Earlier this week, Facebook filed pre-IPO financial results that showed how much the social network relies on game developer Zynga for revenues. Thursday was Zynga’s turn as the startup that went public first reported its Q1 earnings, including record results — and a loss following more investment in game development and the surprise $180 million acquisition of Draw Something parent OMGPOP.
Some numbers from the report and the earnings call struck me as particularly interesting:
$392.2 million: Zynga’s most important revenue metric is one a lot of people might not grok. The bulk of Zynga’s revenue is for virtual goods to use in its games like FarmVille and the new CastleVille. The accounting isn’t as simple as selling something outright. Instead, the company reports it as “bookings” — and those hit $392.2 million in Q1, up 15 percent year over year and 7 percent over the previous quarter.
Actual revenue for the quarter was $321 million. That was up 32 percent over last year but only 3 percent over Q4. Online game revenue hit $292.8 million, up 27 percent year over year but the same 3 percent over last quarter.
$28.2 million: Advertising rose 117 percent year over year, which sounds impressive until you realize that it’s less than $30 million of Zynga’s quarterly revenue and that it, too, was up only 3 percent over the fourth quarter. (Zynga sees a positive in that it is up at all over what is typically the strongest quarter.) Zynga should continue to improve in advertising as it figures out how to best use its games to deliver. As a WWF user, the ads often make me want to pay for the ad-free version, so either way Zynga has a shot at improving ad-related income.
22 million: Zynga’s mobile daily active users nearly doubled in Q1, to more than 22 million compared to 12 million for the previous quarter, thanks largely to Words With Friends, Words With Friends brand extension Scramble with Friends, and Zynga Poker. (Draw Something was only part of the company for 10 days before the quarter ended, so contributed little to Q1.)
Mobile is a trick box for Zynga. It needs mobile for growth but so far mobile users spend less. You need energy to run Cityville but you don’t need to buy letters to play WWF. The rapid growth of mobile draws another important Zynga metric down: average bookings per user or ABPU.
Zynga CEO Mark Pincus talked about the differences between mobile and web with Om recently:
One of the lessons we learned from the FarmVille for iPhone was that web and iOS are entirely different and have different mechanics. That is why we did FarmVille Express. The difference is that on mobile it is a 2-minute session versus a 45-minute session on the computer.
Words for Friends doesn’t do as well on Facebook as it does on the iPhone, because they are a mobile first experience. Our poker game does well on the mobile as well. Even Facebook is trying to figure it (mobile) out, we are all trying to figure it out.
4 million : Zynga introduced its first arcade game, Zynga Slingo. It turned on promotion in late March (sort of like using a portal firehose) and it’s now up to 4 million active daily users.
$180 Million: Post-acquisition comments from Zynga execs, including Pincus, about looking for more deals, gave investors the yips, which in turn helped send shares down from decent double digits to below $9 recently. Pincus used the call to reset expectations, stressing plans to follow the example of Words with Friends by using the new asset to then create more organic growth.
Zynga bought WWF parent Newtoy in late 2010 for $53.3 million, mostly in cash. It’s extended the brand twice, meshing that with in-house games to spur mobile growth. Pincus said WWF has grown more than five times to 14 million daily active users. They hope to do the same with already-more-popular Draw Something and OMGPOP.
As for shopping for more deals, Pincus said when asked directly on the call:
The strategy hasn’t changed since the road show … Our primary focus, the way we’ve built this business, has been organic development and growth of games that have led to a network that we have further leveraged to bring more successful games to market and that’s what you should expect us to continue to do for the bulk of our growth. This product line was the second major product line that we went out and acquired so it was a rare instance for us. … We felt we could organically build more from it but it does not represent a change in strategy.
Macquarie Securities’ Ben Schachter sees potential — and uncertainty:
We continue to like the free-to-play model and the advertising potential inherent in ZNGA’s structural model; however, this is a crowded, competitive space that has few barriers to entry.