Zynga, Inc. (NASDAQ:ZNGA) is showing signs of life as investors are attracted to the substantial cash balance, potential of a new management team, and a reduced cost structure.
Zynga shares have gained 60 percent in the last three months while the company is taking substantial steps to restructure its business away from web-based social PC games in an attempt to narrow its focus on mobile gaming. Mobile contributed 30 percent of bookings in the first nine months of 2013, up from 20 percent last year.
Although the shift of web-based social games to mobile may hurt bookings in the short term, it could grow in 2014, reflecting increased focus on the company's core titles, coupled with improved execution in the mobile space.
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Meanwhile, CEO Don Mattrick's (who formerly headed Microsoft's Xbox business) long history within the games industry where he has navigated through dozens of platform launches and transitions, coupled with COO Clive Downie's mobile background, should help to better position the company for the emerging opportunity within the mobile platforms.
Apart from keeping a lid on costs, Zynga should turn its focus on core properties and franchises to yield better results for the company.
BMO Capital Markets analyst Edward Williams expects the new management team to be more efficient and effective at deploying its capital in a way that is able to generate better returns on investments. Some of this should be brought on by the company's focusing of its resources on core brands and by its being more judicious about which games are green lit.
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The company's renewed focus on investment opportunities in new franchises and new brands that could help to reestablish traction for the company with regard to usage, monetization, and revenues.
However, Williams don't expect to gain visibility on some! of these new opportunities until 2014 as potential release dates move closer.
Though Zynga lost its position as the top game-maker for Facebook to King.com, which develops "Candy Crush Saga," Zynga remains the second-leading provider of games on the world's largest social network with 90 million MAUs (monthly active users) and 17 million DAUs (daily active users), according to AppData. The company is ahead of its next competitor by 41 million MAUs and 8 million DAUs.
Zynga is focused on properties that can show strong and sustainable revenues and users. A review of the top Facebook games highlights Zynga's top three titles on the social network, FarmVille 2, Zynga Poker, and Words with Friends remain popular on the platform by DAUs and MAUs.
The company indicated that combined bookings of its FarmVille franchise grew for the third quarter in a row, increasing by 45 percent in the September quarter.
However, the company continues to lose share to other competitors as mobile DAUs fell to 14 million in the recent September quarter, down from a peak of 22 million a year ago. Mobile MAUs declined from 72 million in the last three months of 2012 to 51 million in the three months ending September 2013.
Williams noted that mobile remains a critical growth sector for the ultimate success of Zynga given the shift in playing trends from PCs to iOS and Android smartphone and tablets.
With a new management team and a significantly lower cost structure, Zynga has taken the necessary steps to leverage its assets toward become a leading mobile game developer. The company removed nearly $200 million of cash costs and operating expenses year to date versus last year, excluding restructuring charges. Overall, headcount was 2,206 people at the end of the second quarter, down one-third from a year ago.
The continued improvements to its cost structure could help deliver incremental opportunities to drive further savings over the rest of the year, apart from helping the company execu! ting the ! turnaround.
On the balance sheet front, Zynga's cash and current marketable securities at the end of the September quarter totaled $1.523 billion, or $1.90 a share, versus $1.648 billion a year ago or $2.18 a share. This represents approximately 43 percent of its current market cap.
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