Zynga draws fewer paid players than expected

NEW YORK Thu Aug 11, 2011 6:19pm EDT

NEW YORK (Reuters) - Video game publisher Zynga may for the first time be less reliant on its top games to make money, but it still depends on under 5 percent of its users for all of it sales.

Zynga's games are free and its revenue comes mainly from selling virtual items such as tractors and weapons that players buy within games. It previously said a small number of its 232 million average monthly active users pay for these, but never specified how many.

"Historically, less than 5 percent of our players have been paying players," the company disclosed in a regulatory filing on Thursday.

The number was below what some industry analysts expected, but still above its peers.

"The average in the industry is under 2 percent, so Zynga is still better at getting users to pay," said Wedbush Securities analyst Michael Pachter, who added he previously assumed up to 8 percent of Zynga's players were paying users.

Zynga also became the second hot Internet company in two days to change its accounting practices. On Wednesday, Groupon dropped a controversial financial metric that was raising questions among investors about the daily deal company's management.

Unlike Groupon, Zynga's changes are minor and related to how it reports the revenue it makes from virtual items in its financial statements. As part of the adjustment, it reported revenue was $242.8 million, or $7.5 million more for the quarter ended March 31, 2011.

"The impact is small, but it is good news that they caught the problem before they went public," said Sterne Agee analyst Arvind Bhatia.

Zynga, which filed on July 1 for an initial public offering of up to $1 billion, also said it arranged a revolving credit agreement to borrow up to $1 billion. It paid $2.5 million in fees up front as part of the terms and will pay fees of $625,000 per quarter.

In the filing, Zynga showed it was making money from a healthy mix of its games and not just top titles. In 2008, Zynga's top games accounted for 93 percent of its revenue. In the first quarter of 2011, that number was down to 63 percent.

On Thursday, its top games on Facebook were "CityVille," "Empires and Allies" and "Texas HoldEm Poker," according to AppData, which tracks social games use.

"This makes Zynga less risky as they become more diverse and less dependent on their big games," said Wedbush Securities analyst Michael Pachter.

Zynga is also still hiring. Since its last filing, it has added 275 employees for a total of 2,543.

Zynga's changes come a day after four companies postponed their U.S. IPOs, but Zynga made no mention of volatile market conditions in its updated filing.

(Additional reporting by Clare Baldwin; editing by John Wallace and Andre Grenon)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.