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Zynga Buys Spooky Cool Labs

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In a bid to gain traction in the online casino-style gaming market, Zynga (ZNGA - Free Report) has reportedly acquired a Chicago-based gaming studio, Spooky Cool Labs. The financial terms of the deal were not disclosed.

Spooky Cool Labs is one of the leading developers of free-to-play social casino games. Moreover, it has recently released a city-building social game, The Wizard of Oz, which has garnered a massive 188,386 monthly active users including 19,785 daily active users, according to AppData. The game is available on Facebook (FB - Free Report) and Apple’s (AAPL - Free Report) iOS.

The current acquisition bodes well for Zynga as the company has been making significant efforts to gain traction in the real-money casino-style game market. It has recently launched two games namely, ZyngaPlusPoker and ZyngaPlusCasino, in the U.K.

Moreover, Zynga’s partnership with, an operator in the U.K., is expected to help the former in expanding its offerings in other European countries. Bwin has the required licenses to operate online real-money game related websites in several European countries.

However, in the U.S., online gambling is restricted and Zynga is expected to launch real-money casino games in the country in the near future once necessary legislative changes are made.

Nonetheless, Zynga is reeling under pressure from poor results. This has prompted the company to reduce its workforce by 18.0% (520 people). The workforce reduction will be implemented across all functions and is expected to be complete by Aug 2013.

Apart from this, the company has toned down its outlook. Zynga projects net loss to be in the range of $39.0 million to $28.5 million (prior guided range $36.5 million to $26.5 million) for the second quarter.

Additionally, the revised guidance for bookings was disappointing. Zynga now expects bookings to be at the lower end of the prior guided range of $180.0 million to $190.0 million. Zynga cited underperformance of games (except the Farmville franchise) as being responsible for the lackluster bookings.

However, we believe that Zynga’s sluggish penetration rate in the mobile gaming segment has been the primary reason behind this dull bookings growth.

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

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 - Free Report) could be a possible headwind in this sector, going forward.

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

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