It seems like Zynga (ZNGA) lost its place among the top game developers almost as fast as its rise to riches. But it wouldn't be wise to count out a company with over $1 billion in cash and securities, and no debt. Zynga's efforts to turn its fortunes around include bringing back original management, continuing acquisitions and creation of new games, streamlining operations and focusing market efforts, increasing its presence on mobile platforms and maintaining a strong cash position.
Zynga's Rise and Fall
Zynga is a leading online and mobile game developer. Founded in 2007, the company became hugely successful with the launch of its "Farmville" game in 2009, in a partnership with Facebook. This led to an initial public offering (IPO) at $10 per share in 2010. However, since then, the game developer's fortunes, revenues and stock price have fallen dramatically, with the stock dropping to nearly $2 a share. As of May 2015, share price appears to have found support around the $2.50 level and has moved slightly higher in the first half of the year. Among the problems the company has experienced are two dramatic management changes, with the departure of CEO Mark Pincus in 2014 and then his return a year later. Other problems include over-hiring, lack of business focus and the company being slow to shift to the growing mobile platforms for game playing.
Year-over-year increases in total revenues and game bookings in the first quarter of 2015, along with a turn upward in the company's stock price and other indications that Zynga may be turning things around, have given Zynga investors new cause for optimism.
Signs of Improvement
One of the primary steps Zynga has taken to right the ship is the return of Mark Pincus to the helm as the company's CEO. Pincus has proven his business ability by creating this multimillion-dollar gaming firm from the ground up – and in an impressively short span of time. His personal connections with key people in the Internet world, such as Facebook's (FB) Mark Zuckerberg, have been a prime factor in the company's successes and should continue to be an asset.
Pincus has displayed innovative thinking through the creation of Zynga.org, a non-profit organization with the stated aim of using social games for social good. Zynga.org has raised over $20 million for more than 50 non-profit organizations worldwide. In 2013, it launched an education technology accelerator designed to improve the quality of learning games for children.
Recognizing the need to continue to develop new games, Zynga has pursued an aggressive acquisitions strategy designed to capture other games and top talent among game developers. Its 2014 acquisition of mobile games developer NaturalMotion is viewed as an important step in the company's push to increase its mobile game platform presence and to continue to create new, successful games.
Beginning in 2014 and continuing in 2015, Zynga has taken major steps to streamline operations, improve cost and operational efficiency, and focus efforts and resources on its most successful projects. To that end, the company is following up a 15% cutback in its workforce in 2014 with plans to reduce payroll by an additional 18% in 2015. It is concentrating efforts on its most successful games, "Farmville," "Words with Friends" and "Zynga Poker," and on increasing penetration of mobile platform gaming, an area that is rapidly outpacing online play. Mobile bookings now account for more than half of Zynga's total bookings and have nearly doubled in the past year. The company has closed down 11 of its lower-performing games, while unveiling "Empires and Allies," a new game that represents part of the company's effort to expand into action strategy games.
Cash Is King
Despite some substantial decreases in game bookings and total revenues over the past three years, the company has managed to maintain a very solid cash position. As of the first quarter of 2015, Zynga held cash, cash equivalents and marketable securities totaling $1.1 billion. It increased its free cash flow to $49 million, roughly twice the amount the company recorded in the first quarter of 2014. This strong cash position, coupled with relatively little debt, will enable Zynga to continue growing and making necessary adjustments to the changing online and mobile gaming marketplace.
Zynga projects its adjusted EBITDA earnings to increase from $2 million in the first quarter of 2015 to $10 million - $20 million for the second quarter of the year.
For more analysis on Zynga, check out Who are Zynga's (ZNGA) main competitors?