Zynga Slashes Headcount As It Struggles To Transform Its Business

| About: Zynga (ZNGA)
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Zynga (NASDAQ:ZNGA) recently announced that it would cut around 18% of its workforce, which will result in approximately 520 people losing their jobs and an estimated $70-$80 million in pre-tax savings for the company. The move will lower Zynga’s headcount below what it had at the time of its IPO. This suggests that the kind of explosive growth that the company was expecting when it went public doesn’t exist anymore. Zynga is struggling and reported a decline of 18% in its revenues during the last quarter. The company is likely to have a volatile year ahead as it terminates some of its well known games to focus more on mid-core and real-money gaming. In addition to this, the company’s biggest opportunity lies in its gaming platform where it can act as a broker for game developers around the world.

Closing More Games In The Second Quarter

Zynga plans to shut down four of its games in the second quarter, including The Ville, Empires & Allies, Dream Zoo and Zynga City on Tencent. The company intends to direct its efforts and funds towards mid-core games, real-money gaming and franchises that have demonstrated success in the recent quarters, including Farmville 2, Draw Something and “With Friends” branded games.

Shifting Focus to Mid-Core and Real-Money Gaming

Zynga expects its mid-core games to keep users engaged for longer periods of time. A mid-core game tries to combine the engagement level of a core game with the learning curve of a casual game to provide an engaging gaming experience to a larger user base. This can potentially allow for retention of a large user base while promoting in-game purchases as the games are designed to be more engaging and users are likely to pay to upgrade, rather than drop off once the free-play scenarios are completed. Zynga recently launched Battlezone, which marks its foray into action RPGs (role playing games).

While investing in mid-core games might help, Zynga has much larger opportunity in real-money gaming (see The Opportunity For Zynga In Real Money Gaming). The company has already rolled out real-money games ZyngaPlusPoker and ZyngaPlusCasino in the U.K. The online gambling market outside the U.S. is worth more than $32 billion, and Zynga can make a big difference to its business if it can tap this market successfully. However, the company will have to deal with the competition from gaming incumbents such as Caesars Entertainment (NASDAQ:CZR), which already operates online gambling services in Europe, and has bought social and mobile game maker Playtika.

Our price estimate for Zynga stands at around $3.50, implying a premium of more than 15% to the market price.

Disclosure: No positions.