Just four months after the Zynga(ZNGA) IPO in December 2011, shares had fallen more than 70% to trade below $3. The software developer was stumbling in its attempts to deliver new megahits to follow up its Farmville series, and it had also become apparent that the company was overly dependent on Facebook users for revenue. Weaknesses in its browser-based model and in mobile were especially apparent in light of app-based mobile downloads quickly becoming the main mode of portable gaming.
At its peak in March 2012, Zynga commanded a stock price as high as $15.91. When current CEO Don Mattrick took over in July 2013, shares were trading in the $3.30 range.
Mattrick reported compensation of roughly $50 million over a 3-year period, attracting plenty of press attention and establishing high expectations. However, there has not been much evidence to suggest his turnaround efforts are working.
While stock performance is not a perfect metric for judging management effectiveness, investors may still lament the 15.5% stock decline compared to more than 27% growth in the S&P 500 under his tenure -- shares of Zynga currently trade at roughly $2.80. To make matters worse, key company officials are under scrutiny due to a recently opened fraud lawsuit centering around post-IPO trading. With sagging performance and a recent bout of legal controversy, is it time for Zynga to find new leadership?
CEO report card
Zynga has posted declining revenues and widening losses since Don Mattrick took the helm of the company. However, the software maker was already trending down on both these fronts. Zynga was a turnaround project when he stepped in. That said, losses last quarter increased to $45 million from $25 million in the prior year.
Mattrick has an abundance of credentials that would seem to make him a good fit to run Zynga. He has a history of more than three decades in the gaming industry, with experience at both developer and management posts. He has enjoyed big successes with the Xbox 360 and first Kinect under his belt from his time at Microsoft. Mattrick also seems to be a firm believer in Zynga's potential, having once argued in favor of Microsoft acquiring the social games maker. On the other hand, subsequent troubles suggest that acquiring the company would have probably been a mistake, and Mattrick also shares responsibility for decisions that negatively affected the development of the Xbox One. Throw in the lack of a promising turnaround at Zynga, and his recent track record does not look so impressive.
Core Zynga properties, Farmville and Zynga Poker, are losing strength, and the company has failed to follow up with popular, new titles. The software company is losing users, and not one of its titles made the the top 10 daily active users for Facebook games in February. King Digital had five games in the top 10.
According to Glassdoor.com, Don Mattrick currently has a lackluster 49% approval rating among Zynga employees. For comparison, CEO Bobby Kotick at Activision Blizzard has an 80% approval rating, which is the same percentage of Electronic Arts employees who approve of CEO Andrew Wilson. Riccardo Zacconi, CEO of rival King Digital, boasts a 97% approval rating. Previous Zynga CEO and company founder Mark Pinkus had even lower approval ratings during his term, but the poor grades for Mattrick suggest the workplace environment at Zynga has improved little.
Yet, even though there are plenty of reasons to be disappointed with the course Zynga has taken under Mattrick, I do not think it is time for a new CEO quite yet. The company is making some progress in transitioning to a mobile first model, with 60% of bookings in the last quarter coming from mobile apps, and it is not reasonable to expect a turnaround or reinvention in fewer than two years. The results are not great so far, but Matrick needs more time to implement changes at the company.
About that lawsuit . . .
A U.S. District Court Judge recently ruled that shareholders can pursue a lawsuit charging that Zynga intentionally defrauded shareholders shortly after the IPO. The suit alleges that Zynga management intentionally misled investors about the strength of its business in order to allow executives to cash out shares before the company underwent its first big stock plunge. Six anonymous witnesses will supposedly offer testimony confirming that management intended to deliberately dupe investors.
While I would caution against jumping to conclusions regarding the suit, it is also worth pointing out that there have been many attempted and successful suits against the company. If the ruling supports the plaintiff side, or the issue is settled out of court such that it seems that Zynga is aiming to avoid an unfavorable ruling, then it will definitely be time for the management involved to hit the road.
