- 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.
- 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.
Compared to Groupon, which has enormous administrative costs and is hemorrhaging a lot of money, Zynga is a ruthlessly-run, well-oiled machine.