Yesterday afternoon, Zynga delivered a brutal second quarter earnings report and its stock nosedived 18% after hours. Its executives, newly minted CEO Don Mattrick, Zynga founder Mark Pincus, COO David Ko and CFO Mark Vranesh, made no excuses for the poor performance.
"We know our our results are unacceptable," Ko stated on the call.
Although the company slightly beat less-than-stellar Wall Street expectations, there was no hiding its shrinking number of active users or dwindling revenue. Worse, Zynga made the decision to take away all remaining hope that the company might soon turn around.
The one thing Zynga had going for it was that it was well positioned to own the real-money gambling (RMG) market in the United States if it became legalized. Yesterday, Zynga announced its decision to pull away from RMG all together. The only excuse given, frustratingly without elaboration: that Zynga needs to focus on casual games.
"Zynga is in a transition and we must stay focused and prioritize against the biggest opportunities that leverage our DNA in social and free to play," Ko said of the decision. But to pull out of RMG suddenly without offering a thorough explanation is disastrous. Macquarie Equities Research calls the move "a bombshell."
"The fact is many investors owned the stock almost solely for their belief in the real money gaming potential," the PE firm writes.
It's also clear that Zynga hasn't been run as leanly as its rivals. Despite shuttering a few of its offices and laying off more than 600 people last quarter, Zynga still has 2,300 employees. By comparison, Candy Crush creator King has 400 employees; Angry Birds maker Rovio ended 2012 with 518. Rich Greenfield of BTIG pointed that out during the call.
"I’m wondering given that [King is] keen to be making more money now than Zynga, why is one of the first moves not to cut the company in half or in a quarter, gaining a substantially greater contraction of the employee base than what’s been previously announced?" he asked.
"In relation to what Kings accomplished, I think they’ve done an incredible job," Mattrick said. "I’ll fess up. I am a Candy Crush player and I’ve enjoyed it, evangelized it and it’s lived up to those attributes that I spoke about in the first place. Imagine if we can start getting the leverage out of our 2,300 people that Kings is getting out of their 400 people. Would we be driving better financial results? I believe we would."
To further test the new CEO, Greenfield asked what Mattrick believes makes a good mobile game. It's not clear Mattrick passed.
Mattrick said he believes a great game is "just incredibly fun" and one people want to share. Neither is the winning recipe behind Candy Crush, which uses a number of tactics to keep people addicted and buying virtual goods. For example, Candy Crush limits the amount of levels a person can play in a given day; users also run out of lives, at which point they can purchase more. It operates like an arcade. In fairness to Mattrick, he's only been on the job for two weeks.
It's clear Zynga is a long time from a turnaround, if it's even possible. Mattrick optimistically suggested two to four more quarters of volatility.
"There‘s no denying we’re not where we want to be," Mattrick said. "We’ve not met our investors’ expectations, we’ve not met our own expectations and most importantly, we’ve not met our players’ expectations. But there’s also no denying that we have what it takes to get back to winning."
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