Photo: Zynga S-1
Zynga just released its Q3 numbers in an amended S-1 filing to the SEC.
At first glance, the numbers look OK. But as with the Q2 numbers, the details are distressing.
The bottom line is this:
Zynga is not growing.
Yes, “revenue” grew sequentially to $307 million, which led to a profit of $13 million for the quarter.
But there are three problems with that picture, which we’ll explain in turn:
- The company’s measure of “revenue” is actually pretty useless when it comes to how Zynga’s actual business is doing;
- Zynga’s “bookings,” which are a better measure of revenue, have been flat for three quarters.
- Zynga’s user numbers are declining.
One reason for the flat bookings and declining users is the fact that Zynga did not launch a big new game in the first three quarters of the year. It has now launched one, CastleVille, which should help the numbers for Q4 and Q1. But still, the flat bookings of the past three quarters is discouraging.
Photo: Zynga S-1
Just what do we mean when we say Zynga’s “revenue” figures aren’t particularly meaningful?As we have previously explained, Zynga discloses two types of revenue metrics:
- Revenue, and
Of these, “bookings” is actually a more meaningful measure of the company’s performance in a given period. This is because “Bookings” represents the dollar-amount of virtual goods sold to game players in the period. “Revenue,” meanwhile, is the amount bought in prior periods amortized over the expected life of the virtual goods.
“Bookings” is what Zynga actually sells in the quarter or year. “Revenue” is what Zynga sold over the past 4-6 quarters and then spread over the next year or year-and-a-half.
Zynga’s bookings for Q3–their more meaningful measure of revenue–was $288 million. Now, this is still higher than last quarter’s $275 million, but it’s basically flat with the Q1 total of $287 million.
Zynga’s revenue, which represents the amortization of goods sold in prior quarters, continues to grow nicely, but this is mostly due to changes in the amortization schedules. Without these changes, as Zynga states clearly in its filing, the company would not be profitable:
Cumulative 2011 changes in our estimated average life of durable virtual goods for various games resulted in a net increase in revenue of $21.2 million in the three months ended September 30, 2011.
In other words, Zynga’s profit would have been wiped out (and then some) if the company hadn’t shortened its amortization schedules.
Photo: Business Insider Research
So, Zynga’s bookings are flat. Worse, it’s user base is declining.
Zynga’s two most meaningful metrics of user engagement, daily active users (DAUs) and monthly active users (MAUs), are both down from last quarter, from 59 million to 54 and from 228 million to 227 respectively.
That’s not a collapse (a 1 million difference is more stagnation than decline), but both those numbers are WAY down from the previous quarter, when DAUs were 62 million and MAUs 236 million. They’re also down from the numbers of 18 months ago.
What does that mean?
It means that Zynga has grown its business over the past 18 months not by growing the number of people who play its games, but by getting better at wringing money out of those existing users. That growth has a limit. It means that for all the growing revenue, what Zynga is really doing is finding efficiencies in a stagnating business instead of riding the wave of a growing business.
This is a big problem for a company that is trying to go public by selling itself as a “growth” story. Not growing users puts a ceiling on Zynga’s growth, which is exactly the opposite of what investors expect.
THE BOTTOM LINE
We draw two conclusions from this:
- Like it or not, like plenty of other media companies, Zynga is a hits-driven business. Zynga’s user numbers are stuck in neutral at least in part because it hasn’t had a major game launch for six months. Zynga likes to say that because of all the data it gets on usage of its games and because it can cross-promote games, and because people keep playing (and paying) continuously, it has taken the “hits” factor out of games, and instead turned it into a recurring-revenue science. The numbers suggest otherwise. Zynga needs regular hits or its growth stalls.
- Zynga needs to find a new growth driver. The company seems to just have hit a ceiling. The new growth could come from a number of things: a new kind of social games that appeals to a brand-new demographics; mobile games; games off Facebook. Zynga has bets on all these, but so far they haven’t moved the needle. If Zynga wants to go public as a “growth story” it needs to explain to investors exactly where the growth will come from.
What are we missing? Let us know your thoughts: [email protected].
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