Zynga, a four-year-old company which has made its riches off selling virtual goods in social games, has filed to raise $1 billion in an IPO.
The IPO may potentially rank among the largest of the year, especially among tech companies. For instance, Yandex, which is considered the Google of Russia, secured $1.4 billion last month.
Zynga said it will use the cash for general corporate purposes, including game development, marketing activities and capital expenditures. It also may continue to make acquisitions.
In an interesting twist, it also said it will use a portion of the proceeds to contribute to charitable causes through Zynga.org.
The company’s underwriters include Morgan Stanley, Merrill Lynch, Barclay’s Capital, Allen & Co., Goldman, Sachs & Co.
In particular, what’s interesting about Zynga’s offering is that it will represent the first publicly held company that makes its revenues mostly from the sale of virtual goods, like a energy boost or a buying a collectible garden gnome.
The company said it operates in 166 countries and sells 38,000 virtual items every second. It has 60 million daily active users and 232 million monthly active users. Astoundingly, people play two billion minutes of play a day and have four billion neighbor connections.
The San Francisco-based company, which was founded by Mark Pincus in 2007, was named after his late American Bulldog, Zinga. It got an early start from launching Texas Hold’em Poker on Facebook, and today dominates the four largest applications on the social network.
Some of its hit titles include CityVille, Empires & Allies, FarmVille and Mafia Wars.
The game-maker has grown extremely fast, acquiring more than one company every month for the past year. Today, it has 2,000 employees.
In 2010, the company’s revenues totaled $597.5 million, compared to $121.5 million in 2009. In the first three months of 2011, it’s revenues already totaled $235.4 million.
In 2010, profits totaled $27.9 million, reversing a 2009 loss of $52.8 million.
Much of its success has been tied to the ability to create games that are attractive to a large userbase. Many of its early players were considered woman, who were looking for away to unplug after a long day of changing diapers, or while a young baby was napping. Zynga and other social game makers are largely credited with expanding the number of people who play games beyond the traditional gamers, who play on the Xbox or PlayStation.
However, because of this social element of playing games with friends, Zynga’s success so far has been closely tied to Facebook. Over the years, the two have shared a hot-and-cold relationship. A year ago, Zynga entered into a five-year partnership with the social network, in which it agreed to expand its use of Facebook Credits in games.
The benefit to Facebook Credits is that there is a common currency across all games, which makes it easier to conduct small microtransactions. The downside is that Facebook takes a 30 percent cut, representing a big chunk of a company’s revenues.
In the filing, Zynga reveals a huge chunk of its business comes from games on Facebook. As of December 31, 2010 and March 31, 2011, 69 percent and 82 percent of its accounts receivable were amounts owed to it by Facebook, respectively.
Also mentioned in the filing is that Zynga does not have any special terms with Facebook. It must share 3 cents of every 10 cent-credit that is sold to a user.
A number of the company’s risks are about its dependence on Facebook, including its ability to limit Zynga’s access to the platform, or modifies its terms of service, which includes fees or how personal information about its users are shared with game developers.
Zynga also says it relies on a small percentage of its players for nearly all of its revenues, meaning that many players play for free and avoid having to ever buy any virtual goods. It did not disclose that percentage.
COMMENTARY: I profiled Zynga in a highly detailed and thorough blog post dated July 29, 2011, so I won't go into too much detail concerning their IPO until after I review their S-1 filing. I recommend you read that to get the complete skinny on Zynga.
Until the SEC publishes a copy of the Zynga's S-1 Registration Statement, we will have to rely on the preliminary stock prospectus which can be obtained from the underwriter's Morgan Stanley & Co. LLC, Attention: Prospectus Department, 180 Varick Street, 2nd Floor, New York, New York 10014, or by email at [email protected], and Goldman, Sachs & Co., Attention: Prospectus Department, 200 West Street, New York, New York 10282, or by e-mail at [email protected]. NOTE: I just requested a copy.
It should be worth nothing that several internet analysts had estimated Zynga's revenues for 2009 and 2010 to be $280 and $850 million respectively. According to Zynga's preliminary prospectus, the actual revenues were $121.5 million and $597.5 million respectively. Zynga also reported that revenues for the quarter ending March 31, 2011 were $235.4 million, putting it on track to do at least $1 billion, but let's not get too carried away.
If you do the math, Zynga's average revenue per user for the year ended 2010 is only $2.57. This is below Facebook's $3.10 and above LinkedIn's $2.43.
Zynga's profits for the years 2009 and 2010 were ($52.8) million loss and $27.9 million profit respectively. So, in essence we have another startup that hasn't made a profit yet. They join LinkedIn and Groupon, two recent IPO bigee's which had lost a bunch of money before they filed their IPO.
Here's a great video of Charlie Rose interviewing Zynga CEO and Founder Mark Pincus about his imputus to start Zynga and its business model:
Notice that Pincus claims that his revenue model has made it possible for Zynga to be "profitable for eight straight quarters". We now know from its IPO filing that this is not true because Zynga lost nearly $53 million for the year ending 2009. A great example of the successful use of hype (or lies, take your pick) in order to paint a far rosier picture of Zynga so as to not scare off investor's.
Here's a great Zynga propaganda video of John Doerr and Gordon Bing from Kleiner Perkins Caufield & Byers taken at TechCrunch's Disrupt 2010.
Courtesy of an article dated July 1, 2011 appearing in All Things Digital
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