Reportedly, social game developer and publisher Zynga Inc. (ZNGA) has closed down six games namely Petville, Mafia Wars, Fishville, Vampire Wars, Treasure Isle and Montopia. According to TechCrunch, Zynga has also withdrawn four games from app stores that include Mafia Wars Shakedown, Forestville, Mojitomo and World Scramble Challenge. The move executes Zynga's reorganization plans, which the company announced on October 24, 2012 along with its third quarter earnings release. As per the plan, Zynga expects to generate fourth quarter pre-tax savings in the range of $15 to $20 million. The company also intends to lay off 150 employees, shut down 13 games and significantly lower investment in The Vile franchise.
Zynga has already shut down 10 of these games. The company has also stopped accepting new players for Indiana Jones Adventure World, which is scheduled to close down on January 14, 2013.
Zynga announced the reorganization after its share price plunged 75.0% in the trailing twelve months. Although the company has more than 292 million monthly average users, investors remain sceptical on the stock due to the company's inability to monetize this strong customer base. The other factor that hurt their sentiment was Zynga's overdependence on Facebook (FB).
Zynga games are mostly free-to-play (i.e. they don't earn any money upfront), mostly generating revenue through the sale of virtual goods and advertisement. The partnership with Facebook enabled Zynga to reach a larger audience, which catapulted it from a small start-up to the biggest brand in social gaming.
However, post Facebook's IPO, the relationship between the two partners began to sour. Facebook's poor reach and inability to monetize the mobile segment had a significant negative impact on Zynga. On the other hand, Zynga was also criticized for the lack of new and diversified gaming content, which failed to attract new users.
Most recently, Zynga lost its exclusivity to Facebook, which is a serious setback for the company, considering the fact that the social networking platform has been its primary source of revenue over the last few years (currently 85.0% of Zynga"s traffic and 92.0% of its revenue). In this regard, we believe that the reorganization plan will help Zynga to boost its profitability over the long term.
Lately, Zynga has been looking for new avenues to boost its sagging revenues. The company has teamed up with a number of companies that include online gambling company bwin.party, credit card provider American Express, as well as game developers Majesco Entertainment (COOL) and Atari. Zynga has also filed an application with the Nevada Gaming Control Board for an online gambling license in the state.
However, we note that growth from these partnerships will take some time to materialize. Similarly the procurement of the online gambling license is a time consuming process. In between, its games continue to lose popularity and money amid stiff competition from established players as well as new entrants. Further, the revised terms with Facebook (despite Zynga's initiatives to reduce exposure) will remain an overhang on the stock in the near term.
We remain Neutral on Zynga over the long term (6-12 months). Currently, Zynga has a Zacks #3 Rank (Hold).