Do Zynga’s earnings foreshadow bad news for Facebook?

In light of Zynga’s disappointing Q2 earnings reported today, eyes are now on Facebook, which will hold its first earnings call on Thursday after the market closes.

When Zynga announced a 5 percent decrease in bookings from its previous quarter, its stock plunged more than 37 percent in after hours trading. With the game developer and Facebook so closely linked, Facebook’s own stock has fallen more than 8 percent after hours. Are investors right to be worried that the social network’s quarter will be just as disappointing?

Zynga accounted for 15 percent of Facebook’s $1.058 billion in revenue from Jan. 1 to March 31. Specifically, Facebook estimated that about 4 percent of its first quarter revenue could be attributed to ads displayed on Zynga app pages, and an additional 11 percent of Q1 revenue came from direct payments from Zynga. Today the developer reported $332 million in revenue and $302 million in bookings for Q2, which is up 10 percent for both year-on-year, but down in bookings from its highest-ever bookings rate of $329 million reported last quarter. If fewer users are interacting with Zynga’s Facebook canvas games and spending less on in-app purchases, then Facebook could see a drop in its own revenues.

However, overall Facebook has been reducing its dependency on Zynga as it expands both its advertising and payments business. Compared to 15 percent last quarter, Zynga was responsible for 19 percent of Facebook’s total revenue in 2011.

On today’s call, Zynga referred to the “increasingly challenging environment on the Facebook platform” and “changes in the Facebook ecosystem adversely affecting our games.” If other developers are having similar difficulty, then this will further hurt Facebook’s payments revenue. The social network has done well in bringing more mobile apps and websites to integrate Open Graph and Facebook login, however, those partnerships do not result in payments revenue for Facebook. Until Facebook begins taking a cut of in-app purchases from non-game apps, its payments business is going to appear weak.

However, some of the difficulty game developers are facing is related to rising user acquisition costs. With increased competition from brand advertisers, developers have to bid much higher to get their ads seen by the right users. This could bode well for the advertising side of Facebook’s business, which in the past has made up about 85 percent of the company’s revenue. The social network has done a lot to court advertisers this past quarter, including a glitzy marketing conference in New York, additional ad units and a new Creative Council to get more industry perspective on Facebook’s products. Still, it might be too early to see the results of those actions in the company’s Q2 earnings.

With Zynga and Apple missing industry expectations, there isn’t much optimism around Facebook’s upcoming earnings call. Still, Wedbush investment firm modeled the social network’s Q2 revenue at $1.11 billion, and rates the stock as “outperform” with a 12-month target price of $44 per share, according to VentureBeat. Brokerage firm Sterne Agee’s projections are slightly higher at $1.21 billion in revenue. Analysts Arvind Bhatia and Brett Strauserad expect Facebook’s ad revenue to be $1.02 billion and payment revenue to be around $194 million. They rate Facebook a buy and have a 12-month price target of $46.

We will have coverage of Facebook’s actual numbers tomorrow sometime after 2 p.m. Pacific Time.