Zynga’s shares endured a brutal day today, dropping almost 18 percent to $11.80, after the company’s first earnings report as a publicly-traded entity. That wiped out more than $1.7 billion from the company’s market capitalization.

Yesterday, Zynga did beat analysts estimates, with earnings of 5 cents a share excluding a massive, one-time $510 million charge related to the initial public offering. Analysts on average had estimated Zynga would earn 3 cents a share, according to a Bloomberg survey.

But it looks like traders — who had bid the stock up more than 35 percent since the day before Facebook filed for an initial public offering — were hoping for more.

In Facebook’s IPO filing at the beginning of the month, the company said it had a 20 percent quarter-over-quarter increase in payments revenue, suggesting that developers like Zynga might see a comparable boost. But Zynga’s bookings grew about 7 percent quarter-over-quarter to $306.5 million from the previous quarter’s bookings of $287.7 million.

It suggests that Facebook, which Zynga is dependent on for 93 percent of its revenue, is diversifying its payment revenue sources while Zynga has yet to prove that it can truly live off the social network’s platform.

At the same time, research and development costs are rising as Zynga aims to produce another CastleVille-class hit on Facebook, mobile and more. Costs popped this quarter in part because of a $510 million one-time charge related to stock-based compensation around the initial public offering plus infrastructure investment to move server and hosting expenses off Amazon. Just today, the company point to how much it had invested in its own cloud hosting services, saying that nearly 80 percent of its games are self-hosted.

Zynga is also looking to break away from Facebook this year with its own games network, titled Z-Live or Zynga Direct. Though no launch date is set for the service, Zynga confirmed during its earnings call yesterday that it was in closed beta — and we’ve heard rumors that the service may publish third-party games too.

Zynga also did not break out any new mobile statistics beyond daily active usage for its emerging iOS and Android business the way that comparable publicly traded companies like Electronic Arts do. It said only that it had 15 million daily active users on mobile, up five-fold from a year before. Zynga’s mobile gaming business is likely to be more dependent on advertising than virtual goods compared to many other mobile-social gaming companies because of the huge footprint that Words With Friends has.

Zynga swung to a fourth quarterly loss of $435 million on a massive $510 million stock-based compensation charge related to its December public offering. Excluding that charge and other costs, earnings per share were 5 cents, beating an average estimate of 3 cents, according to a Bloomberg survey of analysts.

Zynga says that non-GAAP net income (a measure that isn’t in line with generally accepted accounting principles) is $37.2 million compared to $63.2 million a year before. Again, that’s also not necessarily a fair comparison because Zynga only finished its transition to using Facebook Credits until April 2011. If it had been using Facebook Credits the whole time and giving Facebook a 30 percent revenue share, it would have seen a 65 percent year-over-year increase in revenue.

Still, it looks like traders expected a bigger quarter-over-quarter bump in bookings. Shares are down 4.9 percent in after-hours trading to $13.65.

Zynga’s shares had climbed over the past month in anticipation of a stronger-than-estimated quarter. Facebook’s IPO filing revealed that the platform’s payments revenue grew 20 percent quarter-over-quarter into the end of the year, suggesting that Zynga might see a similar increase.

But Zynga did not see a commensurate bump. The company’s bookings were up just 6.6 percent to $306.5 million from the previous quarter’s bookings of $287.7 million. That said, bookings were up 25.9 percent year-over-year from $243.5 million the year before.

For the full year, bookings are up 38 percent to $1.16 billion while revenue reached $1.14 billion, nearly double what it was a year ago. Zynga expects to see between $1.35 and $1.45 billion in bookings for this year. The bookings metric factors in how much users paid upfront for virtual goods while revenue is counted when users actually consume the virtual items they purchased.

Daily active users were flat over the quarter at 54 million while monthly active users rose to 240 million from 227 million in the third quarter. Monthly unique users, which doesn’t double count consumers who play more than one game, rose slightly to 153 million from 152 million in the third quarter.

