Social IPO Season is picking up momentum. The first slew of IPOs have had issues, some of which we have discussed:
- Demand Media – sketchy accounting, dependency on Google
- Pandora – pays too much to music industry
- LinkedIn – lots of members, low engagement and revenue growth
- Groupon – losing boatloads to grow, sketchy accounting, excessive insider selling
Zynga’s S-1 is striking in that it has no such shocking revelations. It is living up to its numbers; while the GAAP numbers are $90m profit on $600m revenue, it actually is making $400m of EBITDA on $840m of bookings. Groupon is losing that much on similar revenues. It is even better than that. The Facebook tax of 30% also includes additional money to market on Facebook. Bookings net of the Facebook payments were a little over $600m in 2010, with $326m of cash flow– huge. It may become the most successful startup ever, in that it might get over $1B of cash flow by 2013, a little over 5 years from launch.
Two insights we found that escaped much of the financial press:
- Zynga rushed its filing we think to get out before a stellar Q2. Over the past year, Zynga has transitioned from its own credits to Facebook credits, which has haircutted its revenues by the 30% sweep of Facebook. This means revenue growth, while spectacular, is less than it would have been. Q2 is the first quarter where the Facebook tax is fully baked in. We should see upside surprise in their next quarterly report - a blowout quarter.
- Revenue is booming while users are flat, which is the one red flag in the filing. Revenue, however, comes from a very small percent of players. This is typical for these sorts of businesses, which often have an 89/10/1% rule: 89% play and churn away, 10% are committed, but only 1% pay. As Paul pointed out in his Bloomberg interview, a small increase in that 1-2% of payers will have a huge impact on revenue.
Zynga gets compared to Groupon, as both are extradinarily fast growing. It is like comparing cats and dogs. The best pithy comparison I have seen is this from VentureBeat:Compared to Groupon, which has enormous administrative costs and is hemorrhaging a lot of money, Zynga is a ruthlessly-run, well-oiled machine.
My take: Zynga is the first big hit in the Digital Economy (because it makes almost all revenue from virtual currency). This truly marks the transition from the Industrial Revolution to What Comes Next. There were other virtual currency successes before Zynga, such as QQ in China, but Zynga marks the start of a new era of exploiting the digital world for itself, a world that is global, fast moving and largely unbounded by the constraints of the past (land, capital, materials, energy). It can scale faster, grow larger and expand outward more easily than essentially any company of the industrial age. Its primary constraint is its own imagination. Game on!
Nice insights, but you forgot to mention the company is named after Mark Pincus’ American Bulldog…!
Energy is still a constraint, those data centers use a lot of electricity.
I have a lot of industry-inside-perspective reasons to be bearish on Zynga but instead I’ll just be bullish on my own thing and send a warm congratulations, it’s going to be one hell of a pop!
Patrick, good comment on energy. The good news is the chip industry is running down a Moore’s Law like curve to reduce energy consumption per bit flip in servers and client devices, so while a constraint it is less so than when we built capital-intensive and energy-hungry businesses like steel mills and mass manufacturing lines.