Zynga's Revamped Mobile Strategy

Nov.13.13 | About: Zynga (ZNGA)

Social gaming player Zynga (Nasdaq:ZNGA) has not had a good run since it went public. Earlier this year, CEO and founder Mark Pincus renounced his position hoping to let new management drive the company to greater success. But social games are played as a fad and do not attract serious gamers, which has caused many social games companies to struggle with slow growth in user metrics. In the recent quarter, despite a declining user base, Zynga managed to exceed financial expectations, instilling investors with some confidence in its future.

Zynga's Financials

For the recently ended third quarter, Zynga's revenues fell 36% over the year to $202.6 million, and non-GAAP revenues declined 41% to $152.1 million. Analysts were projecting non-GAAP revenues of $142.7 million for the quarter. The quarterly loss of $0.02 per share was better than the Street's projected loss of $0.04 per share. These lower losses were attributed to Zynga's severe job cuts. The company laid off 18% of its employees in an effort to manage costs.

By segment, advertising revenues fell 9.1% over the year to $28.2 million, and online games revenues fell 39% to $174.4 million. Among user metrics, monthly active users fell 57% over the year and 29% over the quarter to 133 million in the quarter. The number of daily active users fell 49% over the year and 23% over the quarter to 30 million. At the end of the quarter, three of Zynga's games - FarmVille 2, Zynga Poker, and Words With Friends - were in the top 10 games on Facebook (NASDAQ:FB).

For the current quarter, Zynga projects revenues of $175 million-$185 million with a loss of $0.05-$0.04 per share. The market was looking for a loss of $0.03 for the quarter.

Zynga's Mobile Gaming Focus

Under the new management of CEO Don Mattrick, Zynga now seems to have more of a direction. It has slashed earlier plans to enter the real money gambling market and is now dedicating itself to capturing the mobile gaming market. Mattrick is convinced that Zynga's slumping user metrics were an execution problem as the core social gaming business continues to grow.

According to recent reports, the global mobile games market is projected to grow 27.3% annually to reach $23.9 million by 2016. Reports estimate that 966 million, or 78% of 1.2 billion gamers worldwide, play games on mobiles. On average, 368 million consumers, or 38% of all mobile gamers, spent $2.78 a month on mobile games last year. By 2016, that spending is projected to grow 50% to $3.07 a month. It is this market that Zynga plans to capture by developing games better suited to the mobile devices.

Till now, though, Zynga has had limited success with mobile games. While Zygna Poker remains among the top 20 games on iOS devices, other games have struggled to keep that momentum. Recently, Zynga appointed Clive Downie as its new COO. Downie was the former executive of mobile gaming company DeNA Co., and his appointment is expected to help drive mobile reach for Zynga's games. As part of this move, last quarter, Zynga launched the game CastleVille Legends, a mobile focused game which is also a sequel to its popular Facebook game.

Zynga's stock is trading at $3.51 with a market capitalization of $2.82 billion. It touched a high of $4.05 last month.