Video Games

Zynga
Initiating With Neutral (2)
December 16, 2011
Analysts

Hello Zynga - Welcome to MarketVille!

Conclusion: We are initiating coverage of Zynga (ZNGA) today with a Neutral (2) rating. Although we believe that Zynga has done an excellent job of positioning itself as the leading player in Facebook gaming, we have significant concerns about the company's ability to maintain growth at a level that justifies its current valuation. Our Neutral (2) rating reflects the fact that although we believe ZNGA shares are likely overvalued at current levels, without a clear catalyst for multiple compression we think shorting a growth-momentum stock like ZNGA could be dangerous, particularly with what is likely to be an initially tight float.

Doug Creutz, CFA (415) 646-7225 doug.creutz@cowen.com Jason Mueller (415) 646-7358 jason.mueller@cowen.com

Growth in Facebook Gaming DAUs Has Slowed Dramatically. Since Facebook changed its permissioning policies in early 2010, the average quarterly growth rate in total Facebook gaming daily active users (DAUs) has slowed to less than 3% per quarter. More ominously for Zynga, the growth rate for the top 50 titles has slowed to less than 0.5% per quarter. Zynga's market share of gaming DAUs has declined from 50% to 38%. Margins Compressing as Zynga Ramps Output. Zynga's non-GAAP EBIT margin has declined from over 40% in FY10 to just 12% in Q3:F11 as expenses have exploded higher while bookings growth has decelerated dramatically. A significant increase in title output over the last six months has not translated into meaningful gains in Facebook DAUs. We Believe Zynga's Culture Could be a Stumbling Block to Further Growth. Zynga has a legendarily aggressive and competitive culture. While we believe this was an asset in propelling the company to market leadership during the early days of Facebook gaming, we believe that future success will be dependent on the production of high-quality content as the casual digital gaming market matures; we are concerned that Zynga's culture may not be congruent with creativity.
2010 Actual 178.3 194.7 222.4 243.5 838.9 2011E Prior Current 286.6A 274.7A 287.7A 295.6 1,144.6 6.2x 2012E Prior Current 312.6 333.3 349.7 386.4 1,364.0 5.2x 2013E Prior Current 1,625.6 4.4x

ZNGA (12/30) Mkt cap Dil shares out Avg daily vol 52-wk range Dividend Dividend yield BV/sh Net cash/sh Debt/cap ROIC (LTM) 5-yr fwd EPS growth (Norm)

NULL NA 903.0MM NA $NA-NA Nil Nil $0.87 $1.03 NA 191.5% 21.2%

FY Dec Q1 Q2 Q3 Q4 Year EV/S

RevenueREV $MM

EPSEPS $
FY Dec Q1 Q2 Q3 Q4 Year
EPS

S&P 500

1229.9

2010 Actual 0.07 0.07 0.07 0.07 0.28

2011E Prior Current 0.07A 0.03A 0.03A 0.03 0.16 61.7x

2012E Prior Current 0.04 0.04 0.05 0.05 0.19 53.7x

2013E Prior Current 0.26 38.5x

REV

Non-GAAP; based on non-GAAP revenue, excludes stock comp, pro forma tax rate. excludes deferred revenue impact.

Non-GAAP;

Please see addendum of this report for important disclosures.

www.cowen.com

Zynga

Our Message To (Prospective) Zynga Investors: Content Creation Is A Tough Business

Investment Summary
Our main thesis on Zynga can be summarized as follows: We believe Zynga is an extremely adept Internet analytics company, that needs to become a high-quality content company, but that is being valued as if it is a monopolistic platform company. We are initiating coverage of Zynga Inc. today with a Neutral (2) rating. We believe that Zynga is a real business, with real sustainable profits, that is operating in what we generally view as an attractive space: the expanding casual digital gaming market. However, three key factors drive our highly cautious view on Zynga shares: 1) Growth in Zyngas user base, and the Facebook gaming audience as a whole, has slowed dramatically since early 2010.
Zynga Quarter-End Facebook Daily Active Users (DAUs), Q2:09 - Current
80.0 70.0 60.0 60.0%

DAUs

50.0 40.0 30.0 20.0 10.0 0.0

Q2:09 Q3:09 Q4:09 Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11 Q3:11 Q4:11

40.0% 30.0% 20.0% 10.0% 0.0%

DAUs

DAU Market Share

Source: AppData and Cowen and Company estimates. Q4:11 data is as of 12/12/11. Pre-Q4:11 DAUs are adjusted by estimated impact of October 15 reporting change (see p. 21-22 for details).

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DAU Market Share

50.0%

Zynga

Quarter-End Total Facebook Gaming DAUs, By Size Ranking, Q2:09 - Current

Total Facebook Gaming DAUs

160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0

Top 50 Games Games 101+

Games 51-100 All Games

Source: AppData and Cowen and Company Estimates. Q4:11 data is as of 12/12/11. Pre-Q4:11 DAUs are adjusted by estimated impact of October 15 reporting change (see p. 21-22 for details).

