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Zynga & its Facebook Problem

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Zynga (s ZNGA) has been trying its very best to diversify its business — with 93 percent of its sales coming from Facebook, it doesn’t have much of choice. Ben Schachter, Internet analyst with Macquarie Securities sent a note to his clients this morning after digging through the Facebook S-1. His take — it isn’t going to be a pretty fourth quarter of 2011 for the game-maker, who is still swimming in lukewarm waters since its public offering.

  • The Bottom Line – The initial read-through for ZNGA is potentially a negative indication for ZNGA’s 4Q revenue estimate.
  • Assuming ~93% of ZNGA’s bookings are generated through FB (average of first three quarters of 2011), then total net FB bookings for ZNGA for 2011 would be $1,117mm (based on FB’s ZNGA rev of $445mm divided by 30%, generating gross FB bookings of $1,484mm for ZNGA, then multipled by the 70% that ZNGA keeps).  This implies $268mm in total net bookings for the fourth quarter, while our model estimates $302mm in 4Q bookings.  In other words, unless ZNGA has meaningfully diversified its revenues away from FB, it could miss our 4Q bookings estimate.
  • Additionally, this ignores the fact that some percentage of FB’s ZNGA revenue is generated by ZNGA’s purchase of FB advertising, thus the actual ZNGA bookings from FB is likely even lower.
  • Where we could be wrong – there could be other definitional items around revenue recognition and advertising that we are failing to incorporate into these estimates.
No wonder, Zynga is been on a tear, trying to launch new games for mobile — some of them, copies of other top selling games.

3 Responses to “Zynga & its Facebook Problem”

  1. Michael Hraba

    Zynga never was an innovator. They clones games, just like Facebook clones everything. It’s all theft, and zero innovation. I am happy to see them both crash and burn.

  2. stevenkane

    Om, I believe Zynga negotiated a sweetheart deal for itself when it did the deal with Facebook to use Facebook Credits — meaning, I think, that Zynga pays only 20% of gross revenue (not 30%)