Zynga’s New Games Drive User Growth in Q4 2011; 2012 Full of Promise
Zynga (NASDAQ:ZNGA) reported its Q4 2011 earnings, with higher-than-expected quarterly revenue of around $311 million. [1] The total revenue for 2011 was $1.14 billion, up 90% from 2010, while the operating expenses were also higher than the year before, as the company ramped up operations and launched a series of new games. Following the IPO, it also recorded a one-time stock-based compensation expense of more than $510 million on the issuance of restricted stock to employees and some other expenses, which turned its modest net profit of around $182 million into a massive loss of more than $404 million. [2]
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New Hit Games Drive Zynga’s Growth in Q4 2011
Zynga launched a series of new games like CastleVille and Words with Friends in Q4 2011, which led to significant growth in its user base. The monthly active users increased to more than 240 million for the quarter, compared to 227 million in Q3 2011. Zynga launched many more new games like Hidden Chronicles, ForestVille, Dream Zoo and Scramble with Friends in the beginning of 2012 on platforms such as Facebook, iOS and Google+, many of which have seen high traction among users. We expect the company’s monthly active user base to increase further in the coming years, with new releases driving most of the growth.
Zynga Founder and CEO Mark Pincus said:
“2011 was another milestone year for Zynga’s mission of connecting the world through games. We are seeing social games and more broadly play become one of the most popular pastimes on web and mobile. Zynga set new records in the year in terms of audience size, revenues and bookings. We saw great momentum in mobile and advertising and ended the year with a strong pipeline of new games. We are excited about the opportunities in front of us to continue delighting our current players and to bring play to millions of new people.”
Average Player Spending on Rise
The average revenue per user for all of Zynga’s games continued to increase as the number of paying users increased to 2.6 million by the end of 2011. Zynga also reported a steady increase in the average daily bookings per user. We expect the average revenue generated per user to continue to increase, going forward, as Zynga gets better at monetizing its games and more users start spending higher amounts on virtual goods.
Expenses Continue to Rise as Zynga Gets in Expansion Mode
While Zynga managed to grow its revenue and improve its gross profit margins, its other operational expenses have risen significantly in 2011, even after subtracting the effect of stock-based compensation expense.
As it developed more games and invested in its own platform, the research and development (R&D) costs jumped from around 24% in 2010 to more than 30% in 2011. The rapid expansion spree led to its its selling, general and administrative (SG&A) expenses increasing more than 24% in 2011, from 22% in 2010.
Going forward, we expect Zynga’s SG&A expenses as a percentage of revenue to continue to grow marginally, but R&D expenses as a percentage of revenue should show a steady decline by the end of the forecast period, as revenue grows at a much faster rate.
We have a $13 Trefis price estimate for Zynga, which stands nearly 5% below the market price. New games account for almost 50% of Zynga’s total value. It competes primarily with Electronic Arts (NASDAQ:EA), Playdom which was recently acquired by Disney (NYSE:DIS) and other independent social gaming studios.
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