ZYNGA’S PROFITS: DOWN 95 per cent

What’s going on at Zynga? The company is clearly marching toward an IPO with a confidence clearly defined by the three-tier shareholder structure coveted by the CEO, Mark Pincus. You’d think that everything under the hood is clean and powerful. The latest from the Wall Street Journal suggests that may not be the case.

In a taste of what it’s like to be a public company, Zynga, which has filed, is now on the hook to reveal its financials. In the third amendment to its S-1, the social gaming company revealed a 95 per cent decline in profits from Q2 2010 to Q2 2011. This year, the company showed a profit of $1.3 mn … compared to $27.2 mn a year earlier.

Meanwhile, revenue grew more than 100 per cent year over year, hitting $279.1 mn for Q2 2011. While this is slower than in quarters past, Zynga is still posting impressive revenue gains, and once the numbers reach a certain size, you have to expect the percentages to drop.

Zynga is eyeing a $20 bn valuation at IPO and a capital raise of $1 bn. It’s estimated valuation, based on the most recent financing rounds, is $11 bn.

So, what’s behind the slower growth? According to the Wall Street Journal, it’s because the company didn’t launch any new games in the first half of the year, though it seems to have sought a remedy for this in Q3. Further, Zynga’s user base got a little smaller in Q2, with only 59 mn average daily users (down quarter over quarter from 62 mn).

The Wall Street Journal continues:

The erosion in some metrics of Zynga’s results also highlights the risks facing hot tech companies that had hoped to come public at the high valuations that prevailed in the first half of this year, only to see the window for initial public offerings close when the stock market nosedived in August. Already deal service Groupon Inc. has delayed its debut by at least a few weeks, and Wednesday’s 283.82 point drop in the Dow Jones Industrial Average won’t speed a reopening of the window.

The pressure is on. Zynga clearly has the brand and the hype behind it to fare better than most in an IPO at this point, but it looks like some issues inside the company need to be addressed first.

Source: Wall Street Journal

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