August 11, 2022

DealBook: Zynga Files for $1 Billion I.P.O.

Zynga's office in San Francisco.David Paul Morris/Bloomberg NewsZynga’s office in San Francisco.

With real-world profit and an inexhaustible supply of virtual cows, Zynga is gunning for a blockbuster debut on the public markets.

The online gaming company filed to go public on Friday, teeing up one of the most highly anticipated technology offerings this year. The start-up, founded four years ago by its 45-year-old chief executive, Mark Pincus, said it expected to raise about $1 billion in the offering, based on a figure used to calculate the registration fee.

But Zynga’s ambitions for its eventual I.P.O. may be substantially higher.

According to people briefed on the matter, Zynga is expected to ultimately offer up to 10 percent of its shares at a valuation near or above $20 billion. The company has selected Morgan Stanley to lead the offering; Goldman Sachs, JPMorgan Chase, Bank of America Merrill Lynch, Allen Company and Barclays Capital are also participating.

A spokeswoman for Zynga declined to comment.

The filing offers the first official glimpse inside the business model of Zynga, the company behind FarmVille and CityVille and some of the most popular games on Facebook. Unlike some of its Internet peers that have struggled to claw their way into the black, Zynga swung to a profit last year, recording profit of $90.6 million. Revenue roughly quadrupled last year, to $597.5 million. On an adjusted net income basis, the company recorded profit of $392.7 million in 2010 and has been in the black every year for the least three years.

The numbers reveal how the company’s stable of cartoonish games, has become one of the Web’s most powerful cash machines. As of the end of March, Zynga had $995.6 million in cash on hand.

Zynga’s filing comes amid a growing sense of urgency among some of the largest Web companies to go public.

For several years the I.P.O. market was effectively off limits, chilled by the financial crisis and the anemic recovery in the jobs market.

Although the global economy is still wobbly, troubled by Europe’s persistent debt crisis, a bevy of consumer Internet start-ups have flourished amid exuberant investor demand. A great deal of that enthusiasm is focused on an elite group of social Web companies — Zynga, Facebook, Groupon and LinkedIn – all of which have seen their valuations soar sharply in the last six months. Zynga, for example, raised a round in February at an approximate $10 billion valuation. The social shopping site Groupon, which was valued at $1.4 billion, just last year, is now contemplating an offering near $30 billion, according to two people close to the company.

LinkedIn, which went public in May, crushed expectations on its first trading day, its value more than doubling out of the gates. After pulling back in the days that followed, to about $60 per share, LinkedIn has rebounded to more than $92 a share – still roughly double its offer price.

Now, it’s Zynga’s turn to test investor’s appetite.

Jim Wilson/The New York TimesMark Pincus

At a $20 billion valuation, Zynga is technically cheaper than LinkedIn. At that price, Zynga is trading at 220 times last year’s profit, or 33 times revenue. LinkedIn – with a $8.8 billion market capitalization– is trading at roughly 570 times 2010’s profit and more than 36 times revenue. There are certainly a broad swath of competitors in the online gaming space, including stalwarts like Electronic Arts, but, so far, no has been able to shake Zynga’s dominance on Facebook, the world’s largest social network.

The company has 279.5 million monthly active users on the platform, according to the latest data from AppData, which tracks game developers on Facebook. Of the site’s top five games, four of them are Zynga’s, including the leader, CityVille. That game, which Zynga released just late last year, has more than 87 million monthly active users.

While Zynga has prospered on Facebook’s platform, its dependence on the social network represents one of the greatest threats to the game maker. In the risk factors section of its filing, its relationship with Facebook is listed as the first risk.

“If we are unable to maintain a good relationship with Facebook, our business will suffer,” according to the filing. “Facebook is the primary distribution, marketing, promotion and payment platform for our games.”

At times, the relationship has been strained over disputes concerning Facebook Credits, its virtual currency system, and changes to the site’s notification system. Tensions flared last year over Facebook Credits, which effectively takes a 30 percent “tax” from virtual good purchases, but the pair hammered out a five-year agreement in May to keep Zynga on the platform. Notably, the company’s revenue figures are net of Facebook’s cut.

“I think that’s the major risk in the story,” said Lou Kerner, a Wedbush Securities analyst. “They do exist at the whim of Facebook, but it’s certainly in Facebook’s own self-interest to have a vibrant gaming ecosystem.”

According to the filing, proceeds of the offering will be used “for general corporate purposes, including working capital, game development, marketing activities and capital expenditures.” In an investor letter, Mr. Pincus said he plans to continue to make big investments “in servers, data centers and other infrastructure.” And in a sign that Zynga will continue to be very active in the deals space — the company has made over a dozen acquisitions to date — Mr. Pincus said he plans “to fund the best teams around the world to build the most accessible, social and fun games.”

When Zynga finally goes public, Mr. Pincus, who founded the company in 2007, and its venture capital investors will see their fortunes multiply many times over. The group — which includes Yuri Milner’s DST Global, Kleiner Perkins Caulfield Byers, Silver Lake Partners and Andreessen Horowitz — has sunk hundreds of millions of dollars into Zynga.

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