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Shares of Zynga Inc. (ZNGA - Snapshot Report) plunged 12.03% (41 cents) to $2.99 on June 3, after the social game maker announced its decision to reduce its workforce by 18.0% (520 people). The workforce reduction exercise will be implemented across all functions and is expected to be complete by Aug 2013.

According to the Wall Street Journal, the current plan will bring down Zynga’s staff level to 2,300 compared to approximately 2,700 at the time of its initial public offering in Dec 2011. Earlier in Feb 2013, Zynga had announced a cost reduction plan, which involved workforce reduction by 1%. In Oct 2012, Zynga trimmed its workforce by 5% (150 people).

Zynga announced that it will incur a charge of $24.0 to $25.0 million in the second quarter and $2.0 to $5.0 million in the third quarter related to the current plan. Zynga will also record an estimated $15.0 million reversal of stock-based expense in the second quarter due to this staff reduction.

Besides lowering staff count, Zynga also announced closure of various office locations, similar to the February plan, when the company streamlined its real estate assets and closed its Baltimore studio.

In February, Zynga closed McKinney, Texas and downtown Austin offices, while in October it closed down its Boston office. As per the current plan, Zynga will close down New York, Los Angeles and Dallas offices. The whole process including 520 layoffs is expected to save $70.0 to $80.0 million per year.

Zynga now projects net loss to be in the range of $39.0 to $28.5 million (prior guided range $36.5 million to $26.5 million) for the second quarter. However, the major disappointment lies with the revised guidance for bookings. Zynga now expects bookings to be at the lower end of the prior guided range of $180.0 to $190.0 million.

Zynga cited underperformance of games (except the Farmville franchise) behind the lackluster bookings. In the first quarter, bookings declined 30% from the year-ago quarter and 12.0% from the previous quarter to $229.8 million. Lower Facebook (FB - Analyst Report) related bookings, which declined to 76% of total bookings also negatively impacted results.

We believe that Zynga’s sluggish penetration rate in the mobile gaming segment has been the primary reason behind this lackluster bookings growth. Although mobile bookings grew 21% in the first quarter, it was not enough to offset the 37.0% decline in web bookings, which include the amount of in-game virtual goods purchases and advertisements sold.

Meanwhile, Zynga’s cost-cutting initiatives resulted in a 34.0% year-over-year decline in costs in the first quarter, which was positive in our view. However, we believe that cost containment cannot ensure sustainable profitability for which increase in both bookings and customers is necessary.

As such we believe that Zynga needs to spend on developing mobile resources to fend off competition from the likes of Electronic Arts (EA - Analyst Report). Zynga’s initiatives to expand in real money casino and poker games across different platforms should act in its favor in the near term. However, we believe that competition from International Game Technology (IGT - Analyst Report) could be a possible headwind in this sector going forward.

Currently, Zynga has a Zacks Rank #3 (Hold).

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