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Zynga Diversifying Revenue Streams

Posted on Tuesday, Feb 21st 2012

Market research firm eMarketer projects that 62 million people, nearly a quarter of the U.S. Internet-using population, will become social gamers by the end of this year. The social gaming population is expected to grow to 73 million by 2013. Virtual goods transactions are expected to remain the leading source of revenue for social game developers. In another report by In-Stat, the worldwide market for virtual goods is projected to grow to $15 billion in 2014 from $9 billion in 2011. The recently listed social games developer, Zynga (Nasdaq:ZNGA), will benefit from this growth.

Zynga’s Financials
Earlier this month, Zynga reported their first quarterly results since they went public in December last year. Q4 revenues grew 59% over the year to $311.2 million and were ahead of the market’s estimated revenues of $307 million. EPS of $0.05 fell 44% over the year but was ahead of the Street’s projected earnings of $0.03.

Revenues from virtual good transactions grew 51% to $283.9 million, bringing in 91% of their revenues. Advertising revenues grew 229% over the year to $27.3 million. Traffic to the site’s games has also been increasing. Daily active users grew 43% over the year to 48 million worldwide users, and monthly active users grew 23% to 240 million. According to App Data, Zynga operates six of the seven most popular Facebook games. Their new games are also seeing strong success. Hidden Chronicles, released last month, reported 30.7 million monthly users to become the third most popular game on Facebook.

The company’s expansion into the mobile segment is also seeing good traction. Zynga ended the year with more than 15 million daily active mobile users. Mobile gaming is another high-growth industry with market reports predicting the number of U.S. mobile gamers to grow to 105 million uses by 2015 from the 74 million users in 2011.

Zynga ended the year with revenues growing 91% over the year to $1.14 billion and EPS of $0.24. For fiscal 2012, Zynga is projecting EPS of $0.24-$0.28, ahead of the market’s estimates of $0.22.

Zynga Moves Away from Facebook
Zynga has been worried about their extreme dependence on Facebook and has been taking several steps to move away from it. After launching Project Z last year, which let users play Zynga games without connecting to Facebook, they are now working toward becoming a game publisher. The new program is aimed at enabling third party developers to showcase their games and advertise on their platform. By expanding into the publishing space, Zynga will not only lower their reliance on Facebook, but also diversify their sources of revenues as they will be charging the third party developers a publishing fee.

In addition, they tied up with leading toy maker, Hasbro, to develop toys and games based on successful Zynga games like Farmville and Cityville. Through the deal, Zynga will be able to earn licensing revenues from Hasbro besides expanding their branding efforts.

Zynga’s stock is trading at $12.93 with a market capitalization of $9.04 billion. Zynga listed on the Nasdaq in December 2011 through an IPO of 100 million shares priced at $10 each. Since its listing, the stock had fallen to a record low of $7.97 in January this year before recovering to touch a high of $14.55 earlier this month.

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