Investors were unsettled by Zynga’s announcement that it is cutting 520 employees, or almost one-fifth of its workforce, with shares plummeting 12% to $2.99, before recovering slightly in after hours trading. Trading of Zynga shares were halted twice in the afternoon on the Nasdaq stock exchange, first for the layoff announcement and then again due to volatile trading during which the stock fell by as much as 15%.
Though Zynga said the layoffs will result in $70 million to $80 million in annualized pre-tax savings, its guidance for its second-quarter earnings is still a loss between $39 million and $28.5 million. As Anthony Ha reported earlier, Zynga’s rationale for the mass layoffs is to create a tighter, leaner operation as the company hopes to replicate the success of mobile gaming startups like Supercell and King.com, which have released huge hits despite their much smaller size. Zynga also plans to launch fewer game and franchises in order to focus on turning each franchise into a big brand name.
But today’s plummet in Zynga’s stock price shows that the company still has a long way to go in order to win investors over to its restructuring plans, especially since this isn’t the first time Zynga has attempted to reduce costs by laying off staff. Last October, the company fired 5% of its employees after cutting its revenue outlook for the third quarter of 2012, citing weakness in games like The Ville.
CEO Mark Pincus has described 2013 as a “transition year” for Zynga as it continues to face a challenging environment on the Facebook platform, struggle to build its mobile revenue and deal with declining user numbers, but it’s still far from certain if the transition will be a positive one.