Zynga Prices at the Higher End of The Range With $10 a Share

Zynga priced its shares at $10, the higher end of the $8.50 to $10 range it originally proposed two weeks ago. The company plans to list on NASDAQ tomorrow with an offering of 100 million shares, and 15 million shares on retainer from certain stockholders in case there is extra demand. That price would put it at a valuation of around $7 billion based on the total number of shares outstanding.

The company, which was founded just four years ago, has ramped up to more than $1 billion in revenue a year primarily off virtual goods on the Facebook platform. Its model, emphasizing free gameplay with monetization through virtual currency, has changed the way traditional video game industry giants like Electronic Arts operate.

The company made $30.7 million in net income on $828.9 million in revenue through the third quarter of this year. That’s up from $401.7 million in revenue during the same time a year earlier.

But margins have declined as Facebook coerced developers to use its platform currency, Credits, giving it a 30% revenue share even as the platform cut back on viral channels, hurting growth for game developers. Zynga’s net income has also declined from last year’s $47.6 million as the developer invested in research and development for new games. That trend may continue well into 2012; for example, Zynga expects to spend about $50 to $70 million this quarter on network infrastructure.

When Zynga posted a 30-minute video of its roadshow a few weeks ago, the company emphasized that Zynga’s games tend to peak in revenues long after they’re launched. They pointed to FarmVille, which reached a peak in bookings about two years after it was released. Coupled with the fact that the last six months have been a busy launch period, chief executive Mark Pincus says this lays the groundwork for near-term growth even as daily active users have declined for two consecutive quarters.

In addition to CastleVille, Zynga has recently launched Dream Zoo and ForestVille on mobile. The company has reached 13 million daily active users on Android and iOS, which is about one-quarter of its total usage every day. That suggests that Zynga may be able to reduce its dependency on Facebook, where it earned 93% of its revenue in the most recent quarter.

The company is selling 100 million shares of Class A stock tomorrow, with an extra allotment of 15 million shares. Keep in mind that Zynga has a three-class stock structure, where Class B shares have seven times the voting power of Class A shares. Class C stock — which are wholly owned by chief executive Mark Pincus — have 70 times the voting power of Class A shares. The company is structured so that the Class B and Class C shares, which investors in this IPO have no access to, hold 98.2% of the voting power.

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