Zynga's earnings call revealed that the company is still struggling to regain its mojo. Revenue dropped 31 percent for the quarter compared to last year, from $332.5 million to $231 million, with a net loss of $15.8 million. New CEO Don Mattrick was straightforward. “We have a lot of hard work in front of us and as we reset, we expect to see more volatility in our business than we would like over the next two to four quarters.” In other words, make sure your seat belts are fastened. It's going to be a bumpy ride. The challenges ahead for Zynga include execution, products and even marketing.
First, a look at the numbers defining Zynga's position. The non-GAAP numbers (which Zynga uses to give a clearer picture of the business) show bookings at only $187.6 million, compared to $301.6 million last year. The non-GAAP numbers show a loss of $6.1 million for the quarter, versus a profit last year of $4.6 million, an almost $11 million swing in the wrong direction. Perhaps more disturbing is the drop in Daily Active Users (DAU): from 72 million last year to 39 million this year, down 45 percent. Monthly Unique Payers (MUP) decreased from 4.1 million to 1.9 million, a 53 percent drop. Those are the people who keep the cash flowing in, remember.
There are some positives among all the negatives. Combined bookings for FarmVille and FarmVille 2 grew 29 percent over last year, showing that new life is possible in old franchises. Zynga's new games Solstice Arena and Running With Friends received Apple's 'Editor's Choice' awards, the first time that's happened. Importantly, Facebook was down to contributing only 68 percent of total revenue, reducing Zynga's reliance on that channel. It would be better if that was due more to rising mobile revenue than to falling Facebook revenue, though. The company has $1.5 billion in cash, so there's plenty to keep it going through a few lean quarters.
Mattrick plans to spend the next 90 days “under the hood” going through the product pipeline and trying to improve the slate of upcoming products. An analyst raised the question of whether Zynga had too big a staff, noting that King has higher revenues with 400 people than Zynga does with 2300. “Imagine if we can start getting the leverage out of our 2,300 people that Kings is getting out of their 400 people,” Mattrick replied. Given that mobile is where Zynga is focused, and the market for mobile games is growing rapidly, this is a wise choice. Adding good staff is one of the toughest tasks for game companies, and it would be foolish to cut massive numbers of staff now only to try and hire them back next year. There's plenty of time to cut staff further if new products don't perform well enough. Zynga's got an enormous cash cushion, and this is a good use of it.
One key decision has already been made by Mattrick and Pincus. Zynga is not moving forward with real-money gaming in the US, deciding its focus is better spent on mobile and social games. That's probably a good choice given that real-money gaming in the US would be a state-by-state slog through legal barriers.
Mattrick is looking to improve Zynga's performance from its existing games and ensure that new games get into the top ten. Zynga Poker was called out as an example of one of Zynga's hits that needs help, and Mattrick is already putting some of Zynga's best talent on the job. We'll probably see more shifting of resources in the next few months.
The biggest challenge of all for Mattrick may be marketing. Shrinking audience numbers can be revived to some extent, and perhaps completely, by coming out with the right games (or making the right improvements to existing games). Viral hits are the magic potion that has powered Zynga's growth, and once Zynga had a large audience it could produce new games to serve up to that audience without having to worry about marketing.
That all made sense when Zynga's games were all casual, and generally appealed to the same audience. Things are starting to change with Zynga putting more effort into mid-core games like Solstice Arena, a fast multiplayer online battle arena (MOBA) that's aimed squarely at fans of League of Legends. That's not going to be interesting to a large segment of the Words With Friends audience. The smaller, more dedicated gamers that Zynga is targeting with some of its games will need some marketing attention in order to reach them effectively. Those gamers tend to monetize much better, but Zynga's going to have to make a marketing effort to build that audience rapidly.
For future success, Zynga has to change the basics of what made it big. The company grew rapidly because Facebook allowed unlimited game messaging, giving Zynga games a boost in a brand-new marketing channel for free. Rapid introduction of new games, often by doing versions of whatever was popular in the market, was the appropriate strategy. Zynga grew rapidly tracking with Facebook's rapid growth, until Facebook slowed down, started taking 30 percent of game revenue, and cracked down on viral game messaging. Now Zynga's got to be leading the pack, not 'fast following,' and that's a big change that Mattrick has to implement.
Investors certainly haven't been happy with Zynga's news, driving the stock down by over 15 percent in early trading. It does seem reasonable, though, to give Mattrick some time to make changes and see how it affects the company's position. Mattrick is a seasoned game executive who really, really likes to win. Rumors are that he turned down a shot at being EA's new CEO for the Zynga job. Being CEO of EA would have been tough, but much less volatile. Mattrick sees potential in Zynga that perhaps outstrips what he thinks could be in EA's future. We should know better by the end of this year if Mattrick will be able to actualize Zynga's potential.