Social gaming company Zynga (ZNGA) surprised investors on Oct. 24, when it announced a loss of $68,000 and a decrease in revenue of 12% from the prior quarter.
How does Zynga plan to win mobile gaming?
Although these results may look weak under normal circumstances, investors reacted quite positively, with shares increasing almost 13% in after-hours trading. This is because just one quarter ago, Zynga reported huge losses of $52 million. For two years, the company has struggled with the effects of missing the smartphone revolution. However, in one quarter, Zynga has done major changes in its cost structure, and it is working to improve long-term revenue using mobile gaming as a catalyst.
Source: Zynga Investor Relations
Is Zynga becoming Electronic Arts?
Notice that Zynga's improved profitability was not caused entirely by cost restructuring. There are some signals of early growth. The company's current CEO and former President of Worldwide Studios for Electronic Arts (EA 0.79%), Don Mattrick, is so confident that the company's transition from web to mobile will succeed that he expects the company to be profitable for the full year on an adjusted EBITDA basis.
Mobile is radically changing the gaming industry. However, it is important to be patient, as only long-term strategies seem to work. For example, after many months of bearish momentum, Glu Mobile (GLUU) saw its shares increase almost 40% in the last month.
Despite many years of experience in the mobile business, Glu had not develop a hit for many quarters. This changed last quarter when Glu released Deer Hunter 2014. The game quickly reached the first position in the Free Game spot in the iPhone, iPad, and the Android platforms, and could be generating $217,000 per day in revenues according to Think Online. Assuming revenue flow for this game doesn't change, Deer Hunter 2014 could generate one-third of Glu Mobile's market capitalization this year.
When most investors analyzed Glu Mobile in the past, they focused on the company's long-term inability to generate profits due to weak monetization. However, in the past six months, Glu Mobile made serious progress not only in monetizing its games, but also in developing well-balanced game systems, easy-to-use interfaces, and optimization of the mobile experience.
Zynga may be the next Glu Mobile. To achieve growth, Mattrick is focusing on improving Zynga's mobile offerings in terms of quality, rather than quantity, a promising long-term strategy. The company's development cycle is also changing to be more customer-centric and mobile-focused.
Furthermore, Mattrick has flattened the organization, so now creative product leaders report directly to him. He has also made some important changes in Zynga's executive structure. On the latest earnings call, Mattrick announced Clive Downie was hired as the company's new Chief Operations Officer. Not surprisingly, Downie has 15 years of experience at Electronic Arts, where he oversaw extremely successful franchises like FIFA Soccer and Need for Speed.
With many years of experience at Electronic Arts, Mattrick and Downie will bring plenty of experience and insight from the world's second-largest video game publisher. Electronic Arts excels at creating successful and sustainable game franchises, and is famous for its cross-platform strategy, with major presence in every console and gaming concept, including mobile social gaming. Unlike Zynga, Electronic Arts' most famous franchises enjoy a stable user base, and every time the company releases a new version it generates meaningful revenue, as most of its users are loyal fans.
Final Foolish thoughts
Zynga can benefit enormously from Electronic Arts' experience in generating sustainable franchises. The company needs to strengthen its main titles, and the best way to learn the strategy is by employing previous executives from Electronic Arts.
However, these core franchises alone aren't enough to win mobile gaming. The company needs to continuously release new mobile-focused games to maximize the probability of developing a new hit.
That's why the company released CastleVille Legends last quarter. Actually, Zynga released several games for the web, but only invested "meaningful marketing dollars" in mobile-focused CastleVille Legends. It's too early to know if this game will become a hit or not. However, there is a positive reception, as the game received the Editor's Choice distinction from Apple and four stars out of five in the iTunes Store. Management also said it is getting good early insights on monetization. It's time to be patient.