However, Zynga is seeing growth into the first part of this year with daily active users up at 57.3 million.

The company is also growing its daily active usage on mobile devices. Mobile DAUs have climbed to 15 million, from the 13 million figure the company shared in December before the initial public offering. The company said mobile usage is up fivefold year-over-year and that it’s seeing “good growth” in payments on mobile platforms. Zynga didn’t share any specifics, however.

One thing to consider is that a big portion of Zynga’s daily active usage on mobile is through Words With Friends, which is more advertising dependent than other games. So one would expect that Zynga does not monetize its mobile users on a per-user basis as well as other freemium iOS or Android developers.

Zynga is trying to counter this by launching more virtual currency-dependent games like Dream Zoo, Dream Heights and Dream Pethouse, which are more female-focused and aspirational. Zynga calls them “vest and express” games.

The company also pointed out that it’s doing a better job at convincing users to pay. Monthly unique payers rose 13 percent in the fourth quarter to 2.9 million from 2.6 million in the previous one. Average bookings per user are also up to a record high at $0.061 from $0.058 in the previous quarter.

We’re still going to be updating this story as we go through the filing. Stay tuned.

There is a $100 million discrepancy between what Facebook earned in payments revenue and what it paid out to developers, according to revenue figures in its IPO filing last week.

In the filing it says, “In 2011, our Platform developers received more than $1.4 billion from transactions enabled by our Payments infrastructure.”

But based on the company’s $557 million in payments revenue last year and its 30 percent share of transactions on the platform, Facebook should have paid out $1.3 billion at most. There is at least a $100 million discrepancy here. A company spokesperson declined to comment.

There are a number of possibilities:

Facebook may have comped free Credits for some developers: When Facebook began rolling out its virtual currency Credits, it would give them away for free to entice users to sign-up. Developers would have to eat the extra costs if  players bearing these free Credits showed up to play their games. They complained — loudly. But it’s possible Facebook comped some of this free Credits usage for certain developers.

(Sidenote: This only happened to gaming companies that used Credits as their in-game currency. Some developers like EA and Zynga didn’t change their in-game currency but still used Facebook to manage their payments.)

There may have been initial problems with fraud in the early months of Credits, which the company may have also comped for developers: One other developer told us that there were early issues with fraud and completion in Facebook Credits purchases (as you would expect with a nascent payments platform). So perhaps Facebook covered developers for these problems too.

Certain developers may have gotten a more favorable revenue share: It would be surprising if Facebook discounted its revenue share for favored partners. Facebook has always been adamant about taking a flat 30 percent cut across the board for all developers. Even Facebook’s special multi-year agreement with Zynga explicitly mentions the 30 percent payments share (although there are parts right around that number that are redacted in the contract, which was attached to Facebook’s IPO filing).

From the filing. (Anything marked [*] is a redaction):

“The amount of the service fee described in the Facebook Credits Terms that we charge to you at any given time to redeem Facebook Credits shall be [*] 30% per each Facebook Credit redeemed [*].”

Facebook started doing promotions on Credits with 80 percent discounts last November: One likely explanation might be promotions on Credits that ran from November to January. They gave certain players 80 percent discounts on the virtual currency, but still paid developers as if the virtual currency was priced normally, according to our conversations with gaming companies in the ecosystem.

There are a couple of ways to think about this. On the one hand, when we see individual developers engage in aggressive virtual currency sales, it can be a red flag. It’s a sign that they are sacrificing long-term revenue for short-term gains. They might be trying to boost financial performance to look better in an acquisition or funding round.

But Facebook isn’t a company that culturally operates for the short-term like that. By discounting Credits, the company is potentially getting more users to hand over their credit card data — which will make it more frictionless for them to pay for things down the road with Credits.

Right now, Facebook likely has payments data on just a small fraction of its users. If you consider that 50 percent of Facebook’s 845 million monthly active users play games, and then 2 to 6 percent of them monetize by paying for virtual currency, then a back-of-the-envelope calculation would suggest that they have payments data on around 30 million users. By comparison, Apple has more than 250 million iTunes accounts. Facebook needs more credit card data on more users if it wants to power payments for more interesting areas down the road.

