Zynga is treating its IPO like one of its games — it’s employing a little accounting power-up to turn red ink into profits.
The social gaming company, in its third amended regulatory filing ahead of a possible fourth-quarter stock market debut, revealed that it had tweaked an accounting method that, had it not been changed, would have resulted in a second-quarter loss and not a meager profit and would have also pushed revenue below the vaunted $1 billion-a-year pace.
The accounting change, spelled out in the San Francisco company’s third amended S-1 filing with the Securities and Exchange Commission last week, shortened the estimated average life of its virtual goods to 11 months from 14 months last year.
The change added $27.3 million to Zynga’s top line, it said in the filing.
The boost from the accounting change sent Zynga over the $500 million mark in revenue for the first half of the year, putting it on pace to top $1 billion for the year.
Also, it meant the company reported net income of $1.8 million, instead of a loss of between $1 million and $2 million, according to Sam Hamadeh, CEO of PrivCo.com, a research firm.
It is not unusual for companies to adjust accounting to smooth out earnings, but in Zynga’s case it seemed a bit soon to dip into that bag of tricks, according to Hamadeh.
“You only get to do it once,” he said.
Even the tweaked accounting couldn’t hide a 90 percent drop in profits in the quarter, to $1.3 million compared to $13.9 million a year ago.
Other disappointing news tucked into the filing:
* Zynga reported its first-ever decline in bookings — the total revenue from ads and from sales of virtual goods. While second-quarter bookings of $274.7 were up 41 percent from a year ago, they slipped from $286.6 million in the first quarter.
* User numbers fell last quarter, down 4.8 percent to 59 million compared to the previous quarter.
* Total costs and expenses rose to 95 percent of revenue, its highest since it began making money in the spring of 2010.
The slowdown in growth should caution investors who expected to make a killing on the IPO because of straight-up growth.
Zynga, which, to be sure, still produces plenty of profits, blamed the quarterly slowdown partly on the fact that it didn’t release new hits in time to affect results. The company relies on the hits to keep coming if it is going to maintain its status atop the social gaming world, which it revolutionized with titles such as FarmVille, CityVille and Mafia Wars.
Zynga latest S-1 filing followed rounds of negotiations with the SEC amid concerns about the transparency of some of the results in previous filings.
One of the drawbacks for the company is its almost complete reliance on Facebook as the platform for its games.
Also, the competitive landscape is shifting with gaming stalwarts such as EA getting into the social act and upstarts like Rovio encroaching with “Angry Birds.”
Zynga was on course for its IPO as soon as possible after it first filed at the beginning of summer. The plans were slowed because the market has been murky.
Zynga could not comment, and the company is in a quiet period that restricts its statements ahead of an IPO.