Zynga Restates First-Quarter Financials Citing 'Material Weakness' in Internal Reporting Control

The social gaming giant, which is planning an IPO, revised its quarterly revenue and profit higher, but said "investor confidence in the accuracy of our financial reports may be impacted" if it doesn't ensure internal controls for financial reporting.

NEW YORK - Social gaming giant Zynga, which recently filed for an initial public offering, on Thursday restated some first-quarter financials, saying in a regulatory filing that it "recently identified a material weakness in our internal control over financial reporting."

The filing said that Zynga, whose games include CityVille, FarmVille and Mafia Wars, "determined that our accounting policy related to changes in estimated average playing periods for paying players was inconsistent" with an accounting standard. The firm explained in that context that it previously "did not adjust the ending balance of deferred revenue for the revised estimates for related sales from prior periods."

Zynga restated its first-quarter profit to $16.8 million from $11.8 million and said the updated profit attributable to shareholders came in at $1.3 million. It also restated revenue from $235.4 million to $242.9 million. It said the effects of the previous accounting policy were "immaterial in all periods prior to the first quarter of 2011."

The financials ended up higher for the first quarter, and Zynga said in its filing that it believes that "this material weakness was remediated when we revised our accounting policy." Typically, the Securities and Exchange Commission gives companies filing for IPOs feedback on certain disclosures, which can lead to accounting changes like in this case.

But it also cautioned: "If we are unable to maintain adequate internal controls for financial reporting in the future, or if our auditors are unable to express an opinion as to the effectiveness of our internal controls...investor confidence in the accuracy of our financial reports may be impacted or the market price of our Class A common stock could be negatively impacted."

The Thursday filing also featured some other changes over previous filings of the IPO prospectus. Among them, it didn't list Yuri Milner's DST Global on a list of Zynga investors. The Russian billionaire has invested in many red-hot technology firms beyond Zynga, including in Twitter.

Zynga also mentioned a previously undisclosed $1 billion credit line, which it could use for acquisitions and draw from in case it delays its IPO until the recent stock market turbulence subsides, and reduced dependence on its top games. The firm said its top three games provided 63 percent of its online revenue in the first quarter, down from 93 percent a few years ago.

Zynga didn't say how many shares and at what price it will offer in its IPO or when the IPO may happen. Several companies have recently given up on their IPO plans amid the market turmoil.

Email: Georg.Szalai@thr.com

Twitter: @georgszalai