* Pulls back from U.S. gambling, remain in UK
* Zynga to return to the basics, social gaming
* Shares tank as user exodus continues
By Gerry Shih
SAN FRANCISCO, July 25 Zynga Inc will largely abandon its long-running efforts to build a real-money gaming business in the United States, a prospect investors once believed to be the struggling company's sole lifeline.
The surprise announcement came Thursday as the company behind once-popular games such as "FarmVille" and "Words with Friends" reported that it lost 40 percent of its monthly active users in the second quarter, as it bleeds mobile gamers to aggressive rivals.
In his first public comments since replacing founder Mark Pincus as chief executive on July 1, Don Mattrick told Wall Street analysts that he needed at least three months to thoroughly review Zynga's roadmap.
He intended to take the company "back to basics" with an emphasis on free-to-play games on Apple's iOS and Google's Android mobile devices, as well as tried-and-true franchises like FarmVille, Mattrick said.
"It's clear that the market opportunity around us is growing at an incredible clip," the former Microsoft Corp Xbox boss said. "It's also clear that today we are missing out on the platform growth that Apple, Google and Facebook are seeing. In short, we can do better."
But Mattrick, who has chosen a new desk in the middle of the FarmVille team at Zynga's San Francisco headquarters, warned investors of two to four quarters of volatility in the company's performance before it could "reset" its business.
The company's shares dived 14 percent to $3.02 in after-hours trading, or about 70 percent off its $10 IPO price.
News that Zynga folded its gambling efforts marks a departure from most of the past year, when Pincus, himself a poker aficionado, assured investors that Zynga could tap into a potentially lucrative new revenue stream by launching real-money casino games around the world even as its key games fell into decline.
The gambling effort kicked off this year in Britain, where such games are highly regulated. But real-money gaming continues to be illegal in many U.S. states, despite signs that state regulators will begin to permit games such as poker. Zynga, whose first game was an online version of poker, could have wound up in a regulatory tangle for months, if not years, while it sought a license.
Analysts, while acknowledging the difficulty in obtaining gambling licenses, were nevertheless puzzled by Zynga's decision.
"It's not like applying to a driver's license. They can turn you down, they can stretch you out," said Sean McGowan, an analyst at Needham & Company. "But it's not impossible."
By giving up on real money gambling, "they're capping their upside considerably," he said.
Zynga's announcement heightened the scrutiny on the continued performance of core games like FarmVille and its broader corporate strategy.
Zynga's public market debut in December 2011 was among the most anticipated of the year, but in just the past year or two, its business model has crumbled as it increasingly lost online gamers to rivals more adept at designing for mobile devices or catering to a fickle, younger crowd.
Pincus over the past year has enacted multiple rounds of layoffs to preserve Zynga's bottom line, but he has failed to arrest its steep decline in revenue.
Several months ago, with the encouragement of Kleiner Perkins Caufield & Byers, the venture capital firm and major shareholder, Pincus began preparing to step aside for Mattrick while he turns his focus to games.
Mattrick and other top executives said Thursday they did not intend to aggressively continue cost-cutting under the new regime. While fierce rivals like European-based publisher King.com has overtaken Zynga on the Facebook platform with far fewer employees, Mattrick dismissed the possibility of any imminent layoffs, saying he would examine how the company can turn its size into a competitive advantage in the long term.
"I see a lot of opportunity in having the collection of people we've assembled," he said.
Zynga's results Thursday suggested it had at least come to grips with setting appropriately low expectations for investors.
Excluding certain items, Zynga posted a 1 cent per share loss, compared with a 1 cent profit a year ago. That was better than the 4 cent loss analysts expected, according to Thomson Reuters I/B/E/S.
Zynga reported $231 million in quarterly revenue on Thursday, a 31 percent decline from a year ago.
The number of active monthly players dropped to 187 million this quarter from 306 million a year ago, its lowest since mid-2010. The company, which has acknowledged fundamental problems with its business model, went public in December 2011 at $10 a share.
Zynga reported $188 million in bookings, which is a measure of the value of virtual goods bought by players during the three-month period ending June 30. That is a 38 percent drop from $302 million a year earlier.