Following the disappointing quarterly results that led to a sharp decline in Zynga’s (NASDAQ:ZNGA) stock, CEO Don Mattrick is restructuring the company’s management in a bid to revive the declining business. The company’s Chief Operating Officer, Chief People Officer and Chief Technology Officer are leaving the firm as Zynga looks to pare its management layers to make the business more nimble. The next few quarters are likely to be volatile for the company as the new management team evaluates business opportunities and redefines its core focus. The management shake-up seems to be a continuation of Zynga’s earlier decision to downsize in order to save costs and focus on certain key gaming categories.
The company has lost the top spot in social gaming on Facebook (NASDAQ:FB) to King.com, which is seeing immense success with its game Candy Crush Saga. There is no doubt that Zynga needs better games. The company registered a steep decline in web bookings in the recent quarter due to the closure of certain underperforming games and surprising weakness in Texas Holdem Poker, one of its key game franchises. Although the Farmville franchise is still doing well, Zynga’s future looks uncertain and its new CEO has a tough task of turning around the company and building a more loyal customer base.
Zynga Still Sticking To Texas HoldEm Poker & Farmville
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Zynga continues to rely on Texas HoldEm Poker, Farmville and Farmville 2, which constitute roughly 20%, 16% and 15% of its online gaming revenues respectively.  Farmville 2 did well in the first half of the year and user statistics from appdata.com suggest that the game is going strong. For now, it averages close to 26 million monthly active users (MAU).
Farmville and Farmville 2 grew their combined bookings by 29% in Q2 2013 compared to the same period a year ago.  However, poker bookings fell last quarter due to illegitimate card activity on the Internet, a user shift to the mobile platform and to more casual casino activities such as slots. This demonstrates the volatile nature of social gaming as even a game like poker isn’t finding it easy to hold on to the users.
There Is Still No Clarity On Real Money Gaming
Earlier this year, Zynga rolled out real-money games ZyngaPlusPoker and ZyngaPlusCasino in the U.K. and was looking into getting a license in the U.S. for the same. Q2 was disappointing on this front as the company did not give material insight into the initial traction of these games in the U.K. and announced that it will not pursue license for online gambling in the U.S. In addition to this, the acquisition of Spooky Cool Labs, which builds social and online gambling games, was motivated by the intention to leverage its assets and capabilities to promote social slots, not real money gaming. There is still no update from Zynga on the success of its real money games in the U.K. which leads us to believe that there is a chance that the company’s strategy isn’t working out.
Zynga is likely to focus on innovation and expanding mid-core games and will adopt a steady approach of building its user base rather than relying on explosive and unsustainable growth as it has seen in the past. The company launched some mid-core games on mobile last quarter including War of the Fallen, Battlestone and Solstice Arena. Such games have a different growth trajectory and tend to build audience over longer periods of time. In addition, the company’s long-term strategy of creating its own gaming ecosystem will protect it against the inherent volatility of individual social gaming titles. What Zynga needs is better games, innovation, more sustainable ways of monetizing games as well as higher focus on core gamers. New CEO Don Mattrick can leverage his vast experience in building sustainable customer base for Xbox Live to offer fresh perspective and help the company in managing its costs better.
Our price estimate for Zynga stands at $3.41, implying a premium of about 15-20% to the market price.Notes: