Zynga's ARPU doubling? Not quite
By Osma on Wednesday 6 July 2011, 17:20 - Permalink
Apparently today the pundits and analysts around have come up to reviewing Zynga's ARPU figures from their S-1 filing (Inside Social Games, Eric von Coelin). Something seemed fishy in these calculations, and since I'm home for a day, I had the opportunity to review the filing figures on a computer, rather than just a tablet. Yep, people, you're comparing apples to oranges. Zynga's monetization rate is improving, but it's nowhere as dramatic as you're making it look. Did you already forget, they defer revenue? You can't compare GAAP deferred revenue to non-deferred DAU/MAU figures! Use the bookings data instead.
This is what the S-1 filing states about the difference:
"Bookings is a non-GAAP financial measure that we define as the total amount of revenue from the sale of virtual goods in our online games and from advertising that would have been recognized in a period if we recognized all revenue immediately at the time of the sale. We record the sale of virtual goods as deferred revenue and then recognize that revenue over the estimated average life of the purchased virtual goods or as the virtual goods are consumed. Advertising revenue consisting of certain branded virtual goods and sponsorships is also deferred and recognized over the estimated average life of the branded virtual good, similar to online game revenue. Bookings is calculated as revenue recognized in a period plus the change in deferred revenue during the period. For additional discussion of the estimated average life of virtual goods, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenue Recognition.”
Zynga is of the opinion that bookings more accurately represents their current sales activities, and I fully agree. After all, this is not subscription business we're talking of! If you're as hard-core geek about these things as I tend to be, the description of when a booking turns into revenue is discussed on pages 62-63 of the filing:
"Durable virtual goods, such as tractors in FarmVille, represent virtual goods that are accessible to the player over an extended period of time. We recognize revenue from the sale of durable virtual goods ratably over the estimated average playing period of paying players for the applicable game, which represents our best estimate of the average life of our durable virtual goods"
That deferring means that during periods of rapid growth, ARPU monetization appears to decline, while on the other hand periods of flat or declining traffic would seem to improve ARPU, due to the recognition of earlier deferred revenue against current, not earlier userbase.
With these covered, what are the actual sales figures? The average daily Bookings to DAU rate is somewhat higher than the Revenue to DAU rate, at $0.051 (B) in Q1 of this year vs $0.042 (R). Both seem to have plateau'd on that level since growing from a year-ago $0.030 (B) / $0.017 (R). Respectable, but not earth-shattering -- and the growth, while impressive, isn't quite "more than doubled".
Comments
No question the bookings and deferral distorts revenue recognition and thus what these figures reflect - I probably inelegantly mentioned this in my post. In general, I think this requires a breakdown of how you think each game is monetizing and the percentage of traffic each game makes at any point in time.
For example, FrontierVille is almost solely consumables - I'd bet a good 80% of that revenue is consumables that are being used and thus shown within 30 days. FarmVille is probably 60% durables, with revenues being recognized over six to eight months (I think most games have 3-6 month lifespans).
If you look at Zynga games, the most recent releases are focused on energy or consumable purchases, which would allow them to reflect the revenues more quickly. This is coming at the expense of FarmVille whose users have declined over time. So my hunch is that the majority of the revenue improvement is from being able to recognize revenues faster in faster over the last year.
And now that they've done that, you are seeing the ARPU flatten out, or actually decline in the last quarter. The gains from revenue recognition have mostly been made at this point, and the harder road to optimization lies ahead.
Eric, thanks for the note. Yes, if game design considerations were ignored, then making all virtual goods consumable instead of durable would "fix" the trailing revenue figures. While Zynga's received more than their fair share of critique regarding their games, I would not be ready to claim they've completely sacrificed game design to arbitrary GAAP rules to the point where they're intentionally throwing away durable goods for revenue recognition purposes.
Nor is the deferring of revenue an entirely bad thing, either; on one hand, Zynga have chosen to publish the bookings figures as well, and on the other, the deferred sales provide not-inconsiderable stability and predictability to the official revenue figures, which would probably be quite appreciated by Wall Street, as well as some reaction time for Zynga themselves -- if bookings start to decline, they'll still have a couple of months for corrective measures before revenue is hit badly.
However, my post is intended to point out that when calculating comparable KPIs (such as monetization rate), one should be careful to pick compatible base metrics. In this case, those metrics are even readily available.