Are Zynga’s Cost Cutting Measures Yielding Results?

Zynga (NASDAQ:ZNGA) initiated a $100 million cost reduction plan in May 2015, under which it reduced its workforce by 18% (comprising 364 employees) and curtailed spending on outside and centralized services. The company has continued to demonstrate effective cost management and operational discipline since then, and its operating margin has improved consistently in this time frame.

In 2014, Zynga generated $0.90 in revenue for every dollar spent in operating expenses (SG&A plus R&D expenses adjusted for depreciation, amortization and share based compensation) in 2014. This improved to $1.10 in 2015 and consistently improved in the first two quarters of this year as well. Going forward, we estimate the company’s revenue per dollar of operating expenses to increase from $1.09 in 2016 to $1.17 by 2019. We expect this increase to be driven by the company maintaining strong control over its expenses and growing its revenues from core franchises, new mobile games as well as advertising.

In the first six months of the year, Advertising revenues grew 31% year-over-year compared to a 12% decline in online games revenue. Zynga’s operating margin improved by 12.3 percentage points over the same period last year, driven by a 14% decline in total costs (cost of goods and operating expenses). 

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