So if the sales were successful in getting more users to hand over their credit card details, that’s a good thing in the long run. But if they just encouraged users who already pay with Credits to gorge on the virtual currency, then it could mean softness in payments revenue going into the first or second quarter of this year.

Zynga’s new senior vice president of mobile Travis Boatman has seen the mobile gaming industry go through one seismic shift after another. He saw JAMDAT through its landmark $680 million acquisition to Electronic Arts back in 2005, then built up EA’s mobile business and oversaw its studios worldwide. Raised in Silicon Valley where he grew up on games like Bard’s Tale, he switched to gaming from earlier career ambitions in sports medicine.

Right now under Zynga, there are three main lines of mobile games. The “With Friends” brand grew out of Newtoy’s smash hit Words With Friends and then expanded to include Scramble With Friends and Hanging With Friends. “These are usually asynchronous and directly social,” Boatman said. Then there is a cohort of games that are more or less extensions of Zynga’s core Facebook franchises like Cityville Hometown.

Lastly, there’s the “Dream” line-up, which is new given the recent debuts of Dream Zoo and Dream PetHouse. Boatman says the “Dream” brand is more aspirational. “We like to say they’re about ‘vest’ and ‘express.’ They’re about growing and customizing, which is in line with our core tenants. All of these games have a similar look and feel.”

Like Pincus, Boatman brushed off recent criticism that Zynga’s titles are too similar to ones existing in the market. NimbleBit recently blasted Zynga for an unreleased title called Dream Heights because it was too similar to its app Tiny Tower, which won Apple’s game of the year. Dream Zoo and Dream PetHouse also seem reminiscent of Pocket Gems’ Tap Zoo and Tap Pet Hotel.

“These games are free and our players have the choice to play what they want to play,” he said. “If games were too similar to consumers and there was no clear value add, why would a consumer play it?”

Read the rest on our sister site, Inside Mobile Apps.

Facebook’s top developers say the company’s payments infrastructure and virtual currency Credits are converting fewer paying users than they had hoped a year ago.

Facebook made it mandatory for developers to use its payments platform in canvas games in July. That meant developers on the platform had to start handing over a 30 percent revenue share to the company, mirroring a similar split on Apple’s iOS. The hope was that a single, universal currency would make it more frictionless for users to start paying for virtual goods.

“We thought that conversions would go up and be around 15 or 20 percent,” said Kevin Chou, the chief executive of Kabam, a social gaming company that targets a more hardcore demographic, at the Inside Social Apps conference in San Francisco. “But it turned out to be around 5 to 10 percent, meaning that we’re taking a 20 percent net tax.”

For comparison, Facebook’s biggest developer, Zynga, revealed in its prospectus that it had 3.4 million unique payers during the third quarter of last year. That’s out of 152 monthly unique users in the same time period, suggesting a 2.2 percent conversion rate. Zynga attracts a much larger, more casual audience, so we’d expect to see a lower conversion rate compared to Kabam.

Anil Dharni, who co-founded Funzio, which has had hits on iOS and Facebook like Crime City, said the move to Credits ended up being roughly even for the company.

“Facebook credits is a wash for us,” he said. “It increased the conversion rate but we actually saw a gradual decrease in average revenue per paying user. It’s hard to know why.” Funzio has since moved its focus to iOS, where it has launched Crime City and Modern War, both titles that reached the top of the grossing charts.

Facebook’s payments revenue increased 20 percent quarter-over-quarter going into the end of last year to $188 million, suggesting that the platform may be improving at getting users to pay. However, the company also ran promotions during that time, giving some users an 80 percent discount on Credits. So it’s hard to tell whether those are genuine increases.

If Facebook can’t improve at converting more paying users, it risks losing developer talent to competing platforms like Apple’s iOS and Google’s Android. That in turn could mean growth in its payments business will slow or stagnate over the next year. Facebook diversified its business last year to make payments 17 percent of its revenues in the fourth quarter, up from 10 percent the year before. The rest is advertising.

