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Wall Street analysts view Zynga’s choice of ex-Xbox boss Don Mattrick as both puzzling and positive

Above: Mark Pincus and Don Mattrick

Image Credit: Zynga

Wall Street analysts had a mixed reaction to Zynga’s decision to hire Microsoft games chief Don Mattrick as its new chief executive. Mattrick replaced founder Mark Pincus, who will remain chairman and chief product officer at the struggling social gaming giant.

“We view Mr. Mattrick’s appointment positively, although it is not without challenges,” wrote Michael Pachter, an analyst at Wedbush Securities. “Zynga has seen its market leadership in social gaming wane, and finds itself neck-and-neck with King.com for social games dominance [King.com passed Zynga, according to AppData, to become No. 1 this week]. Similarly, Zynga’s plans to expand on mobile devices have taken seemingly forever; while the company has grown over the past year, it has as yet to generate a significant portion of its revenue from mobile.”

Wall Street itself liked the hiring of Mattrick, with Zynga’s stock rising another 10 percent this morning in addition to its 10 percent rise yesterday, though it’s come back 2 percent since this report (now at $3.25 a share). Jim Cramer of CNBC noted that Zynga has $1.6 billion in cash and a $2.4 billion market capitalization. With a new CEO, the situation seems “pretty hopeful,” he said.

Pachter noted that Mattrick’s tenure at Microsoft since 2007 has been positive, as he oversaw the expansion of the Xbox 360 game console from 10 million consoles sold to 80 million, and Xbox Live memberships grew from six million to 50 milllion. Pachter is maintaining his 12-month target of $4.25 a share for Zynga and his rating of outperform. He thinks the recent layoffs and flexibility in Zynga’s business model will see it return to profits as early as 2014.

Pachter also said, “Zynga has only just begun testing the potential of real money [gambling] in the United Kingdom and is not expected to generate significant revenue from this business for at least another few years. We think that Mr. Mattrick will focus the company’s efforts on streamlining its operations, right-sizing its staffing levels, and focusing employees on the highest revenue-potential projects. In order for Mr. Mattrick to be successful, we believe that Mr. Pincus must give him free rein to operate the business as he sees fit; it is not clear from the two-man executive committee that this will be the case, although we suspect that Mr. Pincus is well intentioned and that he intends to give Mr. Mattrick significant leeway. Mr. Mattrick has a history of accomplishment at Microsoft and Electronic Arts, has consistently surrounded himself with capable executives, and has consistently extracted solid performance from his coworkers. We expect him to repeat this history at Zynga.”

Doug Creutz, an analyst at Cowen and Co., said the new hire was interesting and that Mattrick was a well-regarded executive, but the move was not enough to change his cautious view about Zynga’s stock price. He lowered his estimates for Zynga’s 2013 non-GAAP revenues from $809 million to $782 million, and he lowered his estimate of earnings per share to a loss of 7 cents a share to a loss of 8 cents a share.

Zynga reports its earnings on July 25.

“First and foremost, we view Zynga as a business in desperate need of a radical turnaround,” Creutz wrote today. Competitors such as King and Kabam are moving forward on mobile, and Creutz would not have been surprised to see Mattrick land as the CEO of Electronic Arts.

“As he is a console veteran, we are not sure how much Mattrick’s experience will benefit Zynga; other console executives — John Schappert, for instance — have had their difficulties adapting to free-to-play gaming companies,” he added. “Additionally, while Mattrick will replace Pincus as CEO, Pincus will remain chairman and chief product officer and will also retain his controlling voting stake in the company. As a result, it is not clear how much operating room Mattrick will really have. If there are personality clashes between the two, it could worsen the situation at Zynga.”

Arvind Bhatia, an analyst at Sterne Agee, wrote, “We think the hiring of Don Mattrick as CEO is a positive and could help turn around the company. Still, Zynga’s issue has not been so much a lack of leadership as its recent inability to produce hits, a general slowdown in the social gaming industry, increased competition, a difficult transition to mobile, and a bloated cost-structure.”

Bhatia added, “The Farmville franchise and Zynga Poker title continue to be successful. Many of the other franchises such as Castleville, Cityville, etc., experienced temporary success but have lost most of their audiences. Zynga’s business is now dependent on new hits, which have been hard to come by. We believe this is a product issue and not so much a leadership issue. We think the culture at Zynga is driven more by data-analytics and less by innovation. While this model served the company well when it was able to produce hits, it does not appear to be working that well anymore.”

He said Mattrick’s experience will serve him well, but he added, “Don’s primary focus so far has been in the console business. Zynga will be looking for leadership from him as it transitions to the mobile platform.”


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