Zynga shares sink in morning trade on Nasdaq

After a promising start, Zynga Inc.'s shares dropped below its $10 offering price on the morning of its Friday debut on Nasdaq, dipping to $9.25 a share by early afternoon.

San Francisco's online social gaming company's highly anticipated initial public offering followed the classic pattern exhibited by many other technology IPOs this year: an enthusiastic early reception on the first day of trading followed by a drop in price as investors begin to look more closely at the risks.

With Zynga, the pattern happened much more quickly -- within hours instead of days.

"Their first-day 'pop' has turned into a first-day drop," said Francis Gaskins, editor and president of IPOdesktop.com in Marina del Rey. "Investors have lost their starry-eyed look for social networking stocks."

IPOs from Groupon, Pandora, LinkedIn, Yandex and Zillow, for example, saw their shares surge between 9% and 109% on the first day of trading. All saw their prices fall back to Earth in subsequent days before leveling off in the weeks and months following their debuts.

Zynga chief executive Mark Pincus said in an interview that he was unfazed by the stock's initial performance.

"The value of what we are will be measured in terms of quarters and years, not in terms of trading days," Pincus said. "What really matters is that over the next eight, 12 quarters, we build products that deliver on the promise of social gaming."

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Photo: Zynga CEO Mark Pincus and his wife, Ali, at the opening of the Nasdaq on Friday. Credit: Reuters 

 

 

 

Zynga stock priced at $10 a share

Zynga Inc. priced its stock at $10 a share late Thursday, allowing the San Francisco creator of FarmVille to harvests as much as $1.15 billion from selling up to 115 million shares, about 12.9% of the company.

At $10 a share, Zynga clocks $9 billion valuation, including stock options and grants allotted to executives.

The amount was at the high end of what the company had projected two weeks ago, when it said shares would be priced between $8.50 and $10, implying that the company was worth as much as $9 billion. That was well below what some analysts on Wall Street predicted when the company first filed its initial-public-offering plans in July with the U.S. Securities and Exchange Commission.

At that time, many had predicted Zynga could be worth $15 billion to $20 billion. But then the stock markets went haywire, gyrating by as much as several hundreds points a day beginning in late August. Debt crisis in Europe further squeezed the credit markets, leaving many IPOs, including Zynga's, in limbo.

Despite continued market volatility, the company pulled the trigger Dec. 2 with a substantially lower valuation than expected, setting into motion its long-awaited IPO, which is now set to debut on Nasdaq on Friday.

Max Wolff, chief economist at GreenCrest Capital, predicted that Zynga's shares would rally in the first few hours of trading, then "hit a wall of skepticism" later in the day.

"We've heard a lot of bearish chatter on Zynga," Wolff said.

Some investor concerns pertain to the $1-billion market for social games and its ability to continue its exponential growth, said Michael Cai, a game industry analyst with Interpret, a market research firm in Los Angeles.

"The industry in general faces a number of challenges," Cai said. "Some of that has to do with Facebook, where most social games currently are played. There's some evidence that Facebook's audience growth is starting to slow down. Then there's the challenge of converting free players into paying customers. But if any company can succeed in this space, it's Zynga. There’s no question they are the leader. In the end, it’s a solid company and very well-run."

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Image: A screen shot of CityVille, Zynga’s most popular game.

Zynga on schedule to price its IPO Thursday

For Zynga Inc. and its chief executive Mark Pincus, Christmas Eve could arrive Thursday night, when its shares are expected to be priced for an initial public offering on Nasdaq and begin trading Friday.

The company two weeks ago said it expected its stock would fetch between $8.50 and $10 a share, giving the San Francisco social game developer a total valuation upwards of $9 billion, including the options and grants that have been doled out to senior management.

Since then, executives have crisscrossed the country attempting to drum up investor enthusiasm for its IPO. On Thursday night, the company will see whether they've been deemed naughty or nice as Zynga's shares are slated for official pricing as mutual funds and other institutional investors place their buy orders.

Already, analysts are divided over whether Zynga is a good bet. BTIG's Richard Greenfield on Wednesday gushed that Zynga's debut would be "the biggest IPO since Google," and recommended investors jump on the stock because the company's games -- including FarmVille, Words With Friends and Mafia Wars -- are a "cure for boredom" whose popularity would "outpace TV." 

Other analysts are more reserved. Arvind Bhatia of Sterne Agee cautioned against getting caught up in the social gaming craze.

"Zynga's growth is slowing even faster than what is obvious at first, its margins are under pressure and free cash flow has been declining recently," Bhatia wrote in a note released on Tuesday. "Thus we believe the implied valuation in the IPO is not justified."

Bhatia said a fairer price for Zynga's shares would be closer to $7 a share, versus rate Zynga had projected.

That leaves the market to decide on Friday whether Zynga's stock is worth a diamond, or a piece of coal.

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Photo: Zynga Chief Executive Mark Pincus. Credit: Associated Press

Nexon benefits from virtual marriages — and divorces

Nexon, who?