2) We believe that Zyngas future success (or failure) will be driven by its ability to create distinctive content. We believe that Zyngas past success was driven by superior analytics and aggressive business practices. We are concerned that Zyngas culture is not properly aligned with the business opportunities that exist now that the early hyper-growth phase of the Facebook gaming market has ended. 3) We believe that Zyngas valuation leaves very little room for error, but that errors and missed estimates have historically been almost inevitable for content companies given the difficulties of consistently producing hit content. Our View on Zynga, the Company: As the Facebook Gaming Market Transitions from Blitzkrieg to Trench Warfare, Zynga Needs to Up Its Content Game. Zynga was able to establish its dominant market share in Facebook gaming by winning the blitzkrieg phase of the market (2008-10) through (1) its superior analytics, which enabled the company to iterate more quickly to successful, monetizable game mechanics, and (2) aggressive business practices, including the development of several games that were close imitations of competitor titles, which allowed the company to overcome its own relative lack of content creativity. We believe the company and management deserve credit for identifying a hot, rapidly growing market and positioning itself for dominance through an aggressive, fast moving strategy while competition was still relatively weak and poorly funded. However, we believe the blitzkrieg hyper-growth phase of Facebook gaming (at least in Western markets) is largely over. As we will show in our report, the overall growth of the Facebook gaming market in terms of users has slowed dramatically, particularly at the upper end of the market. We believe that, going forward, Zyngas bookings (revenue) growth will be largely dependent on the companys ability to increase its penetration of paying users, as we believe overall user growth will be difficult to achieve.

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We expect the future of the Facebook gaming industry to be characterized by an increasingly competitive trench warfare battle for market share waged between Zynga and other Facebook gaming companies, including Electronic Arts, Disney, and emerging companies such as wooga and King.com. We believe this battle is likely to drive rising R&D and marketing costs for several years. Ultimately, we believe the winners will be those companies who are best able to produce high-quality content that broadly appeals to consumers. However, as the market enters its trench warfare phase, we believe that even the winners are likely to be saddled with a lower margin structure than that enjoyed by Zynga during its early growth days. Zynga is also pursuing opportunities in other casual digital gaming markets, principally mobile gaming and international (non-North America/Western Europe) social gaming markets. Here, we believe that Zyngas existing strengths, which are largely limited to its current dominance of Facebook, will give the company few competitive advantages. With lots of money flowing into these markets (in part due to Zyngas wild success), we think Zynga will face stiffer competition than it did in the early days of Facebook gaming. Again, we believe that high-quality content creation will be the key to sustainable value creation. One of our most significant concerns about Zynga is that the companys aggressive, confrontational culture which was a huge asset in winning the blitzkrieg phase of Facebook gaming may be a liability when it comes to the trench warfare phase that we believe will be won or lost on the strength of gaming content. In our years covering the movie, television, and video game industries, the most important lesson that has been driven home over and over again is that consistently producing high-quality, successful mass market content is very, very hard. Typically the companies that succeed at that goal the Pixars and Blizzards of the world have cultures organized around cooperation, consensus-building, and creativity. In contrast, Zyngas culture has historically appeared to aggressively discourage these characteristics. While we do not rule out the possibility that the companys culture will evolve to support greater creativity, we think that process, assuming management even chooses to pursue it, would likely be very difficult. As a result, we are very cautious on the companys ability to achieve the continued rapid growth that is implied by the IPO valuation at 43x our FY12 after-tax non-GAAP EBIT estimate (essentially, the P/E ex-cash). Furthermore, we believe the current valuation suggests a business model that is similar to companies that own monopolistic or quasi-monopolistic web platforms, such as Google, Facebook, Amazon, and Netflix (pre-implosion). However, Zynga is not a platform owner; rather, its current profitability is significantly dependent upon the continued success and goodwill of Facebook. Content businesses tend to experience much more volatile performances than platform businesses. We believe the current valuation leaves very little room for any missteps in execution; in our experience, missteps in content creation happen on a regular basis. Our View on ZNGA, the Stock: Aggressively Negative View Unlikely to Be Rewarded, for Now Given our view of the company and its IPO valuation, we are inclined to take a relatively negative view of ZNGA shares over the longer-term. However, we are initiating today with a Neutral rating. We want to be clear: to us, an Underperform rating is equivalent to telling investors to go out and short the stock. We believe that such an investment recommendation at this time would be unwise, for the following reasons:

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Initially, we believe that the biggest factor in the stocks trading will be a relatively tight float. We expect investors will have to pay a significant premium to borrow shares, limiting any profitability of a short position. We believe that a proper short call particularly on a growth stock needs to have a significant catalyst other than valuation. The most fruitful catalyst is generally a negative divergence between company performance and Street expectations. With Street expectations not even established yet, it is difficult to come up with a proper benchmark for a miss. We suspect that the company has likely aligned the expectations of the underwriting analysts - who will be most critical in setting investor expectations - so that the chances of a big miss immediately out of the gate (the first quarter or two) are minimal. We are mindful of the fact that Groupon, which arguably could have much more significant issues with its business model and ability to meet profit expectations than Zynga, continues to trade above its initial IPO price.

