Zynga: Advertising Accounts for 9% of Our Revenue

Zynga Generated $27.3 Million in Ad Revenue Last Quarter, Up 230% From Previous Year

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In its first post-IPO earnings filing, Zynga is reporting that 9% of its $311.2 million fourth-quarter revenue came from advertising, which represents a step toward reducing its dependence on Facebook.

With the sale of virtual goods on games like FarmVille, CityVille and Mafia Wars mostly taking place on Facebook, payments still make up most of Zynga's revenue. But Zynga is attempting to diversify: Ad revenue was $27.3 million last quarter, more than triple the previous year, when advertising made up 4% of total revenue.

Zynga priced its mid-December IPO at $10 a share, raising about $1 billion in the biggest internet company IPO since Google raised $1.7 billion in 2004. The stock hit an all-time high of $14.55 today in advance of the call but had cooled off somewhat in after-hours trading. Zynga reported a loss of $435 million, or $1.22 a share, in the period, attributed largely to $510 million of stock-based compensation expense due to the IPO.

Zynga is clearly looking to make itself less dependent on the virtual-goods business, and its advertising ranges from sponsorships to display ads to more complex brand integrations, which the company is looking to scale in 2012. Some recent examples include a seven-day campaign with Best Buy this past fall, where CityVille players were given the ability to build a Best Buy in their cities and ended up constructing 7.9 million stores.

Zynga also did a 10-day game integration for Farmers Insurance in June, enabling FarmVille players to use a Farmers-branded Airship and "Unwither" applications to weather a dust storm. According to Zynga's internal tracking, 88% of FarmVille players were aware of the Farmers integration during and after that execution.

"What we're creating for both brands and players are deep, meaningful connections," said Zynga's chief revenue officer, Jeff Karp, in an email. "When a player puts a Best Buy or a McDonald's in their game, they're making a statement, sharing it with their friends, and returning to it each day because they know that it's helping them progress. We'll work with more brands and find new and interesting ways to share them in our games in 2012."

Zynga is planning to grow its sales team and is seeking a head of global sales to be based out of its San Francisco headquarters, among other positions. "You'll see our sales team grow significantly in the next three to six months," Mr. Karp said.

Zynga announced a partnership last week with Hasbro, the maker of games and toys like Scrabble, Monopoly and My Little Pony. Under the agreement, Hasbro has licensed to develop and distribute physical toys and games based on Zynga's brands, creating the potential for products like FarmVille ponies, for example. The companies didn't disclose whether Zynga would be compensated through licensing fees or revenue sharing from the sales of the toys.

The company also announced a partnership today to link player accounts to American Express's digital-payments platform, Serve, which will enable players to redeem free credits toward the purchase of virtual goods inside games. However, payments will continue to be delivered via Facebook's Payments platform.

Daily active users increased to 54 million last quarter from 48 million in the fourth quarter of 2010.

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