Introduction• Zynga held an IPO on Dec 16th, 2011 – Management wanted to raise $1 billion • 100 million shares at $10 per share• Since debut last year – High volatility • High: $15.91 • Low: $2.09
Success Factors and Metrics• Making games accessible and fun• Launch new games• Enhance existing franchises• Exploit mobile Growth• Exploit international growth• Technology leadership position• Increase monetization of games Acquisitions?
Success Factors and Metrics Cont.• Monthly Unique Users (MUU)• Monthly Average Users (MAU)• Daily Average Users (DAU)• Monthly Unique Payers (MUP)
Success Factors and Metrics Cont.• Important to note: – Operating metrics may not correlate directly to bookings or revenue• Besides opportunities for more advertising revenue, more users only good to extent they pay• Increases hopefully result in increases Average Daily Bookings Per User (ABPU)
Risk Factors• Facebook terms change – 71% of accounts receivable IPO were owed by FB – Users pay by purchasing credits on FB first • FB takes 30% cut• Most revenues from select few players – Only 2.5%-3% of users actually pay • Online game revenue: 93.5% • Advertising revenue: 6.5%
Risk Factors Cont.• Game formulas become stale – Top 3 games account for 57% of revenues• Advertising negatively impacts player experience• Acquisitions and new games do not pan out• Low barrier for competitors to enter
Accounting Analysis• Refer heavily to Bookings instead of Revenues – Management states that Bookings more accurate – Cash basis, non-GAAP (Revenues + Deferred Rev)• Deferred revenue recognition is confusing – Recognizes “consumable virtual goods” instantly – Recognizes “durable virtual goods” over estimated playing period of game
Accounting Analysis Cont.• Durable virtual goods – Account for 71% of online revenues – No true pre-determined life span• Before IPO amended average paying player life from 19 months to 15 months for Farmville – Caused GAAP revenue to increase $27.3 million – Short term revenue looks good, but is a bad sign – All games easily manipulated?
Accounting Analysis Cont.• Goodwill checked for impaired annually or more frequently if reason occurs• In 2010 & 2011: – Acquired 22 different companies – Spent $105.1M -$91.8M of that was goodwill – Pre IPO had never written anything off – March 21, 2012 acquired OMGPOP for $183.1M 100M approximately in goodwill
Prospective Analysis & Valuation• Outstanding shares: 700,000,000• Price @ IPO: $10 per share• Date of Pricing: December 16, 2011• Ticker/ Listing: ZNGA/NASDAQ Global Select• Use of Proceeds: General corporate processes, capital expenditures and tax withholding obligations related to the vesting of employee equity-based compensation
“Fair Price”$10 $2.3
Valuation Model Price / Multiple ROE Valuation Model
Price Multiple Comparable companies--- High Growth Internet & Digital Gaming .
First Step: Selecting Comparable Companies Activision Blizzard Inc Electronic Arts Inc Groupon Inc Linkedin Corporation Pandora Inc.
Us Gaming Companies Chinese Gaming Companies Electronic Arts (ERTS) Perfect World (PWRD) Activision Blizzard (ATVI) Shanda Games (GAME) Changyou (CYOU) NetEase (NTES)Mean 2.33Price $2.76 Mean of US & Chinese 2.54 Price $3.01
ROE Valuation Model Assumptions: Discount rate 0.15 Initial ROE 1.25 ROE decline per year 0.10 Minimum ROE 0.19 ROE at terminal year 0.19Growth in book value over 10 yrs 0.24 Growth rate beyond 10 years 0.03
Implied price : ONLY $1.58What kind of assumptions behind the analysts forecasts ---------------$ 10
Discount rate 0.15 0.12 0.19 0.31 Minimum ROE 0.31 ROE at 0.19 terminal year 0.24 0.45Growth ratebeyond 10years