Zynga’s COO, John Schappert, resigned from his position and from the board of directors after less than a year. This followed shortly on the heels of last week’s announcement of Zynga’s surprise second quarter loss.
Part of the story is in this paragraph from Zynga’s Form 10-Q filed as of July 30, 2012:
Online game revenue increased $27.6 million in the second quarter of 2012, as compared to the same period of the prior year. CastleVille, Zynga Poker, CityVille and FarmVille accounted for $23.6 million, $14.4 million, $11.8 and $11.1 million of the increase, respectively. The increases in revenue from CastleVille and CityVille were the result of the more recent launch dates, November 2011 and December 2010, respectively, of these games. The increase in revenue from Zynga Poker was mainly due to bookings growth on mobile platforms. The increase in revenue from FarmVille was due to new content releases, which resulted in higher bookings over the last several quarters as compared to bookings generated prior to the second quarter of 2011. The growth in online game revenue was offset by decreases in revenue of $29.9 million and $25.8 million from FrontierVille and Mafia Wars , respectively. The decrease in revenue from FrontierVille was primarily due to a change in our estimated average life of durable virtual goods in the second quarter of 2011, resulting in an $18.0 million increase to revenue in that quarter. All other games accounted for the remaining net increase in online game revenue of $22.4 million for the second quarter of 2012.(emphasis added)
This paragraph was immediately below the table or “Revenue by type,” which shows a pretty clear and continuing slide in online gaming revenues, which reflect an 18% increase for the first half of 2012 ($653 million) relative to the first half of the prior year ($522 million). However, for the second quarter of 2012, online gaming revenue rose only 10%. The market reacted violently to this slowdown in revenue from Mafia Wars, which accounted for about 24% of revenues (unconfirmed estimate heard on news program).
The markets are also concerned with the pace of new game introduction.
Online gaming revenue represented 95% of revenue in 2011 and this dropped to 88% in the first half of this year. Zynga was advancing the notable trend of the rise in advertising revenue that this drop reflected, but the story of problems with major games received the most attention.
Concentration in games and in online game revenue is one thing. Zynga has another well-known concentration. About 90% of its revenues come from operating on the Facebook platform (per Zynga’s July 30, 2012 Form 10-Q). Zynga’s slowdown in revenues was attributed by numerous analysts to be the result of something completely outside of its control, according to Markets Pulse.
At least eight Wall Street analysts have slashed their investment ratings on the online-gaming company this morning following Zynga’s surprise second-quarter loss.
Shares are down 40% at $3.05, down about 70% from Zynga’s $10 IPO price last year, and off more than 80% from its March high.
Zynga’s bookings — which depict the sales of all virtual goods — came in at $302 million for the quarter, well below Wall Street’s expectations for more than $344 million. Zynga pegged the miss to game-launch delays and lower expectations for its purchase of OMGPop, the maker of “Draw Something.”
But analysts have said the biggest factor dragging down about 80% of Zynga bookings is the one out of the developer’s control: a simple change to Facebook’s algorithm makes Zynga’s most profitable games harder to find.
In other words, Zynga has been hurt by a change in “surfacing” policy at Facebook, the effect of which was to make it more difficult for Facebook users to find Zynga’s games. The general consensus is that Zynga will have to reduce its reliance on Facebook.
Facebook, on the other hand, obtains about 90% of its revenues from advertising, and 19% of its 2011 revenues resulted from Zynga games played on its platform (Form 10-Q for second quarter). This percentage was down to 14% for the first half of 2012. The paragraph discussing this risk was followed immediately by a paragraph addressing Facebook’s slowing trend in user growth. This growing realization didn’t help Zynga at all.
This raises questions about Facebook. Where will future revenue come from? Gambling? Will Facebook acquire Zynga now that its market capitalization is so much lower? Zynga’s misfortunes have not gone unnoticed by Facebook investors. Facebook has, in turn, been bitten (mixed views) by Zynga’s problems.
Facebook, watch out for concentrations?
Concentration can affect value.