By now, most folks have heard of Zynga Inc., a social gaming company whose pending initial public offering has riveted the technology and entertainment world for much of this year.

But few know anything about Nexon Corp., a 17-year-old Asian online games publisher that's set to pull the trigger on its own IPO on Dec. 14. Nexon, founded in Seoul, is poised to raise $1.2 billion — that would value the company at roughly $7.2 billion — rivaling what Zynga is said to be worth.

Those previously unaware of Nexon can be forgiven. The company's games are predominantly played in Korea, Japan and China, although it has a small but growing U.S. audience that's served by Nexon's division in El Segundo. Moreover, Nexon's IPO will be on the Tokyo Stock Exchange, whereas Zynga's will be on Nasdaq. More than 100 million people play Nexon's games, 8 million of whom are in the U.S., according to the company. 

Like Zynga, Nexon offers its games for free. Both companies make money by selling virtual items players can use in their games. Among Nexon's bestsellers: A $25 wedding package where two players' game avatars can marry in a game called Maple Story. Last year, Nexon sold 26,982 weddings in North America, generating a tidy $674,550.

Nexon's ingenuity is also illustrated in its related offering — virtual divorces, which can only be purchased by redeeming points accumulated from playing the game (not cash). This is also a hit with players. About 75% of those who hitch up in Maple Story end up divorcing.

The company, whose U.S. division is headed by Daniel Kim, operates very much like a traditional retailer, but for virtual items. The trick has been offering goods that go together. Last year, Nexon's U.S. division sold 96,300 virtual pets, such as the Corgi puppy (to the right), which goes for $4.90. But it sold five times the volume, half a million items, in pet accessories.

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Zynga and Vostu settle lawsuit over social games

Zynga Inc., which expects to begin selling its shares on the Nasdaq Stock Market next week, has settled its copyright infringement lawsuit against Vostu, a Brazilian developer of social games.

Zynga had alleged, among other things, that Vostu's MegaCity game is identical to Zynga's popular CityVille.

Terms of the settlement were not disclosed, but Zynga said in a statement, "Vostu made a monetary payment to Zynga and made some changes to four of its games." The San Francisco social games publisher would not say how much money it received in the settlement nor which games Vostu agreed to modify.

Zynga's lawsuit, filed in June in U.S. District Court in San Francisco, had alleged that five Vostu games -- MegaCity, Cafe Mania, Pet Mania, Vostu Poker and MiniRazenda -- were near clones of Zynga's titles.

Vostu, founded in 2007 by three Harvard University graduates to make social games for the Latin American market, had raised $45.9 million from several prominent Silicon Valley venture firms, including Intel Capital and Accel Partners.

The company, headquartered in New York with offices in Buenos Aires, Argentina and Sao Paulo, Brazil, estimates that 25% of Internet users in Brazil have played one of its games.

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Photo: An image from Zynga's lawsuit filed in June against Vostu. Credit: Zynga

Zynga prices shares between $8.50 and $10

Is Zynga Inc. worth $9 billion? 

The social gaming juggernaut on Friday told potential investors that it planned to price its stock between $8.50 and $10 a share in order to raise up to $1.15 billion.

The price range implies that the San Francisco-based company that began a little more than four years ago with an online poker game on Facebook could be worth up to $9 billion.

Zynga's initial public offering has been one of the most anticipated of the year since the company in July declared its intent to sell its shares on Nasdaq. But the company held off its IPO when the stock markets collapsed mid-August. The European financial crisis that ensued further eroded investor confidence.

Given that global financial markets remain highly volatile, Zynga's decision to press play on its public offering this month is somewhat vexing. Furthermore, few companies choose to go public in December, when mutual fund managers who are likely buyers are loathe to make risky bets that can upset their portfolios' performance for the entire year at the last minute.

But the maker of FarmVille, CityVille and other social games is apparently confident it can overcome those difficulties. Its executives are set to begin a road show Monday to meet with potential investors in an effort to drum up excitement for the company, culminating two weeks later in the stock's debut on Nasdaq.

A lot can happen in that period of time as investors grill Zynga's officials on the company's business plans, its ability to consistently turn big profits and its ability to maintain its torrid growth pace. Depending on how well the company satisfies those questions, the amount Zynga ultimately fetches can fluctuate right up to the minute before its shares hit the trading floor.

Zynga has already anticipated some of those concerns in a series of documents it has filed since July with the U.S. Securities and Exchange Commission outlining its financial performance and arguing that the market for online social games is poised to explode, nabbing a significant share of the $49 billion video game market that has thus far been dominated by console games.

The company, whose games are played by more than 150 million users a month, last year made a profit of $90.6 million on $597.5 million in revenue, largely from advertising and selling virtual goods for its games, which include Mafia Wars, Zynga Poker and Words with Friends. A year earlier, Zynga reported a $52.8 million loss on $121.5 million in sales. 

