Here’s Why We Have Changed Our Outlook On Zynga

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The recent leadership change at Zynga (NASDAQ:ZNGA), with the return of Mark Pincus as its CEO, has brought about a change in the social gaming company’s future strategy. More specifically, the company has decided to focus on fewer gaming categories and exit the Sports gaming genre. In addition, the company has initiated cost savings measures, which could take until next year to complete and are expected to result in annualized savings of $100 million. We believe these recent strategic moves were essential at Zynga, considering its previous efforts had failed to propel top-line growth. As a result of these initiatives, we forecast Zynga to return to profitability in the future, helped by operating leverage and efficiency improvements.

See our complete analysis for Zynga

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Strategies To Re-Accelerate Growth While Reducing Costs

Zynga Has Narrowed Its Focus On Fewer Gaming Categories

As compared to its previous strategy of targeting several gaming categories, Zynga recently narrowed  its focus to five gaming categories, including  Action Strategy, Invest & Express, Social Casino, Racing and Casual. The company plans to exit the Sports gaming genre and lower its focus on the Runners category. Hence, the company has curtailed further development of titles such as NFL Showdown and Tiger Woods Golf. The company now intends to launch six to eight titles during the year, as compared to its previous goal of six to ten games. While Empire & Allies (an action strategy game) was recently launched in May, other major titles that are expected to be launched this year include Dawn of TitansCSR2 and FarmVille Harvest Swap.

Our Take: We believe this recent change in strategy is encouraging. Instead of launching new games in several popular gaming categories, we think Zynga will be better off in launching more unique and differentiated games, that leverage original IP and deliver superior experience to gamers. With Zynga having seen its losses soar over the past few years, this strategy will also help the company save on costs.

Cost Reduction Plan Could Generate Pre-Tax Savings Of Around $100 Million

In addition to narrowing its focus, Zynga recently also announced a new cost cutting initiative under which it will reduce its workforce by 18% and curtail spending on outside and centralized services. The workforce reduction program is forecast to be complete by Q4 2015 and could result in annualized savings of around  $45 million. However, the reduction in centralized services spend could take longer to complete, perhaps until Q3 2016.  This program is expected to generate annualized savings of around $55 million.

Our Take: We believe this cost cutting initiative was essential for Zynga. Even while the company’s expenses have risen in the recent past, they have failed to drive top-line growth. Hence, we expect this pruning of costs, along with the enhanced focus on core franchises, to bring back the company to profitability in the coming years. We expect Zynga’s business to commence a turnaround in the coming future on the back of its new mobile game launches.  Hence, we have estimated it’s EBITDA margin to rise to around 30% by the end of our forecast period.

Our $3.04 price estimate for Zynga, is marginally above the current market price.

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