Zynga IPO: Real Profit Puts Zing in Its Public Offering

Zynga finally filed its IPO paperwork today as it tries to raise $1 billion. And while the reports of how well it has done were significantly overstated, this is a company that still makes significant revenue and profit.

If you thought that the LinkedIn's (LNKD) IPO was hyped and hyper, Zynga's going to put that all to shame. And it will prepare the market for Facebook's eventual filing, in more ways than one.

The best way to get a sense of the company is to look at the statement of operations from the S-1 (click to enlarge):

Zynga lost $74.9 million between 2008 and 2009, but it more than made up for that last year. With a cost of revenue of about $176 million on gross revenue of $597 million, the company had a gross margin of 70.5 percent. It may not be the 80 percent that Microsoft (MSFT) saw last year, but it totally blows Electronic Arts (ERTS) and its 48.9 percent out of the water. Or the farm or empire or Mafia war.

The growth is even more startling. Revenue for the quarter that ended on March 31 was up 233 percent year over year -- and the gross margin was 71.3 percent. The company is clearly executing well, and the numbers also give some insight into Facebook, which takes a 30 percent cut of the revenue that Zynga gets through the social network. It will be interesting to see how high a portion of Facebook's revenue is due to Zynga.

You do have to wonder why Zynga would even bother with an IPO, other than to let investors -- and employees -- cash out in the frenzy that is undoubtedly going to hit. The company already has $996 million in cash and cash equivalents, so it's hardly hurting for money.

One potential weakness is the cost of creating new games, which is high with gaming companies. But even there, Zynga burns a competitor like EA. Last year, Zynga R&D was 25 percent of gross revenue, or 35.5 percent of net revenue. For EA, the percentages were 33.6 percent and a whopping 68.7 percent. It's pretty clear that Zynga will make an IPO offer that investors can't refuse.

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