The IPO Analysis
December 2011

© Investors’ Mosaic, Inc. www.investorsmosaic.com

Table of Content
1) The Thesis
2) Risks That Need to Be Monitored 3) Should You Participate in the IPO? 4) The Business Model: Unique and Potentially Very Powerful
i. ii. iii. How Zynga Makes Money Zynga-at-a-Glance Overview of Key Metrics

5) Analysis of Key Metrics and Financials 6) Financials
i. Income statement, balance sheet, cash flow

7) Valuation
1) Base case, Bull case, and Bear Case 2) Comparable Valuations

8) Questions We Would Be Asking Management
9) Conclusion 10) Appendices
© Investors’ Mosaic, Inc. www.investorsmosaic.com

Summary Thesis
Factor Powerful Business Model Market Leader in Paradigm Shift of Social Gaming Strong Industry Growth Dependent on Facebook Valuation Impact Favorable Favorable Favorable Negative Neutral Details Rapid innovation, low-cost deployment, and strong cash flow at maturity Focused on statistical analysis to improve player engagement and monetization Social gaming market is large ($7BN) and rapidly growing ($14Bn in 2015) Zynga relies on FB’s social platform to achieve virility and keep customer acquisition costs low $9.25 is a fair valuation, wait for a better entry point as a few meaningful unknowns exist

© Investors’ Mosaic, Inc. www.investorsmosaic.com

Zynga Represents a New Paradigm in Gaming, but Valuation Seems Fair
• Zynga is an online gaming and analytics company, utilizing social interactions and data analysis to make games entertaining & engaging. • It’s a new business model in gaming, enabling rapid product releases, viral adoption, and low-risk failures; equates to a competitive advantage. • Social games are for the mass market, focusing on simplicity and easeof-use to offer a relatively mindless form of entertainment. • Zynga is obsessed with building repeatable and scalable processes. They have built their own statistical analysis system, which is enables them to make data-driven decisions to improve user monetization. • They are very dependent on a healthy relationship with Facebook. 93% of revenue came through FB platform, and FB takes a 30% cut of all virtual goods revenue. Also keeps customer acquisition costs low. • In order to reduce their dependence on Facebook, Zynga is expanding internationally and onto additional platforms (Google + and Mobile).
© Investors’ Mosaic, Inc. www.investorsmosaic.com

Zynga Represents a New Paradigm in Gaming, but Valuation Seems Fair
• Zynga also diversifying from FB by building Platform Z. This will be a proprietary platform that utilizes FB’s technology to access friends. Zynga will be able to keeps more $$ from virtual goods. • The upcoming shift to Platform Z has the potential to be disruptive, especially if it ruffles Facebook's feathers due to lost revenue. • Huge market opportunity in social gaming:
– Video software game market is $49.0BN; social game market is $7.3BN, expected to grow to $14BN by 2014

• Zynga has learned the secret sauce of a success game:
– Has the top selling social game on Facebook every month since 2009 – Has 4 / 5 of the top selling games on Facebook based on DAU

• Likely to be very aggressive with acquisitions after failed attempts to purchase PopCap (reportedly $950M) and Rovio (reportedly $2.2BN). • Founder & CEO, Mark Pincus, will have 36% of the voting power, so shareholders won’t really have a say in corporate matters. © Investors’ Mosaic, Inc. www.investorsmosaic.com Risks That Must Be Monitored: Part 1
• Zynga needs to be successful on mobile platforms to maintain growth trajectory. Mobile has different gaming mechanics, payment tendencies, payment systems, and channel partners. • International expansion is also key to growth, but is uncertain due to the need for localized content. • Increased regulations regarding user data may limit game adoption or targeted advertising. • The average life for recognizing a durable virtual good is declining.
– Declined from