To put it more bluntly: there are a lot of ex-investors who were right about Netflix, for example, but were early, and got blown up. We dont have any desire to join that club with a premature short call on Zynga, and we have no desire to lead our clients astray either. If we are correct on our overall fundamental view of Zyngas business and valuation, then we believe there will be a point in the future where an aggressive short call will make more sense on a risk/reward basis. We also think it doesnt hurt to give the company a little leeway for now to prove that it can (or can not) meet the aggressive goals it has laid out for its future performance. Ultimately, though, we think the most sensible choice today is to stand aside (or for those investors who got an IPO allocation, move aside) until the stock and the Zynga story get seasoned a bit.
Video Game Company Multiple Comparison
Price Market Rating 12/16/2011 Cap Outperform (1) $11.86 $13,639.0 Neutral (2) $10.00 $9,029.6 Outperform (1) $20.92 $7,050.0 Neutral (2) $13.76 $1,410.4 Neutral (2) $0.75 $51.3 EV / Revenue 2011E 2012E 2.4x 2.0x 6.2x 5.2x 1.4x 1.3x 1.3x 0.7x 0.1x 0.1x 2.3x 1.9x 1.4x 1.3x Non-GAAP P/E * 2011E 2012E 14.5x 10.9x 61.7x 53.7x 18.6x 14.8x 137.7x 4.6x NM NM 58.1x 21.0x 40.1x 12.9x Mkt Cap Ex-Cash / ATNGOI ** 2011E 2012E 11.0x 8.7x 49.1x 43.1x 16.1x 13.0x 91.5x 4.0x NM NM 41.9x 17.2x 32.6x 10.9x Total Cash Return Yield *** 2011E 2012E 8.7% 10.1% 0.0% 0.0% 3.4% 3.3% 0.0% 0.0% 0.0% 0.0% 2.4% 2.7% 0.0% 0.0%

Company Activision Blizzard Zynga Electronic Arts Take-Two THQ AVERAGE MEDIAN

Ticker ATVI ZNGA ERTS TTWO THQI

* Adjusted to exclude the impact of certain non-recurring items and stock option expense. ** ATNGOI = After-Tax Non-GAAP Operating Income. Ex-cash assumes cash left after paying down outstanding debt. *** Sum of dividends and share buybacks, divided by the stock price.

Source: Company reports, Thomson and Cowen and Company estimates.

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Investment Positives
Positioned in the Attractive, Fast-Growing Casual Digital Gaming Market Segment
In the past, PC and console devices tended to offer complex and relatively expensive gaming experiences that did not appeal to all audience demographics. Conversely, mobile devices tended to offer gaming experiences that were substandard and not very engaging. However, the spread of new methods of low-cost digital distribution in the last few years, as well as the increased power and capacity of mobile devices, has opened up a significant new market segment for gaming, which we call the casual digital gaming market. Casual digital games tend to appeal to a much broader audience than traditional console or handheld games, including women and people in all age brackets, rather than just the stereotypical young male gaming demographic. We believe that there has been a lot of inconsistent nomenclature thrown around about the casual digital gaming segment. On the next page, we have constructed a pie chart to help visualize casual digital market segmentation, using a set of concentric circles. (Note: the circles are not necessarily meant to be to scale in a user or revenue sense.) 1) The outside circle represents the entire casual digital market. We have split this circle into two halves: the left half represents at-home devices, including the PC and gaming consoles, while the right half represents mobile devices, including feature phones, smartphones, and tablets. 2) The middle circle represents casual digital games that operate under what is known as the freemium model (a portmanteau of free and premium). Some casual digital games follow the traditional gaming revenue model, i.e. the user pays a fixed price to gain the right to play a game, though typically at a much lower price point than the $40-$60 levels of traditional console/PC games. An example of a non-freemium casual digital game is EA/PopCaps Plants vs. Zombies, which costs $0.99 to download to an iPhone or iPad. Freemium games, on the other hand, allow the user to play or download the game at no cost, but generate revenue primarily through the sale of virtual goods. Virtual goods are in-game benefits or digital objects that can change or accelerate game play, give the player advantages within the game, or present a more pleasing/customized visual style. We also include within the freemium circle those games that generate revenue primarily from in-game advertising. 3) The inside circle represents social games. The defining feature of social games is that they are attached to, and heavily utilize, a social networking sites social graph. In the U.S., the dominant social networking site by far is Facebook. We note that not all freemium games are social games. For instance, EAs Battlefield Heroes is a freemium PC game, while Glu Mobiles Gun Bros. is a freemium mobile game; though both have some in-game social features, neither explicitly utilizes the social graph of existing social networking sites. This is a critical distinction because social gaming companies have opportunities to promote new launches across the entire social networks social graph; freemium non-social games do not have this opportunity. Note we have significantly tilted the inside circle to the left (PC/console) side of the concentric circle, as most significant social networks are PC-based. While most social networks now have mobile

