It looks like Zynga (NAS: ZNGA) is running out of friends. The social gaming slumlord reported earnings last night, and shares are getting absolutely decimated today, down by as much as 42% so far as of this morning. Shares now sit a solid 70% below the IPO price of $10, and 81% below the all-time high of $15.91.

For good reason, too, as the weakness in the quarter highlights everything I've been telling you all along.

Can I get your digits?
Total revenue rose 19%, to $332 million in the second quarter, with bookings increasing 10%, to $302 million. Heavy R&D spending was the biggest contributor to growing expenses, increasing 79% to $171.3 million. Total costs and expenses jumped 39%, outpacing revenue growth, and leading to a net loss of $22.8 million, or $0.03 per share.


On an adjusted basis, the company posted non-GAAP earnings per share of just a penny, still short of the consensus estimate of $0.06 per share in adjusted black ink. Sales also came in shy of the market's expectations of over $343 million, so we're talking about a top and bottom line miss.

Diving deeper
Breaking down revenue, Zynga's core gaming business is seeing growth decelerate dramatically. Online game revenue increased by just 10%, to $291.5 million. The advertising business soared by 170%, to $40.9 million but, for some reason, I don't think investors are in it for the advertising business.

Zynga reports its bookings figure, which is the difference between revenue and the change in deferred revenue. Whenever bookings is less than revenue, it means that Zynga is recognizing its deferred revenue faster than it can sell new virtual goods waiting to be consumed by players. I think of it like a pipeline, so when bookings shrink, there's a good chance that revenue will eventually follow.

Last quarter, Zynga broke a three-quarter streak of bookings falling short of revenue, but we're now returning to that story.

Source: SEC filings.

Quarters where bookings were less than revenue are shown in red, with green being the other way around. CEO Mark Pincus acknowledged this, saying that "short-term challenges" caused the 8% sequential drop in bookings.

When in doubt, blame Facebook
One of the major factors cited for the weakness was changes that Facebook (NAS: FB) made to its platform, emphasizing discovering new games instead of existing ones, like Zynga's offerings. This is precisely why Zynga's overwhelming reliance on Facebook's platform is such a major risk, because its destiny is in the hands of another company, in many ways. Its core web games saw meaningful declines in engagement.

Zynga also launched its new game, The Ville, later in the quarter than it initially expected, and Draw Something "underperformed versus [Zynga's] early expectations." Pincus said the company is working more with Facebook, and will be plunging even more dollars into Draw Something in an attempt to build the brand. COO John Schappert conceded that Draw Something saw a significant loss of daily average users, or DAUs. That would include me, as I personally bought the game, and was hooked on it for a couple weeks or so, only to quickly get bored with it.

As a result of all of these challenges in web engagement, Facebook's platform, and Draw Something's underperformance, Zynga is now lowering its full year outlook. Bookings are now pegged between $1.15 billion and $1.23 billion, which should hopefully turn into adjusted earnings per share between $0.04 and $0.09.

The next frontiers
There are two new frontiers that Zynga wants to tap. It's already begun to aggressively expand into mobile platforms, primarily Apple (NAS: AAPL) iOS and Google (NAS: GOOG) Android. The company has grown its mobile DAU base fivefold to 33 million. It also estimates that 21% of its mobile player base also plays its web games. Pincus said Zynga is expanding its relationships with Apple and Google to pursue mobile growth.

Mobile monetization remains lower, however, with mobile average bookings per user, or ABPU, lagging web ABPU. This is because some of Zynga's most popular mobile games monetize at lower rates. Overall, ABPU declined to $0.046 this quarter.

The other potentially major catalyst on the horizon is real money gaming. Zynga Poker has a strong following that could be tapped, and Zynga is looking to launch its first real money gaming offerings in early 2013, once it gets the necessary licensing approvals. The U.S. lacks an open regulated online gambling environment, so Zynga's sticking to international markets here, but online gambling is a massive opportunity -- and it's also intensely competitive.

The less bad news
It's not all bad. There are a few positive developments in the quarter. Monthly active and unique users, MAUs and MUUs, respectively, continue to grow. Zynga's percentage of monthly unique payers, or MUPs, also rose slightly, but still remains low overall.

Metric Q1 2012 Q2 2012
MAUs 292 million 306 million
MUUs 182 million 192 million
MUPs 3.5 million 4.1 million
MUP % 1.9% 2.1%
Source: SEC filings.


It doesn't make up for all the company's problems, but it is what it is.

It's getting lonely in here
After investors clamored over the hype of social gaming growth, they're now realizing that Zynga's business and freemium monetization strategy in casual games with short life cycles isn't quite what they hoped. The justifiable fear is that Zynga is just a fad without lasting brand strength or sustainable monetization.

Don't say I didn't warn you.

Zynga hopes to tap international markets for growth, but still has plenty of challenges there. On the other hand, these three American companies are already set for world domination with sustainable businesses. Grab a copy of this free report to find out more.  Or, to check out the bull and bear thesis surrounding one of the pre-eminent names in consumer tech, click here to grab the Fool's brand new premium report on Apple.

The article Zynga Is Running Out of Friends originally appeared on Fool.com.

Fool contributor Evan Niuowns shares of Apple, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Apple, Facebook, and Google. Motley Fool newsletter services have recommended buying shares of Google and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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