hot consumer Internet companies acknowledged on Thursday that it is still struggling to stem user flight from Facebook titles like "CityVille" and "FarmVille" that had once driven revenue growth.
Zynga, which went public to much fanfare in December but has since lost three-quarters of its market value, has also been hit by delays in its game pipeline as older titles fade, while it has struggled to come up with new hits for mobile devices.
With its top line shrinking, the San Francisco-based company's chief executive, Mark Pincus, told employees in a memo that he was disappointed by the results but urged his staff not to lose sight of the bigger picture.
"We're addressing these near-term challenges by targeted cost reductions and focusing our new game pipeline to reflect our strategic priorities. At the same time, we are continuing to invest in our mobile business," Pincus, who named the company after his late bulldog, said in the memo.
Zynga cut its third-quarter earnings outlook to a loss after swallowing an $85 million to $95 million charge related to its $182 million acquisition in March for OMGPOP, a New York game studio that failed to replicate the success of "Draw Something," its main hit.
Sterne Agee analyst Arvind Bhatia said Wall Street was stunned by the magnitude of the outlook reduction, and foresaw more layoffs in the offing as the company tries to shore up its bottom line.
"I don't think this bodes well for next year because they're going to exit the year with declining revenue and declining EBITDA," Bhatia said. "They've got 3,000 plus people and for the level of revenue they're generating, we should expect massive layoffs at Zynga."
Shares of Zynga plunged 22 percent to $2.19 on Thursday, after trade had briefly been halted following the announcement. Facebook Inc, which derives over one-tenth of its revenue from fees paid by Zynga, fell 1.8 percent in extended trade to $21.56.
Zynga is due to report quarterly results in three weeks. For the third quarter, the company estimated a loss of 12 cents to 14 cents per share.
Zynga forecast 2012 adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of $147 million to $162 million, versus its previous outlook for $180 million to $250 million.
Bookings an indicator of future sales were projected at $1.085 billion to $1.1 billion, down sharply from a previously predicted $1.15 billion to $1.225 billion.
Thursday's announcement came after Zynga had cut its 2012 earnings-per-share forecast during its earnings call in late July. On that occasion, its shares plummeted 40 percent, triggering a number of potential lawsuits from shareholders incensed over how they were given little warning.
The precipitous share-price plunge from a high of $14.69 in March has dented employee morale. Zynga has also been shaken by a number of executive departures, including that of Chief Operating Officer John Schappert.
In his memo to employees, Pincus urged them to take heart and said the company would address its decline, while highlighting efforts to invest further in mobile and competitive games like "Mafia Wars."
"Let's not lose sight of the bigger picture. The world is playing games, and is increasingly choosing social games," he wrote.
Copyright Thomson Reuters 2012