Developers earned $1.4 billion in revenue from transactions on the platform last year, according to Facebook’s filing for an IPO. Apple’s iOS was able to pay developers about half of that or $700 million in a single quarter during the holiday season, according to their most recent earnings call.

“Mobile users are more engaged and they produce higher revenue than our tethered titles on PCs,” said John Spinale, the senior vice president of social games at Disney. He added, “We’re also seeing incredible revenue growth on Android. Android is a little bit unwieldy, but the revenue is meaningful enough that it’s worth the pain of doing.”

One developer, Wooga, which is the biggest social game developer in Europe and trails only Zynga in daily active users, defended Credits. The company’s chief executive Jens Begemann suggested that Facebook takes more flack because it instituted a 30 percent revenue share after several years of not charging developers for earning revenue off its platform. Apple had a split from the beginning.

“We have been on Facebook Credits since Day One. So for us, we don’t see really negative trends,” he said. “I’ve also not heard anyone complain about Apple for their 30 percent revenue share.”

6Waves-Lolapps is going more aggressively into mobile gaming by acquiring Escalation Studios, the gaming company it worked with to publish its two very first iOS games.

Escalation is a bootstrapped, five-year-old company out of Dallas that created Yeti Town and Splode, which 6Waves-Lolapps published last month. Splode Free is a music-and-color puzzle that challenges players’ sense of timing while Yeti Town is a game that’s essentially identical to Spry Fox’s Triple Town. The terms of the deal weren’t disclosed.

“We started negotiating a publishing relationship, and we then realized we wanted to make them part of the family,” says Arjun Sethi, who is now the company’s chief product officer. (He was previously Lolapps’ chief executive before the company merged with 6Waves.)

Sethi tells us even though Escalation had a video gaming pedigree, the studio operated more like a highly iterative mobile-social gaming one.

“They looked like a web services-oriented company,” he says. “They’re not very much like a traditional studio. They get games out from a quality perspective, but they also leverage the data as fast as possible, which is pretty rare.”

At the same time, Escalation was looking for greater distribution and reach. The company had a previous publishing relationship with DeNA’s ngmoco, which released its game Dr. Awesome.

“We realized the 6L guys had most of what we wanted. They had a platform, worldwide distribution and so the conversation got steered away from publishing toward acquisition,” says Escalation’s Marc Tardif. The acquisition brings 6Waves-Lolapps’ headcount to 230 around U.S., Hong Kong, Japan and China.

6Waves-Lolapps is one of the last larger venture-backed social gaming companies to make the leap from Facebook to iOS. Zynga has Dream Zoo, Poker and more, while Crowdstar has Top Girl and Funzio has Crime City and Modern War. Germany’s Wooga also brought Diamond Dash to iOS last year.

This story originally appeared on our sister site, Inside Mobile Apps.

With a makeover of its original hit game on iOS, Crowdstar is ending the year by pulling in 50 percent of its current revenues from mobile while the rest is coming from Facebook and abroad. (This isn’t a cumulative figure over the year. It’s revenue flow now.)

It’s a sign of the times as many of Facebook’s leading game developers have migrated toward more promising fronts on Android and iOS as growth for social games has slowed. Crowdstar, Zynga, Funzio and Booyah have probably had the most noticeable crossover success this quarter. Other Facebook stalwarts like EA Playfish, Wooga and Disney’s Playdom haven’t had as much visibility on the top-grossing charts, however.

This past week, Crowdstar retouched its iOS hit Top Girl by polishing the game’s artwork and relaunching it under the name Social Girl. Crowdstar’s changes underscore an industrywide trend toward higher production and better art, which we’ve seen in other titles like Tap Zoo 2 from Pocket Gems.

>> Continue reading on our sister site Inside Mobile Apps.

