Zynga Suffers 90% Profit Decline, IPO Not Looking Good


With yesterday’s news of Zynga’s latest partnership with Google +, it was mentioned that Zynga suffered a 90% profit decline in their second quarter net income and their profit fell to $1.4 million in the quarter ending June 30, from $14 million a year earlier–the drop is associated with their recently released games, Empires & Allies and Adventure World, which were both costly to build.

This profit crunch is a bad omen especially when they’re planning for their initial public offering.  Back in July, it was reported that Zynga expects to raise almost a billion dollars in the IPO as they boasted of having 148 million monthly unique users in 166 countries who create and store more than 38,000 virtual items every second and spend 2 billion minutes a day with their service.  Back then, the $1 billion dream wasn’t so farfetched but with their massive profit drop, it now seems so unlikely.

Though revenue for the June quarter was up 114% year over year, Zynga’s “bookings”, which are the virtual good sales combined with ad revenue, were down 4% on a quarter over quarter basis for the first time in the company’s history.  Zynga look at their bookings as “the fundamental top-line metric we use to manage our business, as it reflects the sales activity in a given period.”

The 4% drop is associated with, aside from the costly build of Empires & Allies and Adventure World, the increased general and administrative expenses of about $27.1 million from March 31 to June 30, 2011 due to a $10.6 million in stock-based compensation expense related to a common stock warrant granted in June 2011, and the $10 million sign-on bonus in connection with an employment agreement with a new member of senior management and other headcount-related expenses.  Also, research and development expenses increased due to headcount-related expenses as hiring continued so that development and game enhancements push through.  And a former employee was paid a total of $8.8 million for stock compensation expenses related to the acceleration of vesting of stock options.

Zynga’s operating income was at $13 million year over year which is not good.  However, the company’s valuation increased from $13.98 billion to $14.05 billion.  This confusing data is simplified to this: since 2010, Zynga’s revenue growth came from cashing in on existing users and acquisitions, rather than from growing its user base.

Zynga will still probably go public at a high valuation but they need to find a way how to boost their user growth to attract more investors.  One step they’ve already taken is opening two of their games to Google+ users.  But the problem with this is that, those who are playing Zynga games on Facebook are likely still the ones who would be playing the games on Google+.  Google+ recently went public and as I’ve noticed, I’m getting game invites in Google+ from the same people who keep inviting me to play games on Facebook.  So even if Zynga brings all of their Facebook games to Google+, that probably won’t amount to much.  Expanding to Google+ doesn’t necessarily mean they’re increasing their user base.  And this is where Zynga needs to work on, how to increase their unique users per month.