ZYNGA INC. (NASDAQ:ZNGA): Can the New Top Management Lend a Hand to Zynga?

Edited By: Vani Rao

Zynga Inc. (NASDAQ:ZNGA) is a leading provider of social gaming services, which include popular web and mobile franchises such as FarmVille, Words With Friends, and Zynga Poker. Its game offerings are enjoyed by millions of online players worldwide. For the quarter ended30 June 2013, Zynga had 187 million monthly active users (MAUs) using its gaming platforms through Facebook, Zynga.com, Apple iOS, and Google Android.

Zynga will announce its Q3resultson 24 October 2013 after market hours.Following the recent change in Zynga’s top brass, investors are anticipating that Zynga will announce strategic plans to shore up the company’s revenues and enhance the number of active users on its game platforms.In July 2013, Microsoft’s Interactive Entertainment President Don Mattrick took over as the new CEO, replacingCo-founder and CEO Mark Pincus.

In light of the upcoming event, WSA provides a brief analysis of Zynga.

Rising Concerns for Zynga

  • Zynga has been struggling to postprofits since Q3 of2011. In Q2 of 2013, the company reported bookings and adjusted EBITDA of$188 million and $8.3 million, respectively. In the same quarter, Zynga’s EBITDA margin nosedived to 4% from 22% in Q2 of 2012.

    Source: Zynga
    Source: Zynga
  • Zynga is also experiencing a continuous decline in the number ofactive users. Its MAU count has fallen from 306 million to 187 million year over year and daily active users (DAU) count from 72 million to 39 million during the same period.

Source: Zynga

Source: Zynga

  • Zynga’s ability to successfully launch, promote, and monetize games in the last few quarters is currently dubious. During Q2 2013,the company’s ‘Free to Paying’ conversion rate fell to 1.60% from 2.10% in Q2 2012.
  • Theinherent risksfrom new entrantsprevail in all industries that are currently witnessing a boom period. Zynga is no exception and has been feeling the heat from bigger gaming players like EA Sports and Disney, which have recentlyentered the social gaming space. As per AppData, a leader in App Data Analytics, Zynga’s games didn’t feature in the top three most popular Facebook games in September 2013, based on number of DAUs(in millions).

Most Popular Games on FB - Sep 2013

Game Plan Ahead: Can Zynga Make a Turnaround

  • Real Money Game- The Game Changer: Zynga has already ventured into real money gaming by entering into a partnership with Bwin.party, the world’s largest listed online gaming companylisted on the London Stock Exchange, in November 2012. It is now looking for a similar partnership to expand its presence inthe US marketas well. However, Zynga chose to put itsplanson the backburner for nowand instead focus on its socialgaming and socialcasino offerings. Zynga already has a presence in online gambling with Zynga Plus Casino and Zynga Plus Poker gambling products.Going forward, the company has the ability to build a strong stance in the US online gambling industry.A number of industry experts believe that Zynga still has the potential to make a difference in the online gaming sphere.
  • An Independent Brand: Zynga has been known for its dependency on Facebook; however, Zynga has been making efforts to gradually decrease its dependency on Facebook. In Q2 2013,Zynga’s revenue share from Facebook declined to 68% from 76% in Q12013.
  • Focus on Core Business: Although Zynga is diversifying into real money gamingapart from social gaming, it may take some time for the company to reap the benefits of this exercise. Until then, Zynga aims to generate profits from its core business and focus on its ability to successfully launch new games in the market.
  • Operational Streamlining: Zynga is determined to achieve turnaround after reducing its head count in June this year and closing down of some its offices. However, the company isalso focusing on its long-term strategy to boost growth, which may have some short-term impacts that could lead to continued volatility of its stocks.

WSA’s Projections on Zynga

Considering the management change, falling active user and conversion rate, the entry of bigger players like EA Sports and Disney, WSA projects Zynga’s Q3 net revenue to fall further to $177.2 millionwithan EPS of -$0.04. These will still be within the range of the company’s guidance of $175-200million of revenue and -$0.02 to -$0.05 of EPS. WSA further expects to see the company’s EPS to be around -$0.06in 2014 and -$0.05 in 2015.Based on DCF valuation technique, WSA sees Zynga’s stocks fair price at $2.95.

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