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updated: 7/26/2013 7:27 AM

Zynga drops after abandoning u.S. Online-betting plan

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Bloomberg News

Zynga Inc., maker of the social- networking game "FarmVille," plunged as much as 16 percent in extended trading after abandoning plans to enter the online- gambling business in the U.S.

"While the company continues to evaluate its real-money gaming products in the U.K. test, Zynga is making a focused choice not to pursue a license for real-money gaming in the U.S.," the San Francisco-based company said yesterday in a statement. The stock tumbled as low as $2.95.

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The shares had surged 48 percent this year on optimism that Zynga could use Web betting to revive growth amid a slump in gaming on Facebook Inc.'s network. Zynga took preliminary steps to get a gambling license in Nevada last year, working to enter a U.S. market for online betting that may reach $7.4 billion a year by 2017, according to Manchester, U.K.-based researcher H2 Gambling Capital.

"Zynga probably realized they're not going to get one," said Michael Pachter, an analyst at Wedbush Securities Inc. in Los Angeles. "There's a greater sense of urgency on turning the business around."

The company also forecast third-quarter sales and earnings that fell short of analysts' estimates as fewer users access its titles on Facebook's website.

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The third-quarter loss excluding some items will be 2 cents to 5 cents a share on revenue of $175 million to $200 million, Zynga said. Analysts on average had estimated a 2-cent loss on sales of $216.2 million, according to data compiled by Bloomberg.

At the end of the second quarter, Zynga had three top-10 titles on Facebook, down from seven a year earlier. Don Mattrick, who replaced founder Mark Pincus as chief executive officer this month, is working to jump-start sales as users shift their attention to mobile devices and more Facebook members shun Zynga's titles for games from competitors such as King.com, maker of "Candy Crush Saga."

"Zynga doesn't have the same advantages on mobile as it did on Facebook," said Arvind Bhatia, an analyst at Sterne Agee & Leach Inc. in Dallas, who has a neutral rating on the shares. "It's a tough platform."

Mattrick, the former head of Microsoft Corp.'s entertainment division, said Zynga expects two to four quarters of "volatility" as he evaluates the business and product line and develops a new strategy.

"We are missing out on the platform growth that Apple, Google and Facebook are seeing," Mattrick said on a conference call yesterday. "We have the ability to break some bad habits and get back to some good fundamentals."

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Before yesterday's report, the shares advanced 6.7 percent to $3.50 at the close in New York, bolstered after Facebook said the number of mobile users on its service expanded 51 percent to 819 million during the June quarter.

Zynga generates revenue by selling virtual goods within its games -- for example, poker chips in "Texas HoldEm" or a tractor in "FarmVille 2."

The company said its second-quarter loss excluding some items was 1 cent a share and revenue fell 31 percent to $230.7 million. Analysts on average had estimated a 4-cent loss on sales of $219.2 million, according to data compiled by Bloomberg.

The net loss for the quarter narrowed to $15.8 million, or 2 cents a share, from a loss of $22.8 million, or 3 cents, a year earlier.

Bookings, or the total value of virtual goods sold in the quarter, fell 38 percent to $187.6 million, within the range of the company's forecast of $180 million to $190 million. Zynga's reported revenue includes virtual items sold before the quarter and amortized over their expected life.

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