HispanicBusiness

Zynga had bad news for investors Wednesday: It reported worse-than-expected second-quarter results and lowered its outlook for the rest of the year. Investors responded by dumping the stock in after-hours trading, sending it down nearly 40 percent.

Company officials blamed the bad tidings on weak showings for Zynga's existing games, delays in launching new ones and a significant drop-off in users of its newly acquired "Draw Something" game.

Despite the setbacks, CEO Mark Pincus said on a conference call with investors that he remains bullish on the company's future.

"We are the most optimistic long-term believers in the opportunity for social gaming and play to be a mass market activity, as it's already becoming," he said.

Investors shared little of that optimism. In after-hours trading, Zynga shares were off $1.91, or 37.6 percent, to $3.17. Earlier they were down more than $2, or 40 percent.

In the second quarter, the San Francisco social gaming company lost $22.8 million, or 3 cents a share. That was down from the second quarter a year ago, when the company earned $1.4 million, or less than a penny a share.

The decline in the company's bottom line came despite a 19 percent jump in sales. The company's results were weighed down by development costs, which jumped 79 percent from the second quarter of 2011 to $171.3 million, and sales and marketing expenses, which grew 47 percent to $56.1 million.

Excluding stock-based charges, amortization of goodwill, deferred revenue and other adjustments, the company would have earned $4.6 million, or a penny a share. On this basis, Wall Street analysts polled by Thomson Reuters were expecting the company to earn 5 cents a share on sales of $344.12 million.

For all of 2012, Zynga now expects to post a pro forma profit of 4 to 9 cents a share on gross bookings of $1.15 billion to $1.225 billion. Previously, the company had forecast pro forma earnings of 23 to 29 cents a share on $1.425 to $1.5 billion in gross bookings.

On this basis, analysts had predicted the company would earn 26 cents a share for 2012.

The dramatic reduction in Zynga's forecast reflects the ongoing trends in its business, primarily the worse-than-expected performance of its existing games in the second quarter, said Dave Wehners, the company's chief financial officer. During the quarter, Facebook changed the way it promotes games, choosing to highlight new games at the expense of older ones, Zynga officials noted. The company gets about 80 percent of its business from Facebook.

The average player spent about 4.6 cents a day on Zynga's games in the quarter, which was down from about 5.5 cents a day in the first quarter and 5.1 cents a day in the second quarter last year. Overall bookings were $301.6 million, which was up 10 percent from the second quarter last year, but down 8 percent from the first quarter.

Zynga has largely built its business around so-called free-to-play Facebook games. The company generally makes money by charging customers small amounts for virtual goods that can be used in its games.

But the company's business model could prove challenging going forward, said Joe Spiegel, a portfolio manager at Dalek Capital who covers the video game industry. The reliance on microtransactions is bad for consumers, who are constantly being pestered to pay for more things, and bad for the company because the revenue it will get from those transactions can be hard to forecast, he said.

Zynga's report "really shows that this idea that you can have a business of microtransactions and nickeling and diming your customers isn't the way forward," said Spiegel, who doesn't have a position in Zynga's stock.

Still, Zynga may be worth buying now, Spiegel said. At its current market capitalization -- about $2.3 billion after the sell-off Wednesday afternoon -- investors are valuing Zynga's business at about $800 million, excluding the $1.5 billion in cash and short-term investments it holds.

"Suddenly the stock's not expensive anymore," he said.

Before its report, Zynga's stock closed regular trading Wednesday up 16 cents, or 3.3 percent, to $5.08.