Why Zynga's Mess Is Bad for Facebook

MINYANVILLE ORIGINAL Zynga (NASDAQ:ZNGA) is getting the Hulk-smash treatment this morning after the once-hot social/online game maker significantly lowered its full-year outlook.

Zynga now expects full-year bookings of $1.085 billion to $1.1 billion, down from a previous outlook of $1.15 billion to $1.225 billion. At the midpoint, this is a reduction of 8%.

But that doesn't paint the whole picture. Let's look at the trend of Zynga's bookings:



Based upon Zynga's new full-year guidance, it is expecting bookings of just $209 million in the fourth quarter, a year-over-year decrease of 32%!

So what's the problem?

Well, Zynga says it has reduced expectations for games like The Ville, and has delays in launching new ones. Also, the acquisition of OMGPOP!, maker of the hot-for-a-minute mobile game Draw Something, has been a big flop, requiring an $85 million to $95 million write down.

Anecdotally, I'm seeing fewer of my Facebook (NASDAQ:FB) friends playing social games of the Mafia Wars and FarmVille ilk. If you're seeing something similar (or different), feel free to leave a comment below.

Which brings us to the obvious topic: What does Zynga's collapse mean for Facebook?

To answer this question, we'll have to once again bust out the eighth grade math.

According to Facebook's second quarter 10-Q filing, Zynga accounted for 12% of Facebook's revenue. This consisted of processing fees related to Zynga's sales of virtual goods, as well as advertisements purchase by Zynga.

But wait, there's more! On top of that, Facebook estimated that an additional 4% of revenue came from ads on pages generated by Zynga apps.

So weakness in Zynga doesn't just hit Facebook's payments business -- it also has a small impact on the advertising side.

Let's talk about Facebook's payments business.

Last quarter, it accounted for 16% of revenues, growing 61% year-over-year, more than twice the rate of the ad business, which was up 28%. As you may know, the primary sources of payments revenue are Zynga games.

Over the last three quarters, the payments business flattened out, mirroring what we've seen with Zynga's revenue and bookings trends:



Given the horrendous bookings trend at Zynga, Facebook's once-hot payments business looks poised to fall in the near future.

So unless Facebook pulls off an advertising miracle, estimates have to go down. As I stated in yesterday's Facebook article (Facebook Hits 1 Billion Users Mark. So Is That a Good Thing or a Bad Thing?), heading into today, analysts were actually expecting an acceleration in revenue growth from the fourth quarter into 2012:

Have you checked out Wall Street's revenue estimates going forward? Analysts are actually expecting an acceleration in revenue growth for 2013. According to Bloomberg data, consensus forecasts call for a 29% revenue gain next year. That's actually an acceleration from the 27% they're expecting in Q4.

That 29% figure has to come down, making Facebook's high current valuation seem unjustified.

Now it's interesting -- there are some folks out there claiming that Facebook gaming is doing just fine as other developers are offsetting Facebook's weakness.

Poppycock! If the gaming business was in good shape, then why did payments revenue completely flatten out over the past three quarters? I can understand mature companies like Electronic Arts (NASDAQ:EA) and Activision (NASDAQ:ATVI) being unable to generate sequential growth throughout the year, but I thought social gaming was in secular growth mode.

Heck, look at what Facebook CFO David Ebersman said about gaming on the last earnings call:

For the past three sequential quarters, payments revenue has been essentially flat. We believe this trend is due to the fact that gaming, in general, has been growing mainly on mobile devices, where our payment system is generally not utilized.

Oops!

There's not much money for Facebook in mobile gaming, and Zynga's Web-based games, which generate the majority of Facebook's payments revenue, are no longer hot stuff.

What does that tell you about the state of things?

Twitter: @MichaelComeau

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