Zynga’s shares hovered near their opening price at $10 as the company raised $1 billion in its initial public offering. It’s a momentous day for the San Francisco-based company and the entire social gaming industry as Zynga is now worth about $7 billion after being founded four years ago. Shares opened at around $11 when the company started trading on NASDAQ around 11 a.m. Eastern, but are now at $9.98.

Long derided by more traditional and console-focused gaming companies for building casual, free titles on the Facebook platform, chief executive Mark Pincus built a company that is poised to gross more than $1 billion in revenues this year. Yesterday, the company priced its shares at the high end of the original $8.50 to $10 range it proposed two weeks ago. It sold 100 million shares of Class A stock, which have the lowest voting power of the three different kinds of shares it has in its financial structure. The other two classes of stock hold 98.2 percent of the voting power.

Zynga’s IPO is just the beginning — not the end — of a four year journey that helped legitimize both the Facebook platform and the virtual goods-oriented revenue model. Zynga made $30.7 million in net income on $828.9 million in revenue through the third quarter of this year, up from $401.7 million in revenue during the same time a year earlier.

The question now is what Zynga can do to keep up its rate of growth at time when it has saturated the Facebook platform. Daily active users have declined for two consecutive quarters and margins have also declined as Facebook coerced developers to use its platform currency, Credits, giving it a 30 percent revenue share. It has also cut back dramatically on viral channels since 2009, 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.

Pincus said in an investor meeting last week that the company could probably double the number of paying players from 3.4 million out of 152 million monthly unique users in the third quarter this year.

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, 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 percent of its revenue in the most recent quarter.

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.

This story originally appeared on our sister site, Inside Mobile Apps.

Zynga boosted the amount it may raise in its upcoming initial public offering to $1.15 billion with a potential valuation of between $5.9 and $7 billion, according to a new amendment to its SEC filing today. The capital it may raise is $150 million higher than the $1 billion it originally said would be the maximum size of the offering when it filed in July. The IPO is on track to happen in two weeks during the week of Dec. 12.

As was reported earlier this week, Zynga lowered its prospective valuation further. At $8.50 to $10 a share and with 699.4 million total outstanding shares, the company would be valued at between $5.9 and $7 billion. That’s lower than the $15 to 20 billion range the company reportedly originally sought. It’s also less than half the $14.05 billion valuation that a third-party Zynga hired back in August put the company’s worth at, according to the filing.

With Zynga on track to make around $1.1 billion this year, a $15 to $20 billion valuation would have proved to be a high revenue multiple compared to other publicly-traded gaming companies like Electronic Arts, which has a market capitalization that’s roughly twice its trailing twelve-month revenues. Zynga lower the valuation because of the market backdrop, according to a source knowledgeable about the company’s deliberations. Not only have offerings from Angie’s List and Groupon been weaker than expected, investors are speculating about the stability of the euro by driving up borrowing costs for weaker economies in the European Union.

Zynga has also posted a 30-minute video of its roadshow here. In the video, 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, Pincus says this lays the groundwork for near-term growth even as daily active users have declined for two consecutive quarters.

He also pointed out growth on mobile platforms where Zynga has 11.1 million daily active users, up from 991,000 thousand a year earlier. Android and iOS are likely to be the most promising way for the company to diversify off Facebook, where it earned 93 percent of its revenue in the most recent quarter.

We didn’t pick up much that was new with the filing, excepted an attached letter showing that several of Zynga’s minority investors including Google, Russia’s Digital Sky Technologies and Union Square Ventures also expect to be selling about 15 million shares, or up to $150 million at the high end of Zynga’s pricing range. Google owns 23.3 million shares in the company, or about $233 million at the high end of Zynga’s price range.

Zynga has 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. Net income, however, has declined from last year’s $47.6 million through the third quarter as Facebook levied a 30 percent tax through Credits and Zynga invested in research and development for new games. Zynga expects to spend about $50 to 70 million this quarter on network infrastructure, for example.

The company is selling 100 million shares of Class A stock, with an extra allotment of 15 million shares if there is demand. 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 percent of the voting power.