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appendages, usually with lower functionality that often does not fully support social gaming, there has yet to be a purely mobile-based social network (at least that we are aware of). Zynga currently dominates and generates the lions share of its revenue from PC social gaming, which represents the left-hand portion of the innermost circle. Zynga clearly also has designs on expanding its reach into the freemium mobile side of the market, which as we noted above, is not (yet) characterized by a significant social gaming opportunity. We think it also helps to visualize the diagram below as being labeled North America/Western Europe and then visualizing an identical set of circles labeled Asia/Rest of World. The casual digital market in Asia is highly significant and growing, but has thus far not been penetrated by Zynga (in any of its aspects) to nearly the extent Zynga has penetrated the western social gaming market.
Visualizing the Casual Digital Market, and Zynga's Current Reach

Left half = PC/Console Casual Digital Gaming Market

Inside Circle = Social Gaming Market

Zynga's Penetrated Market: PC Social Gaming

Middle Circle = "Freemium"/Virtual Goods Market

Source: Cowen and Company.

Right half = Mobile Casual Digital Gaming Market

Here are some current estimates of the current market sizes of various elements of the casual digital market in 2011: Worldwide mobile gaming - $4.1B (Electronic Arts) Worldwide smartphone/tablet gaming - $1.3B (Glu Mobile)

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Worldwide virtual goods - $9.0B (Zynga) Worldwide PC casual digital - $8.3B (Electronic Arts) Worldwide Facebook gaming - $1.6B (eMarketer and industry contacts) U.S. social gaming - $1.1B (eMarketer)

Electronic Arts estimates that digital gaming as a whole will grow at a 16% CAGR between 2011 and 2013, including a low double-digit growth rate for mobile gaming and a high-teen growth rate for PC casual/freemium/social gaming. We believe these growth estimates could lean towards the conservative side, particularly for hot market segments like smartphone/tablet gaming, which Glu Mobile expects to nearly double in size to $2.5B in 2012. Zynga and its social game developing peers have opened up the world of video gaming as an entertainment activity to a whole new audience of gamers. Industry surveys indicate that roughly 55% of social gamers are female (vs. only approximately 30% for traditional console games) with an average age range of 3843 years old. More specifically, according to a survey conducted by Information Solutions Group earlier this year, the average first time new social gamer is a 50+ year-old woman.
Zynga Top 10 Game Demographics, 12-14-2011

Top Ten Games

Top Ten Games

8.28%

14.03%

Under 18 18-25
17.63%

14.56% 44.30% 55.70%

Male Female
20.94% 24.57%

26-35 36-45 46-55 Over 55

Source: AppData.

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Zynga Game Demographics as of December 14

70.0% Young women/girls
Pioneer Trail

60.0%

Caf World

% of MAUs Under Age 26

50.0%

PetVille CityVille

40.0% Older men 30.0%

Mafia Wars Texas HoldEm Poker Mafia Wars 2

FarmVille

Words With Friends Treasure Isle Adventure World

20.0%

Empires & Allies

10.0%

Older women ('Social gamer' demo)

0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% % of MAUs Female

Source: AppData.

Dominant Market Share and Established Portfolio of Games

Zynga was one of the major early movers in Facebook gaming. By early 2009 the company was one of several that had established a significant gaming presence on the platform. However, Zynga quickly pulled away from its competitors through a period of rapid growth while its peers largely floundered. We think this was due to (1) Zyngas superior analytics, which allowed the company to iterate faster towards more successful game designs, (2) better focus on monetization, which allowed Zynga to invest more capital in its business, and (3) Zyngas aggressive by any means necessary culture, which simply carried the company forward faster than its peers. We also believe that Zynga benefited from the acquisition by larger companies of some key competitors during this period (Playfish by Electronic Arts and Playdom by Disney) which, at least temporarily, caused disruptions in the growth and execution of those competitors. As a result of Zyngas superior early mover strategy and execution, the company has by far the largest market share on Facebook, and currently operates 9 of the top 20 games on the platform. The combined daily average user (DAU) count of 48.3MM among all of Zyngas games accounts for 38% of total Facebook gaming DAUs and is more than four times larger than EA, the next largest publisher.

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Facebook Gaming Market Share, 12/12/11

Publisher Zynga Electronic Arts wooga King.com Playdom Tetris Online, Inc. 6waves Lolapps Happy Elements, Ltd GSN Playtika Halfquest ELEX Digital Chocolate DoubleDown Interactive, LLC. MindJolt SNSplus Inc. Social Point CrowdStar Kixeye Nordeus LLC Top 20 Total Estimated All Game Total

DAUs 48,293,933 11,640,990 7,236,000 5,431,000 3,163,260 2,930,140 1,810,516 1,795,700 1,731,304 1,680,000 1,520,000 1,498,870 1,288,171 1,200,000 1,187,524 1,184,810 1,147,700 1,065,302 1,028,000 960,000 97,793,220 128,290,000

% of Total 37.6% 9.1% 5.6% 4.2% 2.5% 2.3% 1.4% 1.4% 1.3% 1.3% 1.2% 1.2% 1.0% 0.9% 0.9% 0.9% 0.9% 0.8% 0.8% 0.7% 76.2% 100.0%

Source: AppData and Cowen and Company estimates.

