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A few years ago, Zynga (NASDAQ:ZNGA) was a company that had great potential. But a series of missteps from the company's former CEO Mark Pincus twisted its fate and consequently, its share price is down 75% from all-time highs.

The company's failure to develop chart-topping games in the last two years is the primary reason why it has lost millions of users in the last few months. The fading popularity of Zynga's blockbuster games like Farmville and Texas Holdem Poker made the situation worse. In addition to that, Zynga has been unable to capitalize on the booming mobile gaming industry.

Q2 2012 (Million)

Q2 2013 (Million)

Daily Active Users

72

39

Monthly Active Users

306

187

Monthly Unique Users

192

123

Monthly Unique Gamers

4.1

1.9

Also, in the previous quarter, Zynga shut down its $200 million acquisition OMGPOP. With gaming analysts suggesting that Zynga lost $528,000 per day in this deal, it isn't surprising that the company decided to cut ties with the creator of Draw Something.

As a result of all these aforementioned factors, Zynga reported a terrible quarterly performance yet again. The top-line of the company moved south 31% year over year while on the earnings front, the company reported a loss of approximately $16 million.

Zynga's shareholders were expecting real money gaming in the U.S. to turn around its fortunes, but any such hopes have been dealt with a fatal blow. The new CEO, Don Mattrick, has confirmed that the company will only focus on free-to-play games in the U.S. Following the success of Zynga's real-money gaming products in the United Kingdom, this announcement hasn't pleased investors. But, considering that due to the presence of casinos in the U.S. it'll be difficult to break into the real-money gaming industry, this decision makes sense.

Will the new CEO have a positive Impact?

The arrival of Don Mattrick has instilled some confidence back into shareholders. Mattrick was quite successful in his previous tenures with Electronic Arts and Microsoft. At EA, he was best known for working on the development of blockbuster games like Need for Speed, FIFA and The Sims. During his reign at Microsoft, Xbox saw its user base increase from 10 million to more than 75 million. Mattrick was also responsible for adding Netflix and YouTube to the gaming console.

The company has struggled to develop chart-topping games and was even accused of copying others, which it openly admits to. With an amazing history of innovations, a character like Mattrick was exactly what Zynga needed. The company has over $1.5 billion in cash; therefore Mattrick will have ample resources to invest in new strategic initiatives.

Plan for Zynga's redemption

  • Cost Cutting Initiatives: In the previous quarter, Zynga laid off many of its employees as it reduced its workforce by 18%. The company also decided to shut down three offices. This closure will result in an estimated $70 million savings.
  • Acquisition: In the previous quarter, Zynga gained the possession of Spooky Cool Labs LLC, a company specializing in social casino games.
  • Management Overhaul: Zynga announced a broad management shakeup and three top executives, including the COO, have already been shown the door. Over the previous conference call, Mattrick stated "Getting under the hood to evaluate every aspect of our business; conducting top to bottom business reviews...looking at how we're deploying people at all levels of the company." Judging by his words, this shakeup may not be the last.

The flipside and threat from Glu

The road to recovery is full of landmines and won't be easy to tread. Even though Mattrick has a good reputation behind him, all his accolades have been in the PC and console segment and whether he could do the same in the social and mobile gaming sector is yet to be seen.

In addition, Zynga will be facing intense competition from Glu Mobile (NASDAQ:GLUU) and private firms like King.com. The story of Glu's struggle is similar to that of Zynga. Glu has been a leader in smartphone gaming segment, but that has not translated to success for its investors. In the previous quarter, the company generated revenue of $17 million and posted a net loss of $2.4 million.

After a year of disappointment, Glu's new game, Deer Hunter 2014, has provided its shareholders a glimmer of hope. As per AppAnnie.com, the game has topped the iOS charts for free games download within ten days of its launch. This game includes new technological advancement which allows more social interaction among gamers.

The freemium game developing company will be launching a few more titles that take advantage of this technology in the next quarter. With gamers competing against each other for something meaningful, the probability of in-app purchases increases. Looking ahead, analysts are expecting Glu's earnings to increase at a terrific pace of 30% per year for the next five years. Glu is quite beaten down now and the company is making some moves to turn its business around. Hence, investors might even consider Glu Mobile for their portfolio.

Conclusion

Mattrick may take time to effect a turnaround at Zynga but the comeback plan as mentioned in this article looks well thought out and methodical. It would not be prudent to write-off the company completely since it has got a decent cash balance, is looking to cut down costs, and is headed by a creative mind who can provide the much-needed spark to kick start the business.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Why Writing Off Zynga Would Be A Mistake