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Zynga: Is this the start of a turnaround?

Game developers may not be lining up at Zynga's doors after a cost restructuring that resulted in approximately 150 layoffs earlier this week, but in business terms, are things finally on the upswing?

Chris Morris, Blogger

October 24, 2012

4 Min Read

I'm about to say something that's likely to make me unpopular around these parts: Zynga may actually know what it's doing. I know… I know… But after months of seemingly drifting aimlessly and taking no steps to correct its ongoing free-fall in the markets, the company has made a few intelligent moves this week that have finally turned heads – and it's done that as its biggest partner has tried to bury it. Wednesday's earnings surprise, while it still presented numbers that were a lot lower than anyone wanted, gave the company a bounce as high as 15 percent in after-hours trading. And it was a page straight out of the Activision playbook. Love 'em or hate 'em, Activision knows how to manage investor expectations. They consistently guide Wall Street to the low end of expectations and often breeze right past those. That's something Zynga managed to do with these earnings, by pre-announcing a shortfall, but still topping those revised expectations. In early October, Zynga said it expected revenue would come in between $300 million to $305 million. Analysts, fearing the worst, had an average projection of $256 million. The actually revenue total was $317 million. It's a play that can be used too often, but when it's run correctly, investor angst can be soothed (at least temporarily). More important was Zynga's decision to buy back $200 million worth of its stock. It's common for publicly traded companies to take this sort of action when their stock falls, since it signals to investors that the company thinks the shares are undervalued. But Zynga has consistently neglected to do so, giving the impression that it agreed with the Street. That doesn't do much to boost the confidence of anyone – whether they're investing in the company or going to work there. It'd be an even bigger boost to see Mark Pincus invest some of his own money to buy shares as an even stronger show of faith, but for now, we'll take what we can get. Tuesday's layoffs, though painful, were also the right move. The timing of them was certainly questionable and the reported two-hour window for people to clear out their desks and vacate the premises was, if accurate, pretty nasty. That said, few have ever described the working conditions at Zynga for the rank and file to be a nirvana. The fact is Zynga was (and still is) a bloated company. While it's never a happy occasion when someone loses their job, the move was long overdue. And frankly, the bloodletting still has a ways to go. Don't be surprised if the company continues to pare down its staff in the coming months, whether by attrition or another painful round of belt-tightening. Closing studios, shelving games that are unprofitable and reducing headcount to adjust for the changing needs of the company are difficult, but essential, steps for Zynga to survive as a public company. So, too, is preparing for the future. While I've pointed out my concerns about Zynga's plans in the "real money game space" (what the rest of us refer to as online casinos), the company took a big step forward with its partnership with bwin.party to launch online poker and casino games in the U.K. Building the international market is a good stopgap as lobbying for online gambling in the U.S. continues. And it's particularly smart to leverage the Farmville name in the games (though exactly how that will work is still a bit confusing). It's the first territory-marking move for new chief operating officer Maytal Ginzburg. And it will be interesting to see what else she has in store. Fortifying itself for the challenges of the future is especially important, given the growing hurdles the company must face. Earlier this week, Facebook founder Mark Zuckerberg stung Zynga with a mighty pimp slap during the social media giant's earnings call, saying: "Now, I want to talk specifically about games for a bit, because I think the story here is a little misunderstood as well. Overall, gaming on Facebook isn't doing as well as I'd like, but the reality is that there are actually two different stories playing out here. On the one hand, our payments revenue from Zynga decreased by 20 percent this quarter compared to last year. But the interesting thing is that the rest of the games ecosystem has actually been growing. Our monthly payments revenue from the rest of the ecosystem increased 40% over the past year since payments has been adopted. This evolution is pretty encouraging." Put another way, he continues to believe in games, but is losing faith in Zynga. Ouch. Zynga has a long way to go. And it's still imploding at a rate we haven't seen since the days of Pets.com. But with this week's series of actions, there just might be a glimmer of hope that it can pull out of its nosedive. If nothing else, it seems like someone has finally stuck their head back into the cockpit, at least.

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