The large scale and interconnected network of Zynga gamers gives the company several key competitive advantages over other social game publishers. First, a social game is inherently stronger the more people you have playing the game. Players gain benefits like increased energy or upgraded tools or weapons when friends they have invited to participate join in the game with them. These relationships then feed off of each other to encourage further game play and engagement. Second, and more importantly, Zynga can use their existing network of gamers to cross-promote new content and new game launches. This helps Zynga to build interest in new games quickly and lowers the risks of launching new intellectual property. We believe the positive effects of Zyngas large existing user base do create a barrier to entry for smaller competitors, particularly those that are not well-funded.

High Potential Profitability and Returns on Capital

The social gaming business has the potential to be a highly profitable business model, given what have historically been relatively low costs of development, customer acquisition (through social networks), and publishing (no physical product or distribution channels) as compared to the traditional console game business. Once Zyngas first hit games gained significant traction in 2009-2010, margins increased significantly. Zyngas non-GAAP EBIT margin was more than 40% in 2009 and 2010, well above console publishing margins which have never risen above the low/mid-20% range (and have more typically been mid-teens or lower), and nearly

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comparable to the 50%ish EBIT margin Blizzard has enjoyed via its highly successful PC gaming business, mainly due to the gigantic World of Warcraft MMO.
Zynga Bookings and Non-GAAP EBIT Margin, 2008-2010

900 800 700 600 500 400 300 200 100 0 2008 Bookings
Source: Company reports.

60% 50% 40% 30% 20% 10% 0% 2009 EBIT (non-GAAP) 2010 EBIT Margin

Zyngas returns on invested capital have been, if anything, more impressive. Historically, the company has run at essentially infinite returns on invested capital, as the companys cash balance has generally been significantly in excess of its equity (the company carries no debt). Intellectual property businesses are typically very asset light, and with Zyngas ability to scale on the Facebook platform, the companys return characteristics in its early years were highly attractive. (Note that for video game companies, we capitalize and then amortize all R&D expense in our ROIC calculations, both because we believe it more accurately reflects the business model, and because it makes intra-company comparisons easier.)
Zynga LTM Return on Average Invested Capital, 2009-2011
($ in MM) LTM NOPAT Adjusted Equity Interest Bearing (Lease) Obligations Capitalized R&D Excess Cash (Cowen Estimate) Invested Capital LTM Average Invested Capital LTM ROIC Q109 $31.5 ($3.6) $7.5 $13.7 ($22.4) ($4.8) $10.1 312.0% Q209 $58.7 ($7.2) $10.0 $18.3 ($44.8) ($23.6) $0.4 NM Q309 $115.5 ($10.7) $12.5 $26.6 ($67.2) ($38.8) ($13.0) NM Q409 $192.5 ($21.5) $15.0 $39.6 ($134.3) ($101.2) ($42.1) NM Q110 $275.4 $93.7 $21.3 $54.7 ($211.3) ($41.7) ($51.3) NM Q210 $337.6 $208.9 $27.5 $61.7 ($440.0) ($141.9) ($80.9) NM Q310 $372.7 $324.1 $33.8 $71.7 ($440.5) ($11.0) ($73.9) NM Q410 $380.6 $482.2 $40.0 $85.8 ($570.3) $37.7 ($39.2) NM Q111 $389.1 $738.8 $46.8 $120.2 ($806.2) $99.6 ($3.9) NM Q211 $358.4 $755.9 $53.6 $151.3 ($759.0) $201.8 $82.0 436.9% Q311 $312.3 $787.7 $60.4 $182.6 ($717.4) $313.3 $163.1 191.5%

Source: Company reports and Cowen and Company estimates.

We note that it remains to be seen whether a high EBIT margin will be sustainable as the online social gaming business matures. We believe that increasing competition is likely to drive growth in development and marketing spending as companies battle for market share. In fact, Zyngas EBIT margin has compressed dramatically to the low/mid-teens range in the last few quarters. Additionally, the company has

Margin Percentage
11

US$ in Millions

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undergone a significant ramp in capital expenditures, which is expanding the invested capital base. We discuss our concerns about future trends in the risk section beginning on page 15. However, even at what we expect to be lower margin and ROIC levels going forward, we still view Zyngas business model as attractive in absolute terms compared with other intellectual property businesses.

