Zynga's Monetization: Less Money, Mo' Problems

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I’ve written before about Zynga (NASDAQ: ZNGA)’s struggles and how investors no longer trust the company. Last week’s second quarter report sent shares to historic lows, hovering in the $3 range. That’s 70% lower than the IPO price of $10 and 33x earnings, using FY11’s revenues and the more generous end of Zynga’s lowered EPS estimates for FY12.

Arguments can be made about Zynga’s overreliance on Facebook (NASDAQ: FB), the company’s poor OMGPOP acquisition, or its continued focus on sequels and copycat titles rather than the gambling games that excel. But at the end of the day, monetization is the most important factor.

And Zynga stinks at monetization.

Less Money, Mo’ Problems

While brick-and-mortar stores have metrics like sales per square foot and comparable store sales, Zynga has its own breed of metrics: bookings, DAU, and MAU. The former refers to an accounting practice and the latter two are user measurements. The relationship between money and users illustrates the company’s monetization issues.

Bookings are the measurement of virtual goods sales, which is rather Zynga’s (digital) bread-and-butter. Bookings for Q2 were $302 million, up 10% from the prior year but 8% down from Q1. Analysts had expected around $344 million.

Earning money through virtual goods requires the players to shell out the cash. It’s important to note that a very small percentage of players spend money on Zynga games. In theory, the more people that show up to play, the more the percentage of paying players will grow.  

How many players turned up for Zynga games during the quarter? Daily active users (DAU) measured 72 million, up 23% year-over-year and 16% from Q1. There were 306 million monthly active users (MAU), up 34% on the year and 4% from Q1.     .

Okay. The active user numbers are growing, even if that growth is decelerating. That means more money, right?

Wrong. Zynga’s quarterly reports include a metric called the average daily bookings per average DAU (ABPU). The second quarter saw an ABPU of $0.046, down 10% from the prior year and over 16% below Q1’s $0.055. Remember that DAU’s had actually increased during those periods, meaning that monetization was falling as users increased.  

A comparison between MAU and bookings shows similar results. Felix Richter made a Statista chart comparing the historic average bookings per monthly user for Zynga. As you can see, the second quarter marked the fourth consecutive quarter that growth diminished, year-over-year.

<img src="/media/images/user_88/zynga-monetization_large.jpg" />

(Source: Statista)

The new earnings report includes lowered estimates due to game delays, increased developer competition on Facebook, and “reduced expectations for Draw Something”. Those lowered figures included bookings, which fell from the earlier estimate of $1.43 billion - $1.5 billion down to $1.15 billion - $1.225 billion. Expect to see ABPU fall even further this year.

Final Thoughts

In-game purchases aren’t working out for Zynga as a monetization method. Advertising isn’t helping out much, either; ad revenues in Q2 were up (an unsustainable) 170% year-over-year but that still only amounted to $40.9 million. Most Zynga titles lack a paid version, nixing that as a major source of revenue.

Finding a brand new source of revenue would be daunting. There hasn't been much success with the proprietary platform the company created in an attempt to distance itself from Facebook. The continued lack of investor confidence in Facebook also continues to take Zynga further down. That looks to be a lose-lose situation for Zynga. Competing companies, such as Electronic Arts, can put games on the Facebook platform without worrying about any Facebook confidence issues reflecting back. 

Zynga’s best shot is still the legalization of online gambling. It hasn’t happened yet and, if it does, it might not come to pass until late next year. The steady popularity of Zynga Poker could reflect a great earnings opportunity, if the company can hold on that long.

Investors, don’t hold your breath.


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