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Photo: Zynga general manager Erik Bethke speaks at a Zynga event in San Francisco in October. Credit: Jeff Chiu / Associated Press.

Investors anticipate Zynga to be worth $7 billion to $9 billion

Zynga Inc., whose initial public offering has been widely anticipated by investors, is expected to hit the road Monday to begin selling its story to potential buyers, according to people with knowledge of the social gaming giant's plans.

The San Francisco company is expected to price its shares between $8 and $10, giving the firm a valuation of between $7 billion and $9 billion. Zynga's games on Facebook draw more than 150 million players a month.

Zynga declined to comment on its IPO.

In July, Zynga filed paperwork with the U.S. Securities and Exchange Commission to pave the way for its offering. Ordinarily, companies begin selling shares within three months or so. But stock market convulsions have kept Zynga and other pending IPOs at bay as they await more favorable market conditions. 

While the market remains extremely volatile, Zynga may have taken its cue from online coupon service Groupon, which pulled the trigger on its IPO earlier this month. Groupon scored a $12.7-billion valuation, the second-highest amount for a technology company since Google Inc. went public in 2004.

Perhaps Zynga believes that investors will be more amenable to its pitch about why the company deserves such a high valuation, which is about twice as much as the $4.3-billion market value LinkedIn Corp. had when it debuted in May. 

Once Zynga officials launch their road show to potential institutional investors, the company is likely to begin selling its shares within two weeks.

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Photo: Zynga Chief Executive Mark Pincus. Credit: Jeff Chiu / Associated Press.

Executive shuffle at Zynga as Owen Van Natta steps down

Owen Van Natta, whose high-profile hire at Zynga Inc. made headlines 15 months ago, has relinquished his role as chief business officer at the San Francisco social gaming company.

Van Natta, the former chief executive of Myspace and chief operating officer of Facebook, has instead taken on an advisory role at Zynga and will remain on the company's board, according to documents the company filed Thursday with Securities and Exchange Commission.

The company did not name a replacement for Van Natta, who last year collected more than $28 million in salary, bonuses, stock grants and options, according to the filing.

Zynga's spokesman declined to elaborate on Van Natta's diminished role. Executives familiar with the decision who were not authorized to speak publicly said Van Natta specialized in developing business strategy, and less on the type of operational expertise currently required at the company.

Zynga, whose games include Farmville and Mafia Wars, has grown to employ 2,789 workers, up from 576 less than two years ago.

The company is planning to sell shares on the public stock market and is required to notify the SEC of major changes, including senior executive shuffles.

Zynga also disclosed that Brad Feld, a venture capitalist and early investor in the company, would leave the board. The board appointed Sunil Paul, a partner in Spring Ventures, to replace Feld.

Although Zynga filed papers with the SEC in July to raise as much as $1 billion through an initial public offering of stock, the company has not said when it will start selling its shares. Some analysts have speculated that Zynga is waiting for the stock and credit markets to recover before launching its IPO.

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Photo: Owen Van Natta. Credit: Zynga

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

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.

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Zynga: One click closer to IPO?

Zynga Inc., the social gaming company that has some investors chomping at the bit for its initial public offering, on Thursday took one small step closer to its IPO, stating that it plans to sell its shares on the Nasdaq under the ticker symbol ZNGA.

The disclosure came in the company's fourth revision to its initial IPO papers, filed in July with the Securities and Exchange Commission.

In addition, there were a couple of zingers in the new filings, including hints that Zynga's players may be giving up on its games more quickly. SiliconBeat's Chris O'Brien reported that Zynga has shortened the time it amortized sales of some virtual goods to 15 months, down from earlier estimates of 19 months. O'Brien said the figures suggest "people are playing the games for shorter periods of time."

The amendment comes on the heels of another disclosure: Zynga's net income in the quarter ended June 30 fell 90% as its costs ramped up to support the launch of new games such as Empires & Allies and a barrage of titles announced at a splashy event this week at the San Francisco company's headquarters.

On the other hand, the documents also contained some good news for Zynga. FarmVille, launched in June 2009 and one of Zynga's oldest games, continues to harvest cash. Although more than half of its players have deserted the game since it peaked last year at 83.8 million monthly users, the remaining 35 million FarmVille players continue to shell out money to plow virtual crops.

In the first six months of 2011, Zynga said it saw a 122% leap in virtual goods sales, to $493.9 million, a good chunk of that from FarmVille, according to the filing: 

Online game revenue increased $271.5 million from the six months ended June 30, 2010 to the six months ended June 30, 2011. FarmVille, FrontierVille and CityVille accounted for $76.6 million, $70.5 million and $46.6 million of the increase, respectively. 

Zynga remains mum on when it expects to pull the trigger on selling its shares, but analysts predict that the company will hold off until the current market turmoil settles and investors feel more confident in shelling over real cash for a virtual goods business.

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Photo: A speaker at a Zynga event in San Francisco, Tuesday, Oct. 11, 2011. Credit: Jeff Chiu / Associated Press