Zynga's Gain Is Microsoft's Pain.
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It could be a game changer. Zynga (NASDAQ: ZNGA) has a new chief at the helm and it could lead to a paradigm shift in the gaming market. Zynga snatched gaming veteran Don Mattrick from Microsoft (NASDAQ: MSFT), and in doing so, it breathed new life into a stock that has been on life support for months.
The details are scant, but are expected to surface by the end of the month when Zynga's second-quarter results are revealed.
For Microsoft, it’s a loss, especially considering the company's recent push into gaming. It's all smiles over at Zynga, where the company is showing a united front.
Mark Pincus and Don Mattrick (Source: Zynga)
Unorthodox to have the outgoing CEO making room for new blood? Maybe. But unlike former Groupon chief executive Andrew Mason, who after being ousted from that company tapped into his musicality and released a CD entitled "Hardly Workin'," Pincus doesn't seem to be singing the blues. That's because Pincus won't be leaving Zynga; he'll stay on as chairman of the board and the chief products officer. If the pair can pull it off, it could not only be a game changer for Zynga but could also set a new precedent for other businesses.
If a turnaround is what Zynga wants, and it is certainly what the company needs, then it has picked the right guy for the job. Mattrick is credited with having grown Microsoft's Xbox 360 distribution by some 700% to surpass 75 million consoles, according to Zynga.
Mattrick is an entrepreneur who sold his first company to Electronic Arts more than two decades ago. He would then go on to become the president of Electronic Arts' Worldwide Studios division before inheriting the same title for Microsoft's Interactive Entertainment business.
While Zynga has had its struggles since losing its exclusive partnership with Facebook, the company is sitting on about $1.6 billion in cash and cash equivalents as of March 31. There is $186 million remaining in an existing share buyback program, and after repaying its long-term debt of $100 million in April, the company has "no debt outstanding," according to its most recent earnings report.
As I pointed out in a recent entry, Zynga needs to reinvent itself if only to stay relevant. This is a step in the right direction and investors rewarded the stock with 6% gains when the development surfaced. But, a good day does not erase the free fall that the stock has suffered since the company first went public in 2011.
After cutting its workforce by some 18% last month, Zynga is calling for a second-quarter net loss of between $28.5 million and $39 million. With the exception of Farmville 2, Zynga's games haven't been delivering. After reporting $230 million in bookings in the first quarter, Zynga is expecting a decline in bookings for 2013 because strength in Farmville 2 isn't enough to offset weakness elsewhere. While 2013 is clearly a year of transition for Zynga, the company is making a push from web to mobile to capture more of the estimated $9 billion social gaming market.
Mattrick's direct reports will now report directly to Microsoft's chief executive Steve Ballmer, according to a report in The Wall Street Journal. A replacement hasn't been named and Mattrick's departure couldn't have come at a worse time for Microsoft (Xbox), which continues to grapple for market share and to distinguish itself from the likes of Japan's Nintendo (Wii U) and Sony (PlayStation) in the console and game wars. And despite Mattrick's success, the WSJ article points out that Xbox sales and subscriptions were on the decline through the first nine-months of Microsoft's fiscal year. Not a good time for this division to be in flux.
In its most recent quarter, Microsoft's entertainment and devices division, under which Xbox is grouped, generated a 56% increase in revenue to $2.5 billion. The company boasted of an 18% increase in Xbox Live members in its fiscal 3Q quarter versus the year-ago period.
Incidentally, Microsoft had another recent management change. Amy Hood was named chief financial officer in May, replacing Peter Klein, who left after four years in the role.
Content is king
It's a different story line over at Walt Disney (NYSE: DIS), where the board of directors just gave the stamp of approval to chairman and CEO Bob Iger. The board extended Iger's contract until 2016, one year longer than expected. Orin C. Smith of Disney's board summed up the reasons in a statement:
Disney has hit new heights during Mr. Iger’s tenure, with total shareholder return of 193% that dramatically exceeds the S&P 500's 54%, and a market capitalization that has risen to $113.7 billion from $48.4 billion when he became CEO in 2005.
Iger will continue under the existing terms of his annual compensation agreement. More than 90% of his compensation was performance-based in fiscal 2012.
Content is king, and Disney just acquired the 100% of the distribution rights for a string of Marvel movies, including Iron Man, its sequel, Thor, and Captain America: The First Avenger. Disney acquired the rights from Paramount. It was under Iger's tenure that Disney acquired Marvel Entertainment, in addition to Lucasfilm, an integration that is still unfolding.
Will the management change bring Zynga out of the doldrums? It did on the day that the management switch was announced. But it’s too soon to say if Mattrick is going to be the change that Zynga needs to create value. I’m not quite ready to bet on the stock yet, but the company has become more interesting. Of the three, Disney is exhibiting the greatest amount of stability. I choose Disney.
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Gerelyn Terzo has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Microsoft and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!