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Yes - at least according to some of the more important metrics.

Like other unprofitable internet companies of today and yesteryear, Zynga (ZNGA) focuses investor attention on non-GAAP measures when reporting quarterly or annual results, as they did when they reported Q4 and FY11 results on February 14th. (When GAAP earnings are ($1.40)/share, you can't blame them for trying to report something positive.)

It's a bit difficult to really analyze quarter-over-quarter or year-over-year performance from the information in the press release, and the S-1's seem to use slightly different reporting metrics, so the forthcoming 10-K will provide additional information about operating trends. However, one metric pulled from the 8-K's press release indicates that Zynga's business may be in trouble.

In the press release, Zynga reports a metric called Monthly Unique Payers (MUP). Unfortunately, I could not find a definition for this statistic in the 8-K, the press release, or the most recent amended S-1, but I would assume that it means the number of individual users that made a Zynga purchase in any given month, averaged over the quarter.

Zynga's press release tries to portray the MUP information favorably; the release states that MUP increased 13% from the prior quarter, up to 2.9 million from 2.6 million. What could be bad about that? Well, that the revenue per MUP is (probably) declining.

The press release also reports that revenue increased just 1% sequentially, with $311 million reported in Q4. Of that revenue, $284 million was generated by in-game purchases, while $27 million was from selling advertising. There was no mention of advertising revenue growth from Q3, but it did grow 230% vs. Q4 2010, outpacing the 51% year-over-year growth in online game revenue.

Based on that growth percentage, advertising revenue was roughly $8 million in Q4 2010, meaning that, if it grew linearly, it increased about $5 million during each quarter in 2011. If it actually increased by $5 million from Q3 2011 to Q4 2011, it was responsible for more than all of Zynga's Q4 revenue growth.

That means that their bread and butter business, selling virtual goods (or what they call "online game revenue), probably contracted in Q4. Revenue per MUP definitely decreased; the following chart is my estimation of the quarter-over-quarter change in revenue and revenue per MUP. (The numbers in this table are my estimates, and I will revise if the numbers published in the 10-K differ materially from my calculations).

zynga shrinking

So, it seems like Zynga's primary business is broken. Online game revenue seems like it was flat at best, and online game revenue per monthly average payer almost certainly declined. I'd love to know more about revenue per MUP, especially in light of the claims about "whales" that I discussed in my last article, but it's simply too difficult to make much sense of the financial information that Zynga publishes, and the lack of comparability to prior statements is frustrating. For example, while they give the 2.6 million Q3 MUP figure in this press release, their S-1 (amendment 9) filed in December indicated that there were 3.4 million "unique payers" during Q3 2011. (According to the S-1, in Q3 2011, each unique payer made 73 transactions, and the average transaction was about $1.42 [$248 million in "unique player bookings" divided by 3.4 million unique players divided by unique player transactions]). Unfortunately, "unique payers" and "monthly unique payers" do not seem to be comparable, but hopefully the 2011 10K helps clear up the confusion so that financial statement users can actually understand how the business is performing.

It's worth noting that Zynga's business is seasonally weakest in Q4 (maybe it's people buying real goods instead of virtual ones) but that can't excuse away high-growth Zynga's failure to grow its main business. The growth in advertising revenue (>200% YoY) is certainly impressive, but it's still less than 10% of overall revenue. The company looks like it's in trouble.

Investors were rightly spooked by this and other disappointing elements of Zynga's Q4 release. Shares were punished, and they fell from about $14.30 before earnings to $12 on February 16. But shares might have fallen further if they had not promised better days ahead during the press release; they forecast bookings (essentially, revenue) of $1.4 billion in 2012 (vs. $1.16 billion in 2011). However, they handicapped that statement by noting that they expect "slower sequential growth in the first half of the year."

So why would one own Zynga shares? Zynga managed to grow revenue just 1% sequentially, and have now admitted that they don't expect to be able to grow much faster than that over the next six months. Zynga promised to grow at a respectable 20% for the full year, but that's nothing more than a promise at this point.

So, right now, Zynga is worth $8.5 billion, even though the company lost either $400 million last year (according to GAAP) or made $300 million (in highly-adjusted EBITDA). Even if you think a company's self-adjusted EBITDA is the perfect way to report results of operations, shares sport a 30 P/adjEBITDA, while the company is arguably unprofitable and not growing.

I certainly wouldn't be long shares, and a short position (probably via puts) seems like it may be very attractive before the next earnings release. Unless Zynga sandbagged its no-growth estimate in this earnings release, a sequential revenue decline seems possible, which would likely send shares much lower.

Source: Has Zynga Stopped Growing?