Freemium Model Broadens Appeal

Casual digital games, including social games, have clearly broadened the gaming audience significantly beyond that which has historically been present on traditional platforms, in part due to their use of new game mechanics and social appeal. However, we believe another key component of the success of social gaming is the freemium pricing model, which essentially allows publishers to price discriminate and allows gamers to spend exactly up to their marginal utility within the game. We believe the freemium model has been a key facet of the success of social gaming. Additionally, we believe that as consumers become more accustomed to the model, the penetration of paying customers relative to the total freemium gaming population is likely to increase over time. The traditional gaming model requires a gamer to lay out substantial dollars to purchase a gaming system (console, PC, or handheld) and then an additional $50-60 per game to purchase the game disk or digital download to get started. This creates a psychological price hurdle for any new gamer to overcome. In the end, this can stop some potential gamers from getting in the game, particularly given the increasing complexity and steeper learning curves associated with traditional core gaming experiences. In contrast, the way Zyngas games (and most social games) are priced lowers that price hurdle, and in most cases eliminates it altogether. The freemium model allows gamers to simply log in, create an account and get started, all without having to commit to spending a cent. Freemium games generate revenue by offering opportunities for the player to enhance or accelerate game play at a cost. These typically come in the form of ingame purchases of virtual items: energy/time resources, upgrades to characters or items that give the gamer an advantage in the game, or simply aesthetic improvements to avatars or buildings. These purchases can be micro-transactions that cost only a few US cents, or can be very significant such as the Fighter Drones in Bigpoints Dark Orbit game that recently sold for EU1,000 each (they recently sold over 2,000 of them in 24 hours!). We note that the latter may be a bit of an extreme example since the most expensive virtual item in Zyngas Farmville reportedly recently sold for the equivalent of $40 in Zynga currency. By providing a range of options from fully free-to-play to shelling out real cash for virtual items, freemium games are able to monetize gamers right up to the level of that players engagement in the game and willingness to pay. We note that currently most Western freemium titles only monetize around 3-5% of their total player base. However, we believe some freemium titles in Asia where the freemium model has been around for a much longer period are monetizing at rates above 10%. We believe that monetization rates in the West will generally (though slowly) increase over time as gamers become more comfortable with the freemium model and as developers optimize the gameplay mechanics that drive customer monetization.

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Lower Risk R&D Given Iterative Development Process

Traditional console video games require a high level of investment of both time and capital to develop hit titles, with budgets often in the tens of millions of dollars and development cycles spanning several years. All the work on a console video game has to be completed before the title is shipped; then, the publisher has to hope that sales of the game justify the upfront investment cost. As a result, the volatility around results can be very high (evidenced by the fact that traditional video game companies are generally lousy at giving accurate forward guidance). In contrast, social games can be rolled out much more quickly with smaller budgets and development teams. Since social games are played as a service delivered over an Internet connection, developers can utilize shorter development times and real-time customer activity to assess and modify components of games not only while in the beta testing phase, but in an iterative process throughout a games useful life. Most games typically are released incomplete, and the publisher can use early usage and monetization data to decide whether to continue investing in a game or kill the project. This allows social game companies to reinforce their winners and cut losses on losers before the investment gets too big. We note that to the extent that this feature benefits all social game developers, it becomes part of the competitive landscape. In other words, while the iterative development process holds out the promise of better returns on R&D investment dollars, this very fact is likely to bring more competitors into the space, potentially whittling away the excess returns. We note that the number of competitors in the traditional console gaming space has continued to shrink over time, with only a few major developers remaining; the high-risk nature of traditional video game development increasingly serves as a barrier to entry.

Best-In-Class Analytics
While Zyngas industry-dominating base of existing socially networked users is a highly valuable asset, the social gaming analytics capabilities that allowed the company to build that base of 48MM+ daily active users are likely its greatest core competency. Zynga has become known within the industry as having built up a large database of information around its users; in particular, Zynga understands its users behavioral patterns and interactions with Zynga games. Quickly learning exactly which types of offers, rewards schemes, game features, and social interaction capabilities to program into games, and being able to measure effectiveness in realtime, has been critical to Zyngas success. In particular, Zyngas analytics helped the company reach significant monetization earlier than competitors, which led to a virtuous cycle of greater reinvestment in success. The iterative development process described in the section above is greatly enhanced by the quality and depth of data and analytics experience which Zyngas data analytics group has in its toolbox. This analytics competency is something that was built into Zynga from a very early stage, and was crucial to its success. Andrew Trader, one of the founders of the company, recently commented in an interview with Wharton business school: Everybody at Zynga -- developers, product managers, business people, executives, CEO, everybody -- had that focus on metrics and transparency, which really did allow us to innovate quickly, test things really, really aggressively, and ultimately, kind of dominate this space...

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According to Ken Rudin, VP of Analytics, Zyngas data warehouse collects 3 terabytes of new data everyday, but the key to his teams success is not necessarily insight, but what his team does with the insights that are gleaned from a constantly erupting volcano of data. Analytics is not about insights, he says, Analytics is about impact. If no one changes behavior, theres no impact.

