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Zynga's 3rd-quarter revenue is up, but so are costs

November 4, 2011 |  2:16 pm

Zynga3Story
Social gaming company Zynga Inc., which has a widely anticipated initial public offering in the works, nearly doubled its revenue in the third quarter.

But a fourfold increase in research and development costs damped profit as the San Francisco company continues to spend hundreds of millions of dollars to build out its development capabilities.

For the quarter ended Sept. 30, Zynga took in $306.8 million in revenue from advertising and the sale of virtual goods within its games which include CityVille, Mafia Wars and FarmVille. 

Zynga, whose games are played by more than 150 million users a month, had reported revenue of $170.7 million in the same period a year earlier. Net income, however, fell 54% to $12.5 million in the third quarter, down from $27.2 million last year. In its second quarter, the company's profit dropped 90% to $1.4 million from $14 million a year earlier.

Some of the gyrations in Zynga's margins have to do with the nature of the social games business, where the costs of creating games are largely made upfront and meaningful revenue from those titles don't begin to flow in until several weeks or months following their launch. This can lead to lumpy quarterly profits, particularly if a portion of the new titles flop.

To smooth out the financial picture, Zynga has been on an aggressive tear to launch as many games as possible to minimize the effect of a few failures.

In the short run, that means spending a lot of money acquiring both manpower and computer power. In the third quarter alone, Zynga spent $114.8 million on research and development, up from $39.8 million a year earlier. That includes buying thousands of computer servers to handle the vast amount of Internet traffic that goes through Zynga's games.

At the same time, Zynga's payroll grew from 576 employees at the end of 2009 to 1,483 at the end of 2010. As of Sept. 30, the company counted 2,789 workers, doubling its workforce in nine months through acquisitions and aggressive hiring.

In some ways, Zynga benefits from making its big purchases before it goes public, when investors are quick to pummel companies that post profit declines. With major expenses out of the way, its bottom line can suddenly seem a lot smoother.

Then the only question becomes: What's Zynga's next big hit? The company hopes that its next big game, CastleVille, to be released in the next two weeks, will work its magic on the bottom line.

RELATED:

Players make friends, Zynga makes money

Zynga builds empire of social games

Zynga files long-awaited IPO 

-- Alex Pham

http://twitter.com/alexpham

Photo: George, a character in Zynga's upcoming game, CastleVille. Credit: Zynga. 

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