Zynga: Executive Shuffle Analysis for Stakeholders

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Zynga (NASDAQ:ZNGA) once again announced several management changes.  The company’s executive suite is quite different from the one that comprised its management team when it went public late last year.  While we were exceedingly critical of the departure of former COO John Schappert in July, our views are more positive on the latest round of changes.  With the exception of the departure of CFO David Wehner (who we believe was a capable executive, notwithstanding several guidance missteps), we think that the majority of the new appointments strengthen the company’s management team.

Chief Financial Officer David Wehner resigned to take a senior finance position at Facebook (NASDAQ:FB), and several other executives were appointed to more senior positions. Zynga announced that Mark Vranesh, Chief Accounting Officer, would take Mr. Wehner’s position as CFO. Mr. Vranesh was CFO of Zynga from 2008 – 2010, and previously held senior financial positions at Fortinet and Support.com. Additionally, David Ko was promoted to Chief Operations Officer from his previous role as Chief Mobile Officer. In this role, Mr. Ko will oversee strategy planning, international, infrastructure, and operations. Barry Cottle was promoted to Chief Revenue Officer from his previous role as Executive Vice President, Business and Corporate Development. In his new role, Mr. Cottle will continue to oversee corporate and business development, and has the added responsibility of overseeing distribution, strategic partnerships, advertising sales and operations, publishing, and real money gaming. Finally, Steven Chiang has been promoted to President of Games from his previous role as Executive Vice President of Games. In his new role, Mr. Chiang will oversee all games and new IP development on both web and mobile platforms.

In our Q3:12 review note for Zynga, we listed key recent departures from the company. These departures include (with former positions at Zynga in parentheses): Erik Bethke (General Manager of Mafia Wars 2), Brian Birtwistle (Vice President, Marketing), Ya-Bing Chu (Vice President of Mobile), Jeff Karp (Chief Marketing and Revenue Officer), Allan Leinwand (Chief Technology Officer – Infrastructure), Bill Mooney (Studio Vice President at Zynga Game Network), Alan  Patmore (Studio General Manager of CityVille), Nils Puhlmann (Chief Security Officer), John Schappert (Chief Operating Officer and Director), Jeremy Strauser (Studio General Manager of Zynga Elite Slots  and Zynga Bingo), Laurence Toney (General Manager of Zynga Poker), and Mike Verdu (Chief Creative Officer).

Along with its announcement, Zynga reaffirmed its prior guidance. Zynga reaffirmed FY:12 guidance for bookings of $1.09 – 1.1 billion, adjusted EBITDA of $152 – 162 million, and non-GAAP EPS of $0.02 – 0.03.

We believe that Mr. Vranesh is a capable CFO, and believe that the promotions of Messrs. Ko, Cottle and Chiang strengthen a management team that, quite frankly, was in need of reinforcement.  Zynga has had serious credibility issues with investors, and although we respected Mr. Wehner, he had a tough uphill battle to restore investor confidence.  We are hopeful that Mr. Vranesh will communicate clearly and frequently, and we are confident in the other three executives’ abilities.  All are accomplished video game industry veterans, and we are hopeful that with its new management team in place, Zynga will begin to earn investor confidence.

Maintaining our OUTPERFORM rating and our 12-month price target of $4. Our price target reflects 2x cash and real estate of $2/share. Despite the cost cuts outlined over the past two days and the new share repurchase program, we expect Zynga shares to remain somewhat constrained over the next few quarters until management and investors can judge the success of the turnaround plan.

Risks to the attainment of our share price target include changes to game release timing, decreasing interest in Facebook and other social networks among the general public, changes to the terms or economics of its Facebook agreements, the inability to create popular mobile games, increased competition from other social gaming companies and the traditional video game publishers, greater-than-expected consumer demand for video game hardware and single purchase software, and changing macroeconomic factors.

Michael Pachter is an analyst at Wedbush Securities.