Zynga Settles Lawsuit

Reportedly, Zynga Inc (ZNGA) settled a trademark lawsuit against the makers of Bang With Friends. Zynga had alleged that the web application violated its trademark of “with friends”, that it uses in a number of games namely Words With Friends and Chess With Friends.

Although the details of the settlement were not made public, Bang With Friends accepted Zynga’s trademark right. The application has agreed to change its name and rebrand its service offering going forward. This is the third lawsuit Zynga settled this year.

The company recently settled a case with one of its former employees and KIXEYE Inc. In Oct 2012, it sued Alan Patmore, former general manager of Cityville, for stealing 760 documents related to unreleased games at the time of leaving Zynga for KIXEYE. Although Zynga settled with both the defendants, terms of the settlement were not disclosed publicly, except that Alan Patmore had apologized for his conduct.

Zynga also settled a lawsuit with game developer Electronic Arts (EA) over the allegation that the former’s Ville games copied some major features of the latter’s The Sims in February this year. We believe that the settlements remove a major overhang on Zynga, as it will lower the company’s overall legal costs.

Zynga has been struggling a lot in recent times, particularly after the company’s decision to not enter the online-gambling business in the United States. Due to its troubled business fundamentals, Zynga expects its third-quarter sales and earnings to be short of street expectations.

Although Zynga is the developer of the famous Facebook Inc. (FB) 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) iOS platform. To revive growth, Zynga has undertaken several cost-cutting initiatives, which include spending cuts in technology outside services, and reduction in labor and marketing costs.

However, we believe that these strategies will take some time to positively affect the stock price. Moreover, a fragmented gaming market and stiff competition are the primary headwinds in the near term.

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

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