Zynga’s Woes Continue

Since social gaming player, Zynga (Nasdaq:ZNGA), went public, their troubles have only increased. Not only have their acquisitions failed to deliver, but their existing games are losing steam as well. Add to that concern of increased competition and slowing growth rates for the industry. Little wonder then that Zynga has had to rethink not only their business plans, but also their organization structure.

Zynga’s Financials

Despite these worries, Zynga managed to surpass market expectations for the recently ended second quarter. Revenues fell 31% over the year to $230.7 million, but were ahead of the Street’s projections of $224.3 million. During the quarter, revenues from in-game virtual good and ad sales fell 38% to $188 million. Loss per share of $0.01 was disappointing compared with previous year’s earnings of $0.01 per share, but it managed to exceed market projections of a loss of $0.04 per share. To curb losses going forward, Zynga announced plans to lay off 18% of their workforce.

But their operating metrics were disappointing. Daily active users (DAU) fell a whopping 45% over the year to 39 million for the quarter. On a sequential basis, DAUs reported a decline of 24% over the year. Monthly active users (MAUs) fell 39% over the year and 26% over the quarter to 187 million. As many analysts have suggested, social games are a fad, and it appears that Zynga Games are losing their appeal.

For the current quarter, Zynga expects revenues of $175 million-$200 million, with a loss of $43-$14 million.

Earlier this summer, founder and CEO, Mr. Mark Pincus, renounced his position and appointed Microsoft XBox alumnus, Don Mattrick. Additional restructuring included the departure of their Chief People Officer, CTO  and COO. Zynga also announced plans to shut down OMGPOP, the controversial $180 million acquisition they made last year. They will retain the once popular, Draw Something game, but all other games of the subsidiary will be closed to curb growing losses.

Zynga Slashes Real-Money Games

Zynga’s woes stem from the fact that they have been unable to deliver games that manage to retain gamers’ attention resulting in a waning user base. Zynga was counting on real money games to not only help increase subscriber base, but also significantly add to their revenues. But after several months of pursuing licenses within the U.S., Zynga suddenly announced plans to drop the idea. They will still be developing the game in the U.K., but for now, U.S. money games are off the shelf. Zynga has not disclosed the reason for change of plans, but to me, it appears to be a smart move. Within the U.S., online gambling regulations are still being finalized. When the rules have been finally set, I expect big casinos to invest heavily in the segment to gain market leadership, leaving no space for Zynga.

I also agree with J.P. Morgan Securities analyst Doug Anmuth when he says, “This is the right strategy for Zynga as it attempts to focus its investments on its core Web and mobile games”.

Zynga Facing Tough Competition

Zynga’s competitive landscape has also changed for the worse. Recently, Facebook announced their plans to open a new publishing platform for third party mobile game developers. Facebook plans to be very selective in identifying the developers whose games will be published on their platform. But once published, these mobile device games will receive advertising and analytics support from Facebook. Facebook’s move will help small, quality game developers get access to their billion plus users, thus potentially hurting Zynga, which has been scaling back usage through Facebook due to the 30% revenue share agreement.

Zynga is also facing stiffer competition from within the industry. Other game developers such as King.com and Supercell have managed to publish high revenue earning games. King’s Candy Crush Saga alone generates nearly $633,000 a day and recently King became the largest gaming platform on Facebook. King has been a successful games publisher because of their focus on skill-based games and their tight scrutiny of game releases. King uses their hard-core gamers to test their games before release to multiple platforms including Facebook. Similarly, Supercell has also managed to establish a strong mobile presence and recorded revenues of $179 million in a quarter with only two successful iOS based games – Hay Day and Clash of Clans.

Under the new leadership, Zynga wants to “get back to basics and take a longer term view on products and business.” For now, though, Zynga needs another hit social game like the Farmville series to get their lost charm in the short run. But to succeed in the longer run, they need to come up with games that attract and retain hard-core gamers as they continue to press on their mobile strategy.

Zynga’s stock is trading at $3.27 with a market capitalization of $2.63 billion. It touched a high of $4.03 in March 2012.