When Zynga (ZNGA) brought in new CEO, Don Mattrick, I was initially thrilled. Obviously, this company needs a shakeup since Mark Pincus has a history of bad decisions leading to the loss of millions of users alongside a slumping stock price. As much as I love to see a new CEO at the helm, the mystery we must uncover is whether Don Mattrick truly has the ability to turn this flailing company around.
After reading Christopher Solerno's article "Zynga Shares Face Even Further Downside" and the subsequent comments concerning the new CEO (especially his botched revealing of the Xbox One), I thought it ideal to dig deeper into the "Don Mattrick" factor and determine if he can realistically restore Zynga.
First, at age 17, Don Mattrick co-founded Distinctive Software Inc., a company responsible for Test Drive for the Apple II, Commodore 64, and PC DOS. The company grew in popularity for sport games and was eventually purchased by Electronic Arts (EA) in 1991 for $11 million.
During his tenure with EA, Mattrick was involved in numerous leadership roles including President of Worldwide Studios for Electronic Arts where he oversaw global studios and research. He was best known at EA for having helped bring to life such celebrated game franchises as Need For Speed, FIFA Soccer, Harry Potter and The Sims.
In 2007, Mattrick joined Microsoft (MSFT) as a Senior Vice President overseeing the Xbox 360 and PC gaming business. During his reign, the Xbox 360 user base increased from 10 million to more than 76 million worldwide, while the Xbox LIVE membership increased from 6 million to over 48 million. At the same time Mattrick is well-known for moving the interactive business from an operating loss into a sustained and profitable business for the company.
On top of adding Netflix (NFLX), Hulu Plus and YouTube to the gaming console, Mattrick is largely credited for bringing Kinect on Xbox 360 to life. The "controller-free gaming and entertainment experience" for Xbox 360 launched in November 2010 worldwide and sold over 8 million units in the first 60 days. The Kinect has been seen as highly innovative winning numerous awards including being named one of the top inventions of the year from Time Magazine.
Cleaning house - AllThingsD reported that COO David Ko, CTO Cadir Lee, and Chief People Officer (i.e. HR chief) Colleen McCreary "will step down from their positions" as part of a restructuring launched by new CEO Don Mattrick. A variety of other executive changes were also confirmed.
Back to basics - As Zynga announced financial results for the quarter ending June 30, 2013, Mattrick was very clear on his approach.
"The next few years will be a time of phenomenal growth in our space and Zynga has incredible assets to take advantage of the market opportunity, to do that, we need to get back to basics and take a longer term view on our products and business, develop more efficient processes and tighten up execution all across the company. We have a lot of hard work in front of us and as we reset, we expect to see more volatility in our business than we would like over the next two to four quarters. I'm privileged to lead Zynga and I look forward to spending more time with our players, employees and shareholders."
Innovation - Mattrick has a remarkable past of innovation, and I expect him to continue this as CEO of Zynga. This is an area where Zynga has greatly lacked which is evident as the company has been criticized for outright copying ideas which they openly admit to.
Bold decisions - One major decision of Mattrick is to not pursue an online gambling license in the US. Investors didn't exactly react well to the news further slumping share prices, but executing a "back to basics" approach requires focus which includes removing distractions.
"Zynga believes its biggest opportunity is to focus on free to play social games. While the Company continues to evaluate its real money gaming products in the United Kingdom test, Zynga is making the focused choice not to pursue a license for real money gaming in the United States. Zynga will continue to evaluate all of its priorities against the growing market opportunity in free, social gaming, including social casino offerings."
Capital - With $1.5 billion available, Mattrick has the resources he needs to carefully execute a proper long term plan.
Commitment - One particular trait I do not want to overlook is that Mattrick has long histories with the companies he's been with. Either the man is highly desired or very committed - both exceptional qualities necessary for a Zynga revival. With an attractive $50 million incentive package, I truly believe Mattrick is "in it to win it".
Xbox One disaster
A huge issue some investors seem to have with Mattrick is his botched introduction of the Xbox One.
On May 21, 2013, Mattrick unveiled the new Xbox One, the successor to the Xbox 360, an all-in-one entertainment system. He later dismissed criticisms of the system's "always on" internet connection by saying "We have a product for people who aren't able to get some form of connectivity; it's called Xbox 360." I personally felt this was a brilliant move that would move the gaming console business forward. Fans at E3 and across the world disagreed.
On June 19, 2013, on Xbox Wire, Mattrick stated, "An internet connection will not be required to play offline Xbox One games" and "Trade-in, lend, resell, gift, and rent disc based games just like you do today".
As expected, the Q2 2013 numbers were horrific. Revenue saw huge declines and active users dropped during the quarter compared to previous periods. The top two concerns of mine are as follows:
Revenue down - Q2 2013 revenue of $231 million, down 31% year-over-year, and bookings of $188 million, down 38% year-over-year.
Less active users - Daily active users (DAUs) decreased from 72 million in the second quarter of 2012 to 39 million in the second quarter of 2013, down 45% year-over-year. On a consecutive quarter basis, DAUs were down 24% from 52 million in the first quarter of 2013.
As an industry-leading executive in entertainment, games and consumer products, Don Mattrick has established himself during a 30-year career as a world-class leader of game, platform and team development. I expect he, a life-long gamer yet hard-core manager, can bring new, much-needed, light to Zynga and increased stock prices will eventually follow. This is likely to take at least 3-4 quarters (as Mattrick himself has prepared us for) so now, in my opinion, is an ample time to start buying.