Exclusive: Zynga says can double number of paid players

BOSTON Thu Dec 8, 2011 5:35pm EST

Zynga CEO Mark Pincus speaks during the Zynga Unleashed event at the company's headquarters in San Francisco, California October 11, 2011. REUTERS/Stephen Lam

Zynga CEO Mark Pincus speaks during the Zynga Unleashed event at the company's headquarters in San Francisco, California October 11, 2011.

Credit: Reuters/Stephen Lam

BOSTON (Reuters) - Zynga Inc Chief Executive Mark Pincus said the social games company can double the number of its paying players but he and other executives sidestepped questions about player retention and churn rates, speaking at a luncheon ahead of its IPO.

Zynga executives on Thursday fielded more than a dozen questions from an audience of about 100 potential investors who ate a lunch of chicken, mashed potatoes and spinach salad.

Pincus appeared relaxed, wearing a jacket but no tie. He opened his slide-show presentation with a picture of his cartoon avatar.

The social games maker, known for Facebook games such as "FarmVille" and "Mafia Wars," is prepping potential investors for a $900 million-plus initial public offering set for next week. It would be the largest IPO from a U.S. internet company since Google Inc raised $1.7 billion in 2004.

Most of Zynga's revenue comes from more than 227 million monthly active users who buy virtual items such as houses and tractors while they play free games on the Internet. Only a small portion -- about 7.7 million for the 12 months that ended September 30 -- are considered unique paying players.

"We could see that doubling," Pincus said at the luncheon at a Boston hotel. He did not give a time frame for meeting the target.

Paying players, he said, represent less than 3 percent of Zynga's total number of players.

The company also said in the presentation that it now has 13 million daily average users on mobile. This is up from 11.1 million the company had previously given for the month of October, which it posted in a video to pitch the IPO on the Internet.

Investors are looking at mobile games growth to see if the company can reduce its reliance on Facebook, where it currently makes 95 percent of its revenue.

Pincus, the CEO, said one of its mobile games, "Words With Friends," has jumped to 10 million users from 2 million users a year ago. He joked about an incident on Wednesday when actor Alec Baldwin was booted from a flight for playing the game before take off.

"He wanted to play it even if it meant getting off his flight to play it," Pincus said.

Zynga Chief Financial Officer David Wehner said the company has ramped up its capital spending, but ultimately Zynga is targeting an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margin in the "40 percent range."

According to its last filing, Zynga's operating margin based on its adjusted EBITDA and bookings is 28 percent for the first three quarters of the year.

A 40 percent operating margin would be "robust" according to Robert W Baird analyst Colin Sebastian.

"Zynga is still is in investment mode so I imagine that's a target and we don't know what the time frame is," he said.

He added there is a precedent for those high margins in the video game business, where Activision Blizzard has a 50 percent operating margin with its online game, "World of Warcraft."

Executives sidestepped questions about player retention and churn rates, focusing instead on the growing number of monthly active users.

Strauss Zelnick, chief executive of video game maker Take-Two Interactive Software Inc, recently questioned Zynga's business model, saying the company quickly churns through players.

When asked about Zelnick's remarks, Zynga Chief Operating Officer John Schappert said his company can quickly launch new games, attracting more players. In addition, Wehner said a Zynga game's bookings - a measure of revenue - can maintain a level rate even as the number of daily average users falls.

On Friday, the company will be holding a luncheon in New York and also having one-on-one meetings with investors.

(Reporting by Tim McLaughlin in Boston, additional reporting by Liana B. Baker; Editing by John Wallace, Gary Hill)

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