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Investment Risks
Dependence On Facebook
Facebook is the primary distribution, marketing, promotion, and payment platform through which substantially all players and revenues from Zyngas games are generated. Any deterioration of Zyngas working relationship with Facebook could cause substantial harm to Zyngas business. We believe that Facebook is in a significant position of power as a monopolistic tollbooth owner of the platform. In 2010 Facebook changed its policy to require all applications on Facebook to accept its own virtual currency, Facebook Credits, as the only form of payment from users. Consequently, Facebook increased the amount it collected as a fee for payment processing to 30% of all transactions. We believe that Zynga and its social gaming peers face the risk that Facebook could extract further value from the social gaming value chain due to its dominating gatekeeper position. We note that Facebook can also change the terms by which app companies are allowed to position their products at any time, and has already done so on at least one occasion by removing the ability of social games to spam messages across players friends list in mid-2010. This significantly diminished game virality and removed a free source of advertising for the social game developers. We believe that a similar scenario has already played out in the music industry. Apple has established a dominant, near monopoly tollbooth position through its iPod hardware and iTunes platform. In conjunction with Cowens senior Wireless Equipment analyst, Matt Hoffman, we estimate that Apples music distribution business (iTunes music sales; excluding iPod hardware sales) contributes roughly $10B in value to the companys $300B+ market cap. In contrast, Warner Music Group, which controls around 20-25% market share of the music publishing industry, was recently sold at an enterprise value of $3B. Roughly speaking then, if the music publishing industry as a whole is worth $12-15B, then one could argue that Apple has been able to extract about 30-40% of the value out of an industry that it was not even a part of 10 years ago. We believe another (more ominous) tollbooth analogy played out in the Chinese wireless value added services (WVAS) space over the past decade. In the early 2000s, as Chinas population took to mobile phone usage on a widening scale, service providers rushed to the market to provide content (ring tones, wallpaper pictures, news, etc.) to consumers across the country. These WVAS providers had to go through the wireless operators to deliver their services, with China Mobile positioned as the dominant carrier (currently at roughly 70% market share). In the beginning, China Mobile encouraged WVAS providers to enter the market with favorable terms for revenue sharing, as services helped drive new customer growth as well as revenue from data usage. However, as growth in new subscribers slowed, China Mobile began to take a greater share of revenues from the WVAS providers and charge more for traffic fees. While the split of revenues that went to China Mobile started out at 10-15%, it crept up to as much as 50-75% by the end of 2006. In addition, China Mobile increasingly exerted its gate-keeper powers by adding restrictions and structural changes to the way in which WVAS providers could deliver their content. All of this contributed to the decline in revenues, profits, and eventually shareholder value in the WVAS companies. Finally, over time China Mobile began to roll out its own VAS to subscribers, competing directly with the

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service providers and eventually rendering them almost completely irrelevant in the market. Three independent China WVAS providers went public on U.S. markets beginning in 2004; their share prices decreased by an average of 74% from their IPOs through the end of June, 2008. HRAY was purchased by Joy Media (now Ku6) in April 2009 for $77MM, nearly 70% below its peak market capitalization, primarily for its music studios and production business. LTON still trades and has a market cap of $25MM. KONG has recovered significantly due to a new management team stepping in with a change in focus to mobile game development and an acquisition which entered KONG into the traditional online MMORPG gaming space.
China WVAS Stock Performances, 2004-2008
$16

$14

$12

Stock Price in US$

$10

$8

$6

$4

$2

$0

Source: Thomson One.

16

3/ 12 /2 00 4 5/ 12 /2 00 4 7/ 12 /2 00 4 9/ 12 /2 00 11 4 /1 2/ 20 04 1/ 12 /2 00 3/ 5 12 /2 00 5 5/ 12 /2 00 5 7/ 12 /2 00 5 9/ 12 /2 00 11 5 /1 2/ 20 05 1/ 12 /2 00 6 3/ 12 /2 00 6 5/ 12 /2 00 6 7/ 12 /2 00 6 9/ 12 /2 00 11 6 /1 2/ 20 06 1/ 12 /2 00 7 3/ 12 /2 00 7 5/ 12 /2 00 7 7/ 12 /2 00 7 9/ 12 /2 00 11 7 /1 2/ 20 07 1/ 12 /2 00 8 3/ 12 /2 00 8 5/ 12 /2 00 8 7/ 12 /2 00 8 9/ 12 /2 00 11 8 /1 2/ 20 08

KONG

HRAY

LTON

We note that Facebook derives a second major benefit from its positioning, in that it is likely the primary beneficiary of advertising spending by the social gaming companies. Zynga has been reputed in the press to be Facebooks single largest advertiser, and we believe that other social gaming companies drive significant advertising revenue for Facebook as well. As competition in the space increases we think marketing budgets will by necessity go up, further adding to the value Facebook is able to extract from the space. We also believe that, over the longer-term, there is a risk that Facebook itself could decide to enter the game business as a publisher. In that event, Facebook could easily use its ownership of the platform to give its games preferred placement and we believe Zynga would be at significant risk for market share losses. While this seems a remote possibility at present, we are hard pressed to think of a content distributor that did not, at some point, attempt to extract additional value through vertical integration with content production.

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Finally, as unlikely as it may seem now, Zynga also faces the risk that Facebook could be supplanted by another social network in the same way that Facebook supplanted MySpace. Although we expect that Zynga could move its games to another social network, it would risk losing its dominant market share in any transition.

