Zynga's Most Important Metric

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Beleaguered social gaming giant Zynga (NASDAQ: ZNGA) will report earnings this Wednesday. The company’s filings offer an alphabet soup of metrics that include DAU, MAU, and ABPU. But here’s the low-down on Zynga’s most important metric -- and how it also impacts Facebook (NASDAQ: FB) 

A quick guide to ABPU

ABPU stands for average bookings per daily user.

Bookings are Zynga’s accounting category for in-game purchases. Zynga’s vital revenue segment is online gaming. Because Zynga focuses on freemium or free-to-play game titles, the money comes in through in-game purchases. Players spend money for extra rounds or game rewards that will advance play.

The daily user metrics tracks the amount of players who log in to Zynga’s titles on a given day. In theory, a higher number of daily players would lead to a growth in bookings. But that’s not what’s happening.

Here’s a comparison of Zynga’s DAU and ABPU growth over the past few years. Note that DAU growth has held somewhat steady, while ABPU growth declined for five straight quarters before recovering slightly.

<img alt="" src="http://g.fool.com/editorial/images/34776/dau-abpu_large.png" />

Source: Company filings

So what?

Zynga’s user base has grown, but the amount of money spent per person has plummeted. The company’s problems will continue if the ABPU doesn’t grow. Zynga needs to retool its in-game incentives so that they’re more desirable to players.

There’s another variable in the mix. Zynga games historically used Facebook Credits for the in-game purchases. Facebook’s proprietary currency didn’t match up to the real world value. For example, $5 bought 50 Credits. But Facebook announced last summer that Credits would phase out in favor of using local currencies – or “real” money.

Credits ended in the third quarter, but developers had an additional 90 days to make the change. Zynga’s earnings reports for the first half of this year should show whether that change will make players more or less likely to make in-game purchases.

If players balk when they see the real world price spelled out clearly, Zynga will also need to reconsider its pricing strategy. But there’s little wiggle room there since Facebook gets 30% of what Zynga earns on in-game purchases.

Facebook likes ABPU 

Facebook receives a cut of Zynga's in-game purchases and from the advertising done on the social networking giant's platform. That money added up to make Zynga responsible for 12% of Facebook's overall revenues in 2011 and 9% in 2012. The codependency of the companies explains why one tends to move with the shares of the other.

Here's a look at the share price growth for the two companies over the past year. Notice the similar shape? 

<img alt="" src="http://media.ycharts.com/charts/3b000125f8543011798ea64ed83fc559.png" />

ZNGA data by YCharts

If the switch from Credits to local currencies winds up tanking Zynga's ABPU, Facebook might work to develop another payment alternative. Facebook had had its own rough start, and doesn't want 12% of its business in jeopardy. 

Foolish final thoughts

Zynga’s earnings report is expected after the market closes on Wednesday. Look first at the APBU and its year-over-year growth. Then check to see if DAU had a proportionate change. It’s the easiest way to check if Zynga’s revenue will remain weak-- and if Facebook's shares get shaken. 

Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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