Zynga Struggling to Play its Game

There is sudden interest in the online gaming industry’s stock market performance followed by the recent $5.9 billion acquisition of King.com by Activision earlier this week. It is a reasonable exit for a company that was valued at $7 billion when it went public in March last year compared with the massive erosion in value that some other players have seen. Case in point is online and social gaming rival Zynga (Nasdaq: ZNGA) which is currently trading at nearly 75% discount over their list price valuation of $7 billion.

Zynga’s Financials

According to a recent report by gaming intelligence firm SuperData Research, global digital game sales increased 11% over the year to $5.4 billion. Game sales were up in all segments except for the pay-to-play massively multiplayer online (MMO) games. Digital console games recorded the highest growth at 29% to $326 million. Meanwhile, mobile gaming sales increased 9% to $2 billion and reported the biggest absolute gain.

In their recently reported results, Zynga’s revenues increased 11% to $195.7 million, significantly ahead of the market’s forecast of $186.5 million. Bookings for the quarter were flat at $176 million with mobile bookings growing 26% over the year and 6% over the quarter to $121 million. They reported a break even quarter compared with the Street’s forecast of a loss of $0.01 per share.

By segment, revenues from the online game segment fell 7% over the year to $151 million and advertising and other revenue increased 18% to $45 million. Among their key games, Farmville 2, Zynga Poker, Hit It Rich! Slots , FarmVille 2: Country Escape, and Wizard of Oz Slots accounted for 21%, 17%, 16%, 14% and 12% of online game revenue, respectively.

But Zynga’s user metrics remain dismal. During the quarter, average daily active users fell 21% over the year and 9% over the quarter. Average monthly active users also continued to decline and reported a 27% fall over the year and a 9% fall over the quarter to 75 million. The declines were offset by an increase in the average daily booking per user which increased 27% over the year and 10% over the quarter to $0.100.

For the current quarter, Zynga projected revenues of $170 million-$185 million with a net loss of $0.01-$0.00 per share.

Zynga’s Improving Product Offerings

Zynga’s poor performance is not for lack of trying. They continue to add new titles and companies to their portfolio. Last quarter, they announced the acquisition of Rising Tide Games, the publisher for the game Black Diamond Casino. Terms of the deal were not disclosed. Zynga plans to leverage the game to improve their presence in the social casino segment. Zynga already plans to launch a new casino game Princess Bride Slots worldwide during the current quarter.

But the launch of some of their games have been delayed. For instance, the launch of Dawn of Titans and CSR2 has been moved to the next year.

To drive advertising revenues, they recently released SponsoredPLAY, a pioneering engagement advertising product for social games. The ads on this platform are developed by their in-house studio Studio E. Through these ads, players will be able to earn values within the game they are playing in exchange for engaging with brand advertisers. The SponsoredPLAY beta has received positive reviews as the company saw a double-digit increase in player opt-in interactions compared to the other video ads. Additionally, players spent between 15-25 seconds on these ads, which is 5-7 times the industry average for static ads. The ads also delivered a two-to-four times lift compared with the industry average for static ads on key metrics including message recall, purchase intent, and favorability.

Zynga’s stock is trading at $2.55 with a market capitalization of $2.36 billion. It touched a high of $3.13 in May this year. The stock has fallen significantly from the $11 list price that it had recorded in December 2011.

Zynga has also witnessed several senior management changes recently. Earlier Founder Mark Pincus has come back to the helm once again. During the call this week, Zynga announced that their CFO David Lee was stepping down with immediate effect. However, Mark is convinced that things are headed the right way for Zynga. His strategy to fix Zynga is to go back to targeting casual gamers who enjoy video games, but do not have the interest to play on dedicated gaming consoles. As he said last quarter, this was a “blue ocean opportunity” for them as they could make games more accessible to the users, and more social. They are also improving their focus on providing more quality games by focusing on games and products that the market likes using their data-driven and player-centric analysis. But Zynga has a tough road ahead if it needs a valuation to boast of. They have always been accused of copyright violations and have counted on the success of their first few successful games to pull them through. A few years ago, there were suggestions that Amazon and Google may be interested in them. But, in their current avatar, I doubt they would find any one willing to touch them even with a ten-foot pole.