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Zynga Inc’s Struggles

Zynga-logo inc - zyngas sturggle

Zynga clearly faces an uphill climb at the present moment.    Zynga’s stock price has dropped more than 75% since it’s IPO in December 2011.    The recent fallout has sent the firm into a complete tailspin  which has resulted in senior executives exiting stage left.

Yahoo Finance.

On December 1st, Zynga lost two more executives in the form of Vice President Roy Sehgal and general manager Steve Schreck.     Steve Schreck has left to join a startup game company that is headed by the former chief creative officer of Zynga, Ray Verdu.   Verdu left Zynga Inc four months ago.    Overall, six Zynga executives have recently resigned.

Zynga’s decline may have been spurned by their brutal decision to acquire the online game app OMGPOP for the primary purpose of drawing profits from its flagship online game “Draw Something”.    Zynga acquired OMGPOP for 180 million dollars in March 2012.

Unfortunately, the popularity of Draw Something would decline significantly a couple of months after the acquisition.

zynga -draw something's usership

In October 2012, Zynga conceded Draw Something’s value decline by taking a 95.5 million dollar impairment charge in its third quarter 10-Q.  Similar to Google and Facebook,  Zynga noted that they had trouble adjusting to the popularity in mobile phones.  It was not prioritized the way it needed to be.

Zynga’s recent third quarter 10-Q significantly emphasized the firm’s problems.   Zynga posted a 52.7 million dollar net loss in the third quarter.   Zynga’s overall revenue increased by 3%, or nearly 10 million dollars from a year ago to $316.637 million dollars.   All of those gains could be attributed to the 12.087 million dollar increase in advertising revenue from one year ago.

Costs of Revenue increased by 10 million dollars from a year ago while research and development costs increased by $40.8 million dollars.   The 95 million dollar impairment charge incurred by Zynga for the failed acquisition of Draw Something only served to exacerabte Zynga’s current cost issues.

Even without factoring the 95.5 million dollar impairment charge by Zynga,  Zynga’s expenses have increased by $347 million dollars from a year ago.  Most of this significant increase can be attributed to research and development.

Zynga has responded to it’s cost issues through shutting down subpar-performing games, layoffs and closures of studios in Boston and the United Kingdom.

And in a bold, yet curious move, Zynga just recently signed a partnership agreement with Facebook in which they will gain the right to develop game apps for other platforms.   Investors are obviously nervous that Zynga is trying to break away from an entity that may be indirectly responsible for 84% of it’s total revenue.      It remains to be seen how this current deal will pan out for Zynga.    However, one cannot help but have doubts considering the current state of the firm.

Andre Waldron

Andre Waldron is the founder of Market Eyewitness. He provides financial analysis and commentary on equities, economic indicators, industries and mutual funds. In addition, Andre Waldron is also a contributor to Seeking Alpha as well as The Street.

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