Zynga, the social-gaming company known for "FarmVille" and "Texas HoldEm Poker," is looking to raise $1 billion in an initial public offering, letting investors buy into a new market -- virtual goods.
The San Francisco-based company has more than 232 million monthly active users, and it is the biggest developer of social games on Facebook with the four most popular apps: "CityVille," "Empires & Allies," "FarmVille" and "Texas HoldEm Poker," according to research firm AppData.com.
The games are free to play, with the company making money by selling virtual goods -- say, a tractor for "FarmVille" -- as well as advertising in the form of branded virtual goods and sponsorships. Zynga booked $597.5 million last year, compared to $121.5 million in 2009, and it took in $235.4 million in the first three months of this year. Advertising accounts for a much smaller portion of revenue at 3.8%, or $22 .8 million, last year.
Some examples of sponsorships include virtual Coca-Cola drinks served in Zynga's "Cafe World" game. The company claims that 2.5 million Cokes were served during the promotion and that 80% of players "took action post-advertisement," meaning that some purchased a real Coca-Cola beverage. Other advertisers that have bought sponsorship within the company's games include Amazon, HBO, Discover Financial Services, General Mills, Kraft Foods, McDonald's, Target and Walmart.
But the significant factor underlying the company's rapid growth is its reliance on Facebook. The games are almost entirely played within the social network's ecosystem.
"Facebook is the primary distribution, marketing, promotion and payment platform for our games," the company wrote in its S-1 filing. "Any deterioration in our relationship with Facebook would harm our business." Zynga recently agreed to a five-year deal to use Facebook's Credits system as its form of virtual currency. The company had already begun migrating to that system as of last year and only completed the transfer this April. The exchange resulted in some revenue loss for the company, as Facebook takes a 30% cut -- or tax -- on every credit. Each credit sells for 10 cents on the social network.
The worldwide virtual-goods market is expected to more than double to $20.3 billion in 2014, from $9.28 billion last year, according to ThinkEquity LLC, a San Francisco-based research firm.
Zynga's proposed public offering comes as part of one of the biggest waves of internet IPOs since the dot-com bubble of 2000. LinkedIn Corp., Pandora Media and Yandex NV all went public in the past two months, and other internet companies such as Groupon aim to benefit from the rebound with their own IPOs.
The offering will be managed by Morgan Stanley, Goldman Sachs Group, Bank of America. Merrill Lynch, Barclays Capital, JPMorgan Chase & Co. and Allen & Co., and the company didn't say how many shares it would sell or at what price.
Zynga is valued at $15.4 billion on SharesPost, an exchange that connects buyers and sellers of privately held companies. That would make it the most valuable U.S. game company, ahead of Activision Blizzard and Electronic Arts. Zynga recently hired former Electronic Arts Chief Operating Officer John Schappert for a senior role.
The company is backed by venture firms Foundry Group, Union Square Ventures, Kleiner Perkins Caufield & Byers, Institutional Venture Partners and Andreessen Horowitz. Russia's Digital Sky Technologies and Google are also stakeholders.
~ ~ ~
-- With Bloomberg