How Tiger Woods Becomes Zynga's Last Hope for Glory

NEW YORK (TheStreet) –– As Zynga (ZNGA) struggles to stay relevant amongst gamers, investors and the company's nearly 2,000 employees, the company is expanding into sports games, at the expense of its balance sheet.

Zynga announced Zynga Sports 365, a new brand that will house all of the company's sports games, including the recently launched NFL Showdown, as well as a pending game from Tiger Woods. Zynga, which has traditionally been in casual gaming, including games like FarmvilleFarmville 2: Country Escape and Zynga Poker, is moving to sports gaming because it believes it's an nascent opportunity in mobile gaming.

Barclays analyst Christopher Merwin called the move into sports a "silver lining," in light of the company's weak second-quarter results and lowered 2014 guidance. Merwin rates shares "equal weight" with a $3 price target, down from $5 prior to the results.

"Sports are underserved, and there are a lot of consumers who consume and play sports," said COO Clive Downie in a phone interview. "We felt that we had the right product design, the right individuals to take a run at the category and get into a leadership position and then grow and sustain that over a period of time."

Both games will continue the company's freemium model, with in-app purchases on free-to-play products. Downie would not specifically say what the in-app purchases were when asked.

However, these games, as well as the upcoming running game with Looney Tunes characters come at a cost. The company signed licensing deals with the National Football League, NFL Players Inc., Tiger Woods and with Warner Bros. Interactive Entertainment to license the Looney Tunes brand to bring the content to the games, and while financial terms were not disclosed, it's clear the company's cash balance is declining over time.

At the end of Dec. 31, 2013, the company had $1.541 billion in cash and cash equivalents, and just $1.14 billion at the end of the second quarter. This largely reflects the Natural Motion acquisition, done in January, for $527 million in cash and equity. However, the company had $1.14 billion in cash and equivalents at the end of the first quarter, showing no sequential growth in cash.

This may signal that the company cannot produce the necessary hit games needed to grow, despite having a headcount of nearly 2,000 people, a fact Downie tried to assure investors the company has the right strategy in place.

"In terms of head count, we need to be number one and leading in a diverse set of categories that go after scale and an addressable market," Downie said over the phone. "The right size for us to win is what we’re committed to doing having those people to make sure we hit our strategies."

Other companies have had success licensing out content and celebrities, with Glu Mobile (GLUU) having a hit game using celebrity Kim Kardashian, Kim Kardashian: Hollywood. In July, the $500 million market cap company announced the Kim Kardashian game had broken "Glu single-day revenue and sustained ARPDAU (average revenue per daily active user) records."

San Francisco-based Zynga has made major acquisitions before Natural Motion, including the ill-fated OMGPop acquisition in 2012, which the company subsequently took a write down on. This leads to the potential of further acquisitions, something Pacific Crest Seucirites analyst Evan Wilson noted "could eat into Zynga's cash balance."

This may mean continued weakness for Zynga shares, as the company lowered 2014 guidance, due to pushing release of some games until 2015. It now expects bookings between $695 million and $725 million, below the prior forecast of $770 million to $810 million. For the third quarter, Zynga expects revenue of between $160 million and $170 million and earnings between break-even and 1 cent a share.

Downie noted the games were pushed out for "quality assurement," adding that Zynga felt it owed its consumers the very best, eliminating bugs "that didn't meet our quality bar."

The company is in a long-term transition under CEO Don Mattrick, who took over from co-founder Marc Pincus last year. The company's previous business model had been very heavily reliant on Facebook (FB) and the Web, but it is increasingly turning toward mobile devices, such as smartphones and tablets for its games. In the second quarter, monthly active users (MAUs) fell to 130 million, down from 187 million in the year-ago quarter but up from 123 million in the first quarter. Perhaps the company's most important metric, monthly unique payers (MUPs), came in at 1.7 million, up from 1.4 million in the first quarter of the year but down from 1.9 million in the year-ago quarter.

It may be an awfully bumpy rest of 2014, as the company spends its cash on licenses and continues to transition its business model under Mattrick, moving into sports and other others. "We're continuing to look at new categories that we can do in the future," Downie said. "We're going to create the preeminent brand on mobile."

While this may mean the company will look to more sports than just football and golf, it will continue to cut into the company's balance sheet. Given the string of losses the company has racked up over the years, that may not be something investors see as a hole in one.

--Written by Chris Ciaccia in New York

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