Is This the Beginning of an Exec Exodus at Zynga?

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A mass exodus of high-level executives is pretty much always a bad sign for any company. Wait, scratch that, it’s decidedly always a bad sign. Research In Motion (Nasdaq: RIMM  ) has been bleeding numerous “chiefs,” “VPs,” and “seniors” for a while now, and we all know how the BlackBerry maker is faring: not well.

Could a similar fate befall social gamer Zynga (Nasdaq: ZNGA  ) ?

A quickie
Earlier this month, COO John Schappert resigned after an internal reorganization stripped him of some of his responsibilities and oversight. Schappert was previously overseeing game development but, after last quarter’s earnings release, it was obvious a change was needed, as revenue growth continues to rapidly decelerate, and bookings dropped 8% sequentially.

CEO Mark Pincus set out to revamp Zynga’s organizational hierarchy, and moved up two execs to report to him directly: Dave Ko, chief mobile officer, and Steve Chiang, executive VP of games. Both execs had previously reported directly to Schappert, and their broadened responsibilities came at the expense of Schappert’s, leading to his departure. The changes underscored Zynga’s shifting focus to mobile games and platforms.

Schappert’s exit is particularly notable because Zynga poached him from rival Electronic Arts (Nasdaq: EA  ) just 15 months ago, in April 2011, where he had spent roughly 10 years. He’s one of three execs who Zynga grabbed from EA in recent times, which EA is none too happy about.

Who’s coming with me?
On the heels of Schappert’s resignation, Zynga’s general manager of CityVille, Alan Patmore, is also calling it quits. Maybe Schappert can hold the door for Patmore as he follows him out the exit door. Patmore is leaving to join developer Kixeye that, much like Zynga, has also been riding Facebook’s (Nasdaq: FB  ) web platform to riches.

Kixeye’s games aren’t as casual as Zynga’s, and are geared towards more mature audiences who get immersed in games. You won’t find any disproportionately cute cartoon characters tending a field of cabbage there; in their stead, you can expect a strategic war game for world domination, like War Commander.


War Commander. Source: Kixeye.

More importantly, this strategy is yielding much higher monetization rates than Zynga. The average social game company brings in roughly $0.04 per user -- Kixeye does $0.60, or fifteen times more. Kixeye has also been profitable for the past couple years. Patmore will be responsible for product strategy and development at Kixeye.

Show me the money
Zynga’s cratering stock price, down 70% from the IPO price, has also reportedly been weighing heavily on internal morale, as many early employees have sizable equity stakes -- employees who are still subjected to lock-in provisions and can’t unload their shares. Instead, they watch helplessly as public investors dump the stock to new lows every month.

In an attempt to boost morale and employee retention, Pincus has issued out even more equity to all employees in the form of stock options. The irony here is that even if issuing additional stock options at such low prices is successful in boosting morale, the move will similarly boost stock-based compensation expenses borne by public shareholders. Thank goodness for non-GAAP metrics, right?

If you thought Zynga’s stock-based compensation is already overly generous -- which it is -- just wait and see what it’ll look like if Zynga’s stock price recovers, and all those freshly issued options increase in value. Zynga’s net loss last quarter was $22.8 million, with that red ink due, in part, to $95.5 million in stock-based expenses.

Abandon ship?
Rival companies are reportedly seeing a "flood of resumes" recently from Zynga developers looking to jump ship. Two executives leaving doesn’t necessarily constitute an "exodus" quite yet but, amid criticisms over Zynga’s business model and depressed morale among employees, this could quite easily just be foreshadowing of more dire straits on the horizon.

If employees are already looking to abandon ship less than a year after Zynga’s IPO, then maybe investors should also. This brand new premium report will outline all the flaws in Zynga’s business but, also, some potentially lucrative opportunities it has. Sign up today and get free quarterly updates.

Fool contributor Evan Niuholds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of Facebook. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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