[ChuckMcM]

Interesting, so its $100K in revenue per employee per quarter, that is annualized out to $400K/employee/quarter.

Note that it isn't that people are being paid $100K per quarter, it is that the business generates $100K in revenue per quarter per employee. When you manage a business one generally has a model, generally that model starts with revenue - cost of goods or "gross margin", in an info business like this I tend to model the Operational expense of "operations" (the folks who run the server, the cost of IP transit service, co-location fees, etc) as the "cost of goods" (basically the amount of money you're spending to make the product available for the customer).

So you start with that Gross Margin and your business model is the formulae you use to "spend" it. In old school tech companies you'll spend x% of your gross margin on "R&D", y% on sales, z% on customer acquisition etc. And at the end of the trough is your "net profit" which some folks report as free cash flow. So lets say Zynga spends 10% of their gross margin on R&D, then the money available for R&D would be $100K * GM * R&D margin. To work an example lets say Zynga's margins are 80%, 100K * .8 * .1 is $8k/quarter available for our R&D employee during the quarter. That is not even $3k/month or $36K/year loaded cost (meaning their salary, benefits and office space).

That is why it is a useful sanity check to see what the revenue per employee is. That helps you understand how healthy (or unhealthy) the business is. In comparison Apple has 80,000 employees and a quarterly revenue of 57B for a revenue per employee of 720K (about 7x Zynga).

I know boring stuff but sometimes it helps when trying to figure out if you're making progress or not.

[TylerE]

I'm not sure the comparison re: Apple is a fair one. If you were comparing net, and not gross, maybe.

[ChuckMcM]

Its not really a fairness question, its just math. Given revenue x, gross margin g, and employees y determine the "quality" of the business. It also can give insights into what might make the business more sustainable.

[TylerE]

Yes, but on a $100 Facebook tranaction, Zynga nets probably $95 or so after fees. Apple may net $2000 on an iMac, but if they're immediatly shipping $1500 off to Taiwan to play supplers, that needed to factor in.

[ChuckMcM]

Ok, I see where you are coming from, if you are defining "fair" as similar they are not similar. Its a reasoning tool not a comparison tool. But the question you pose is a good one to think about.

So let's start with Zynga, and take for our example that they "net" $95 on a $100 Facebook transaction. How often does the customer do that? Once a month? Twice? every day? So every 24 hrs you clock out a chunk of cash to power servers, cooling, operators, maybe a security guard etc. So your "factory" is this data center with a bunch of machines in it. If you turn off the data center, money stops coming in. So if you model out the transactions that data center did in a month, you have the cost of running the data center, and you have the money it generated. You take the difference and that is the money that you got to keep and that is your gross margin. So customer pays $100 facebook transaction, $5 goes to Facebook (leaving Zynga with $95) and if they happen once a month and the cost of keeping the data center up and running for a month per transaction is $55, then Zynga gets to "keep" $40 of that $100. Their gross margin is 40%, if the cost to keep that data center up for a month per transaction is only $15, they keep $80 and their gross margin is 80%.)

Now lets look at the Apple case, Apple has a factory in China making iMacs. It takes a certain amount of time, and labor, and parts to make the iMac. When someone buys an iMac the money first is used to pay off the parts suppliers and the labor and the lease on the floor space and what other costs it took to make. And that what is left over they keep as gross margin. So if they sell it for $2000, spend $1000 on parts, and $100 worth of factory time to make it, they keep $900 and have a 40% gross margin)

So at a very high level, you've got employees of Zynga in a "studio" which design a game, draw the assets, and plan the flow, and you've got a data center "factory" which ships that game to customers. None of the customers pay for the game studio directly, instead they pay for access to the game and in game tokens, and that money, once it covers the cost of the data center goes toward paying their salary and benefits.

In Apple's case you have a bunch of engineers who design a cool laptop, and an OS to run on it, and design its shape and asthetics, they are not paid directly by customers, instead they transfer that design to the factory which manufactures them and ships them to customers. The revenue from that first pays the suppliers and factory and then the salaries and costs of the design staff.

In this way the information businesses are "similar" to the goods businesses. They differ however in their ability to respond to demand. A data center can go from idle to full utilization in milliseconds, it can take weeks to have a factory go from idle for its maximum production capacity.

But in both cases, the work output of all the employees, whether they are soldering boards, being an on call sysadmin, writing an OS, or drawing attractive cartoon characters, is financed by the amount of revenue that work generates for the company.

[qdog]

True, but I think in this case the you have to keep your eye on expectations.

A year ago Zynga was making 900 million gross, now it's 205 million.

I'm going to assume that they are looking at their portfolio and realizing they aren't going to go up next quarter, so the real issue is they know they can't continue at the current level, regardless of margins.

If Zynga was a stable company, making similar revenues every quarter, or slightly up/down like Apple, Intel, IBM etc., I think your points are more valid. In fact, I'm pretty sure you could make a reasonable investment in that scenario (or call, if you will).

Since Zynga is not stable, the analysis isn't very helpful, since you already know they are 2 months into the next quarter and probably already burning cash.

Hmm, I guess this is why Buffet doesn't invest in tech so much...visibility seems limited....