Zynga Announces 18 Percent Layoff of Workforce as Shares Plummet, Analysts Defend the Stock

Mobile app maker Zynga ZNGA Monday announced that it was reducing its head count by about 18 percent and closing offices in an attempt to reduce costs. The company has been fighting stagnating revenue and is cutting costs to boost profitability. Shares tumbled 12 percent on the news.

Cost Reductions

Zynga expects to complete a reduction in force of approximately 520 employees or approximately 18% of its global workforce. The workforce reduction will occur across all functions and is expected to be substantially complete by August 2013.

The layoffs will have a direct impact on the bottom line for Zynga as well. The costs of the restructuring are expected to be $24-$26 million in the second quarter and $2-$5 million in the third quarter. Zynga also expects to record an estimated $15 million reversal of stock-based expense in the second quarter of 2013 as a result of the net impact of these workforce reductions.

Updated Outlook

As part of the release, the company updated its guidance for the second quarter of 2013. Zynga now expects that its quarterly loss for the second quarter will be between $28.5 million and $39 million, or $0.035-$0.49 per share. Analysts surveyed by Reuters expect the quarterly loss to be $0.03 per share.

The company did reaffirm its guidance for the full year in the release. Analysts expect that the company will lose $0.04 per share for the year with revenue declining to $859.49 million from $1.15 billion in the prior year.

Zynga also noted that bookings for the year are projected to be in the lower half of the range guided in its last earnings release in April. The company highlighted that Farmville continues to perform well while other products are lagging.

Analysts Defense

Analysts at Needham and Co. defended the stock after the announcement, suggesting that investors should buy the stock on the weakness from Monday. Needham has a Buy rating and a $4 price target on the stock, representing 33 percent upside from Monday's close.

"ZNGA announced an 18% reduction in headcount on Monday as part of an ongoing effort to cut costs. In addition to the layoffs the company is closing several office locations; management expects the cuts to save ~$70-$80mm annually. While ZNGA had hinted at further headcount reductions during the 1Q conference call, Monday's announcement was further confirmation that the company is streamlining costs as it shifts focus towards mobile games."

"Management expects 2Q bookings to be in the lower half of previous guidance ($180mm-$190mm) due to poor performance in non-Farmville titles. The company re-affirmed 2Q guidance for revenues, EPS, adj-EBITDA, and NG EPS. Management reiterated FY EBITDA margin guidance of 0-10%."

"Several news outlets were reporting that Zynga was closing its New York development studio—Draw Something developer OMGPOP—which, if confirmed, would represent a disappointing end to the company's $200mm acquisition. We are leaving our estimates unchanged as they fall within management's updated 2Q guidance."

The analysts concluded, "We would be buyers on weakness after this announcement."

Zynga shares bounced back in early Tuesday trade after the large drop Monday. Shares rose 2.64 percent at the open to $3.07 per share after closing at $2.99 on Monday.