Once again, Zynga turns in a mixed performance as CEO Don Mattrick attempts to lead the company back to profitability in an increasingly competitive market. So far there are some encouraging signs but also worrying trends. Still, investors responded positively to the earnings report by bumping the stock up over 13 percent in after-hours trading, though it’s given back those gains a few days later.
The good news for Zynga is that it almost broke even in Q3, losing a mere $68,000 by GAAP accounting methods. Of course, usually software companies prefer to use non-GAAP accounting methods to get what they consider to be a truer picture of their situation, and by that method Zynga lost $16.2 million in Q3. The differences get ironed out over time, as one accounting method books revenue or loss immediately even though the cash may be taking some time to move in or out of accounts. Suffice it to say that these results were better than the range Zynga had projected last quarter.
New Zynga COO Clive Downie
Zynga announced its best news just before the earnings call: the hiring of game industry veteran Clive Downie as Zynga’s new COO. Clive Downie is a shrewd, experienced executive with a long history in the game industry, from his time at Electronic Arts through his recent experience with mobile games as CEO of DeNA West, the portion of the Japanese mobile social game giant that’s trying to expand to the rest of the globe. The fact that Zynga was able to lure him away from his CEO position at a division of a multi-billion dollar game company has two positive implications for Zynga. One, of course, is Downie’s experience and judgment should be very helpful in building Zynga into a profitable mobile game company.
The second implication of Downie’s hiring is that Zynga’s got a good shot at becoming a serious competitor in the mobile game business. Here’s a savvy guy who has a very good senior position at an even bigger company, and he thinks Zynga offers him a better opportunity. He’s obviously seen a good shot at a positive outcome when Zynga revealed to him what it’s got in the pipeline.
Looking more closely at Zynga’s financial news, the near break-even results were the result of cost-cutting and not income growth, as revenue continued to fall. Revenue was $203 million for the third quarter, down 36 percent from last year’s third quarter, and down 12 percent from Q2. Zynga expects to report a profit for the full year, which means it doesn’t see a very bad fourth quarter. The company projects revenue in the range of $175 million to $185 million for the fourth quarter, with a loss of somewhere between $21 million and $31 million. Not a great quarter, but it could be worse in the middle of a turnaround.
The bad news for Zynga is really the continuing loss of the customer base. Here’s how Zynga reported it: “Daily active users (DAUs) decreased from 60 million in the third quarter of 2012 to 30 million in the third quarter of 2013, down 49 percent year-over-year. On a consecutive quarter basis, DAUs were down 23 percent from 39 million in the second quarter of 2013. Web DAUs and Mobile DAUs were 16 million and 14 million in the third quarter of 2013, respectively.”
Monthly unique users were down 45 percent over last year, from 177 million to to 97 million, and monthly unique payers (the folks that actually provide the revenue) dropped from 3 million last year to only 1.6 million this year. Zynga’s top three game franchises — Zynga Poker, FarmVille, and Words With Friends — provided 59 percent of the company’s revenues.
Zynga’s cash and marketable securities are still in the range of $1.5 billion, which gives the company flexibility and room to take some chances. While Zynga’s audience shrinkage is disturbing, most of it is from erosion on the social side, not from mobile. Social games are a tougher market these days, as game players seem to be bored with Facebook games. The core of the situation is that most of Zynga’s older titles like CityVille have faded, and new releases have generally not set the world on fire. New releases on Facebook aren’t really delivering massive revenue for any publisher these days. Facebook is turning its attention to mobile and to advertising, and really doesn’t seem to be concerned with a possible decline in interest for Facebook as a gaming platform.
Still, Zynga has to start pushing out mobile games on a regular basis in order to have a shot at another hit mobile game. While the mobile game business is still young, so far the biggest hit games haven’t displayed tremendous longevity. Angry Birds is nowhere to bee seen in the top ten any more — in fact none of the mobile games in the Top Ten are very old. The advantage of free-to-play games is it’s very easy for people to try new games… and for publishers of existing games, that’s also the danger. Once the newness is gone, players tend to wander off, attracted by shiny new games. Success means keeping a large group of customers deeply engaged with a game so they spend money, and having a regular supply of new games to show to your audience in hopes that if they wander, they’ll wander over to one of your other games.
There’s plenty of room for growth in mobile games, with hardware sales still growing strongly around the world and many genres barely tapped. The design possibilities inherent in mobile platforms are just beginning to be explored. It’s a good market to be in, if you have a good team and can execute well. Zynga has plenty of capable creatives, a strong technical infrastructure, and now a well-seasoned management team. What’s required now is good execution and a steady pace, and demonstrating the ability to create some brand new hits while keeping old warhorses like Zynga Poker and FarmVille churning out profts.
The results of Mattrick’s review and revisions of the product pipeline and organization should begin to be felt in the next quarter or two. If it takes longer than that, it’s not happening fast enough for the swift pace of the mobile game business. Analysts remain positive on the company’s prospects, but the clock is ticking. Some good new games need to appear and become hits on mobile platforms, and there’s not an infinite amount of patience among investors.
