SiliconBeat

Zynga released its latest quarterly earnings number in an updated prospectus. Dean Takahashi at VentureBeat has a good overview of the numbers:

“Zynga reported net income of $12.5 million in the third quarter ended Sept. 30, down 54 percent from $27 million a year ago, according to anupdated S1 filing with the Securities and Exchange Commission. The performance isn’t stellar, but it’s not so bad as to suggest Zynga’s planned initial public offering is in trouble.

Revenue was $307 million in the quarter, up 80 percent from $170.6 million a year ago. In other words, Zynga is working harder for the profits it gets by generating a lot more revenue compared to the past.

In the second quarter, Zynga reported only $1.4 million in profits on $280 million in revenue, so the third quarter report is an improvement on a quarter-to-quarter basis.”

What’s interesting are the user metrics. From the filing:

“According to AppData, as of September 30, 2011, we had the largest player audience on Facebook, with more MAUs on Facebook than the next eight social game developers combined.”

In the previous filing, Zynga had as many users as the next 15 developers combined as of June 30.

Also:

“Our players are also more engaged, with our games being played by more than 58 million average daily active users, or DAUs, worldwide as of September 30, 2011.”

That’s down from 60 million at the end of June. And the quarter included the release of two new games: Empires & Allies and Adventure World. Also, monthly average users fell from 232 million to 230 million in the quarter.

Finally:

“According to AppData, as of September 30, 2011, our games were played by more DAUs than the next 14 social game developers combined.”

That number is down from 30 at the end of June.

So, as Takahashi notes:

“Zynga is working harder for the profits it gets by generating a lot more revenue compared to the past.”

The good news, as Zynga prepare for an IPO in the next few weeks, is that it’s coaxing more revenue out of fewer players. And Zynga has a big pipeline of games coming. That includes CastleVille, which will launch in the next couple of weeks.

The CastleVille release is the latest in Zynga’s “Ville” franchise that includes FarmVille and CityVille.

“This is really built on the shoulders of the games that came before it,” said Bill Jackson, the Zynga creative director who led a team based in Dallas that built the game.  ”It’s built on the shoulders of giants.”

Jackson was giving me a preview of the games a few days ago. And the quality is indeed impressive.

CastleVille is set in Medieval times and has many elements that will be familiar to Zynga players. In this case, the goal is to build the castle of your dreams by engaging in a series of quests. A preview of the game demonstrated how Zynga continues to push the edge in terms of graphics as well as music, which includes the use of a full symphony to create the soundtrack.

Where the game pushes into new territory is in its expanded use of narrative. There is a story at the heart of it that players can choose how they follow, rather than having quests or goals dictated to them as in previous games.

At its heart, CastleVille remains a social game, but it also shows how Zynga is moving toward creating massively multiplayer experiences. The question now is whether the rising production values and the evolving game experience will draw new players as well as longtime Zynga fans.

While Zynga’s update to its IPO filing today doesn’t have huge news, it does include two important clarifications that will provide fodder for both critics fans of the company.

First, the bottom line: The clarifications confirm that users are playing Zynga games for shorter periods of time. That’s going to fuel critics. But, the company also said that the biggest increase in revenue for the first six months of 2011 came from FarmVille, one of its relatively older games.

So, the takeaway seems to be that while the company faces challenges in holding the attention of more casual players, it’s doing a solid job in coaxing long-term, hardcore players to spend more money on its games. That’s good news for the company’s boosters.

The declining lifespan can be problematic, of course, because if new games have shorter lifespans, then the company will need to crank up investment in creating new games, or find ways to sustain interest in old ones. The filing shows that it’s having some luck at doing the latter. And at the Unleashed press event at Zynga’s new headquarters (which the filing says has increased in size from 345,000 square feet to 406,000 square feet) earlier this week, the company was trying to deliver the message that it has a big pipeline of games in the offing.

Two other important tidbits: The company selected the ticker sympbol “ZNGA” and revealed that it will trade on the Nasdaq. While this doesn’t tell us when the company expects to actually go public, it does indicate that it’s checked a couple more items off the IPO to-do list.

Now, back to the numbers.

The first clarification involved a somewhat arcane accounting issue, but one that had muddled questions about Zynga’s overall momentum. The company has provided more transparency on the issue, so kudos to them for doing so.

Zynga makes money primarily through the sale of virtual goods in its game which are free to play. There are two types of virtual goods: Consumable, which is something you buy and use right away; and Durable, which is something you buy and use essentially as long as you continue to play. More importantly, revenue from consumable virtual goods is recognized immediately, while revenue from durable virtual goods is recognized over the time the average person plays the game.

In previous filings, Zynga said the time period over which the company recognized that revenue was declining, from 19 months to 11 months. The problem was that it had averaged both durable and consumable virtual goods together, and so you couldn’t say conclusively that the decline meant that people were playing the games for shorter time periods. For instance, it could have been possible that people were buying more consumable virtual goods, which would also pull the average consumption period down.

But the new filing separates those two categories:

“Consumable virtual goods accounted for 40% and 32% of online game revenue in the six months ended June 30, 2010 and 2011, respectively. Revenue from consumable virtual goods accounted for 25% of the increase in online game revenue from the six months ended June 30, 2010 to the six months ended June 30, 2011.”

Then the company says:

“Durable virtual goods accounted for 60% and 68% of online game revenue in the six months ended June 30, 2010 and 2011. Revenue from durable virtual goods accounted for 75% of the increase in online game revenue from the six months ended June 30, 2010 to the six months ended June 30, 2011.

The company then plainly states that the average life of durable goods has declined from 19 months to 15 months for the six month period ending June 30, 2011. Thus, people are playing the games for shorter periods of time.

The company then also, for the first time, breaks out revenues by games:

“For the six months ended June 30, 2010 and 2011, Mafia Wars, FarmVille and Zynga Poker were our top three revenue-generating games and comprised 84% and 59%, respectively, of online game revenue.”

And just as impressive:

“Online game revenue increased $271.5 million from the six months ended June 30, 2010 to the six months ended June 30, 2011. FarmVille, FrontierVille and CityVille accounted for $76.6 million, $70.5 million of the increase, and $46.6 million of the increase, respectively.”

One caveat: Part of that increase for FarmVille, which launched in 2009, came from an accounting change, when the company decreased the lifespan of durable goods, that means it recognizes more revenue sooner. It would be nice if the company said how much of the increase was the result of the accounting change vs. organic growth in the amount of durable goods being purchased.

Still, my hunch is that the accounting change is likely only a small part, and it doesn’t seem to be a factor in the increase seen in the other games. If nothing else, I base that on the surprisingly large number of requests I keep getting from my FarmVille friends for help, even though I probably haven’t really spent any time in the game for, well, months.

One other tidbit: The filing says the company has filed for 248 patents, more than double what has previously been reported.

Finally, the big question that doesn’t get answered: When’s the IPO?