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CONCLUSION -- All is not well with Zynga on a longer term basis based on a financial analysis of recent quarterly performance. This means that IPO aftermarket buyers should do their own valuation homework, and should carefully evaluate their own risk/potential reward ratio.

DISCUSSION -- Often it’s helpful to look at sequential quarterly performance leading up to an IPO. Most IPOs that are well regarded have several strong quarters going in their IPO. “Strong quarters” means positive sequential quarterly rates of growth.

Not so with Zynga, so far. Maybe their June quarter will be better based on introduction of new games. If so, however, then it just illustrates they are as good as their last hit, much like Hollywood studios. Yes, Zynga seems to be buying up all their game competition, but that’s no guarantee of an intellectual game-creating monopoly.

Comparing the March 2011 quarter with the December quarter consider the following:

  • Revenue climbed 20% and bookings climbed 18% based on new game introductions, as you would expect. BUT operating income declined 60% and net income declined 73%.
  • Sure, there are reasons but high quality IPOs (in the IPO aftermarket) don’t rely on excuses.

Those negative income growth rates suggest that Zynga may have some underlying problems that can only be masked by periodic new game releases.

For example, all the revenue-per-user metrics for the March 2011 quarter compared with the December 2010 quarter headed south:

  • Revenue per DAU (daily active users): -6.9%
  • Revneue per MAU (monthly active users): -0.6%
  • Revenue per MUU (monthly unique users on any platform): -8.6%

Maybe that's because users have to play for some time before they start buying virtual goods.

Year over year period

Comparing March 2011 qtr with December 2010 qtr

Dec 2010

March, 2011

% change

Revenue

$195,759

$235,421

20%

Bookings

$243,499

$286,598

18%

Operating income

$71,466

$28,733

-60%

Net income

$42,994

$11,805

-73%

EBITDA

$103,194

$112,263

9%

Revenue Per User Category

Revenue per DAU (daily active users)

$4.08

$3.80

-6.9%

Revneue per MAU (monthly active users)

$1.004

$0.998

-0.6%

Revenue per MUU (monthly unique users on any platform)

$1.76

$1.61

-8.6%

And notice the decline in the user metrics for the June, July and December 2010 quarters. Zunga clearly has to run very fast to stay in the same place.

USERS

March 2010

June 2010

Sept, 2010

Dec, 2010

March, 2011

DAU: daily active users

16%

-10%

-18%

-2%

29%

MAU: monthly Active Users

14%

-1%

-13%

-4%

21%

MUU: monthly unique users on any platform

13%

-4%

-8%

1%

32%

Source: All Is Not Well With Zynga