Confirmed: Zynga laying off 520 employees as it restructures to focus on mobile

[Update: Zynga confirmed the announcement in a blog post.]

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Social game publisher Zynga is reportedly lying off 18 percent of its employees, or 520 people, and closing its New York, Dallas and Los Angeles offices, according to AllThingsD. Zynga has confirmed the story.

The move is affecting all parts of the social gaming company and it will accelerate its shift toward mobile games. The goal is to cut $80 million in staff costs. The move shows just how far Zynga, the maker of social games such as FarmVille and Zynga Poker, has fallen from its initial public offering in late 2011, when the company was valued at $9 billion. Its value is now $2.4 billion.

Zynga has been trimming back staff in recent months as it tries to move toward consistent profitability and focus on establishing long-term franchises. But today’s rumored cuts are a much more drastic reaction to the company’s problems.

AllThingsD described the cuts as a narrowing of the focus of the company, or “right-sizing” to reflect a more “somber reality that these mobile buisnesses are harder to monetize than its formerly stronger web-based ones” on Facebook. Zynga’s stock was halted as the news came out. Its shares have resumed trading and are down 11.6 percent at $2.99 a share.

The sources told AllThingsD that the decline of the web business was more drastic than anticipated and the rise of the mobile business is slower than needed. Zynga chief operating officer David Ko told us in past interviews that he had put up “guard rails” to try to keep the company’s costs under control. The company has begun to shut down or has shut down 18 games in recent months. And it has shifted more than half of its staff to focus on mobile games.

In a press release, Zynga said the cuts would save $70 million to $80 million a year in pretax spending. The layoffs will be complete by August, and Zynga will take a pretax restructuring charge of $24 million to $26 million in the second quarter and $2 million to $5 million in the third quarter. Zynga expects $15 million in a reversal of stock-based expenses in the second quarter.

Zynga now projects a net loss of $39 million to $28.5 million in the second quarter. Books are expected to be in the lower half of previous guidance. While FarmVille continues to do well as a franchise, other games are underperforming.

A spokesperson for Zynga said the most recent employee count at the end of the first quarter was 2,902 employees. So the 520 employees is 18 percent of that number. The spokesperson did not confirm which regional offices were closed. The spokesperson also could not say which games Zynga would discontinue as a result of the layoffs. The teams in New York included the OMGPOP team that created Draw Something and Draw Something 2. In Dallas, Zynga’s team made the CastleVille game, while the Los Angeles team made Empires & Allies.

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Mark Pincus, chief executive of Zynga, recently cut his pay to $1. He also raised the pay of a number of other executives in order to stave off a brain drain at the company. We have asked if Zynga will now proceed to cut executive pay as well.

Here’s a copy of the internal memo from Mark Pincus, chief executive of Zynga, to staff:

To our Zynga Community,

Today is a hard day for Zynga and an emotional one for every employee of our company.  We are saying painful goodbyes to about 18% of our Zynga brothers and sisters.  The impact of these layoffs will be felt across every group in the company.

None of us ever expected to face a day like today, especially when so much of our culture has been about growth. But I think we all know this is necessary to move forward. The scale that served us so well in building and delivering the leading social gaming service on the Web is now making it hard to successfully lead across mobile and multiplatform, which is where social games are going to be played.

These moves, while hard to face today, represent a proactive commitment to our mission of connecting the world through games.  Mobile and touch screens are revolutionizing gaming.  Our opportunity is to make mobile gaming truly social by offering people new, fun ways to meet, play and connect.  By reducing our cost structure today we will offer our teams the runway they need to take risks and develop these breakthrough new social experiences.

Because we’re making these moves proactively and from a position of financial strength, we can take care of laid off employees.  We’re offering generous severance packages that reflect our appreciation for all of their work and we hope this will provide a foundation as they pursue their next professional steps.

Although these are hard decisions, I’m confident that our strategy of building leading franchises and supporting them with the largest network is the right one for the long term. I’m encouraged by our recent progress.  Running With Friends is a great example of the quality player experience we can deliver, already receiving an average 4.5 app star rating from 22,000 players in less than one month after launching. Our FarmVille franchise teams continue to innovate and deliver ground breaking new social experiences like County Fair which, despite only being available on the web, is engaging 39 million monthly players.

I want to thank every one of you for the spirit, creativity and energy that you’ve invested in Zynga.  You’ve reintroduced a generation of people to gaming and through these games offered them new ways to connect with their families, make new friends and even sometimes find love.

Everyone will be affected by these changes and I’m sure there will be many follow up questions to this email.  If you have specific questions relating to your project or team, please talk to your manager.  For any other feedback or thoughts feel free to email me directly.