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Zynga Restructures Management

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The recently appointed Chief Executive Officer of the social gaming company Zynga Inc. , Don Mattrick, is in the process of restructuring the company’s management hierarchy. This process, while reducing the layers of hierarchy, is expected to increase management’s efficiency.

Zynga recently announced that the Chief Operations Officer, David Ko, Chief People Officer, Colleen McCreary, and Chief Technology Officer, Cadir Lee, are leaving the company to pursue other interests. We, however, believe that this is a strategic move made by management to replace people in some key positions to increase efficiency or reduce cost.

As part of the restructuring process, Zynga is trying to bring the functional heads closer to the CEO.  So, now the functional heads from studios, tech, live ops, publishing, legal and HR will interact with Don Mattrick directly. The company is also making this process effective through regular meetings.

Zynga has been struggling a lot in recent times, and the stock price has moved down by 17% since Jul 25, following the company’s decision to not enter the online-gambling business in the United States. Due to its troubled business fundamentals, Zynga forecasted third-quarter sales and earnings will be short of street expectations.

Although Zynga is the developer of the famous Facebook Inc. (FB - Free Report) game, Farmville, it has been unable to build a loyal customer base, leading to a drop in revenues. The company witnessed a decline in its daily active user base by 45% to 39 million during the second quarter which is one of the main reasons behind the bleak third-quarter outlook.

Zynga has been trying to boost its competitive position in the mobile gaming segment through the launch of mobile games for Apple’s (AAPL - Free Report) iOS platform; the strategy is yet to yield satisfactory result.

To revive growth, Zynga has undertaken several cost-cutting initiatives, which included spending cuts in technology outside services, labor costs and marketing. These resulted in a 29.0% decrease in costs to $261.1 million in the second quarter. Sequentially, costs were down a modest 2.8%.

We believe that Don Mattrick’s strategic moves will boost visibility, which will help Zynga to return to profitability   in the near term.

He is known for speaking his own mind to superiors and also for his management style. Since it is now clear that his management style is independent from that of Mark Pincus, the founder of Zynga, we believe that things may revive after a couple of quarters.

However, a fragmented gaming market and stiff competition from the likes of  Electronic Arts (EA - Free Report) are the primary headwinds in the near term.

Currently, Zynga has a Zacks Rank #3 (Hold).

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