Gaming User Trends On Facebook Are A Matter Of Serious Concern As Growth Has Slowed Dramatically
Zyngas overall daily average user (DAU) count across all of its games in aggregate has been generally declining since it peaked at nearly 69MM in February 2010. This comes despite Zynga putting up a substantial effort to attract new (and retain existing) gamers with an onslaught of new gaming titles. As of February 2010, 10 of Zyngas current top 20 games were in operation; these 10 titles in aggregate accounted for substantially all of Zyngas DAUs at that time. In the nine quarters since then, Zynga has doubled its number of core games, adding 10 key new titles; however, DAUs have declined. While some of the decline was due to a change in Facebooks notification permissioning that decreased the virality of social games (and increased customer acquisition costs), even after the impact of that change, Zynga has continued to generally shed users, other than a significant spike around the launch of CityVille in late 2010. Between Q2 and Q4 2011, Zynga launched six key new games: Empires & Allies, Pioneer Trail, Words With Friends, Adventure World, Mafia Wars 2, and CastleVille; DAUs actually declined during that period, from 54.2MM at the end of Q1 to 48.3MM as of 12/12/11.
Zynga Quarter-End Facebook DAUs, Q2:09 - Current
Quarter DAUs (MM) DAU Market Share Q2:09 9.1 28.1% Q2:09 35.5 44.7% Q4:09 62.2 48.2% Q1:10 67.1 50.0% Q2:10 50.2 45.8% Q3:10 48.4 41.5% Q4:10 58.2 45.1% Q1:11 55.5 45.2% Q2:11 52.2 41.5% Q3:11 46.8 36.9% Q4:11 48.3 38.7%

Source: AppData and Cowen and Company estimates. Q4:11 data is as of 12/12/11. Pre-Q4:11 DAUs are adjusted by estimated impact of October 15 reporting change (see p. 21-22 for details).

Taking a Step Back: Facebook User Trends Are Not That Hot For The Social Gaming Industry As A Whole The Facebook social networking platform continues to grow its worldwide user base; we estimate it has enjoyed roughly 35% growth in users this year to over 800MM from roughly 600MM users at the beginning of the year. However, the rate of growth does appear to be slowing; according to Facebook, it added 50MM users in the first month of the year, then 100MM over the next four months (or 50MM every two months), and then another 50MM between June and September, a three month period. In other words, the annualized growth rate has dropped from 100% in the first month of the year, to 44% between February and June, and then to 27% between June and September. Additionally, we believe that the majority of Facebook growth is occurring in markets that are not core to Zyngas user base (we believe Zynga generates a significant majority of its revenue from North America and Western Europe; the United States alone has accounted for 65% of revenue year-to-date). We estimate that over the last 6 months, U.S./Canada Facebook users have grown by 3.4% and Western European users have grown by 5.5%, while the rest of the world has grown users by 12.4%. We estimate that over 80% of the users that Facebook has added over the last 6 months have been outside of North America/Western Europe.

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Growth in Facebook Users by Region

Growth Jun-11 Dec-11 U.S./Canada Western Europe * Rest of World Total 167.2 140.4 456.2 763.8 172.9 148.0 512.8 833.7 Rate 3.4% 5.5% 12.4% 9.2%

Contribution to Growth 8.1% 11.0% 80.9%

* U.K., Ireland, France, Germany, Belgium, Netherlands, Luxembourg, Spain, Portugal, Denmark, Norway, Sweden, Finland, Switzerland, Austria, Italy, Greece.
Source: Socialbakers.com and Cowen and Company estimates.

Looking specifically at the growth of gaming on Facebook, overall user growth has been fairly modest for the last six quarters. Since Facebook changed its message permissionings in early 2010, we estimate that total Facebook gaming DAUs (adjusted for the October 15 reporting change) have grown at an average of 2.8% per quarter, vs. 70.2% per quarter for the three quarters leading up to the change. Within that modest gain, most of the growth occurred in 2010; we estimate that total current Facebook gaming DAUs are down slightly from year-ago levels, and down about 5% from the pre-permissioning change peak in Q1:10. Additionally, we note that total DAUs for the largest 50 games have grown at an anemic 0.4% per quarter since Q2:10. In contrast, the aggregate DAU growth rate for games outside of the top 100 largest titles has been 20.9% per quarter (though again, most of this growth took place in 2010). This suggests that what growth in the market has occurred over the last six quarters has largely been at the periphery, with smaller niche titles. In contrast, there has been very little growth in aggregate in the larger hit games that Zynga is known for. We think this suggests that new major game releases are mostly driving market share shifts and churn rather than incremental growth for the space.
Quarter-End Total Facebook Gaming DAUs, By Size Ranking, Q2:09 - Current
DAUs (MM) Top 50 Games Games 51-100 Games 101+ Total Q2:09 27.3 2.7 2.5 32.5 Q3:09 72.3 4.2 3.0 79.5 Q4:09 116.4 7.1 5.4 129.0 Q1:10 120.4 8.5 5.4 134.3 Q2:10 92.5 9.6 7.6 109.6 Q3:10 91.0 12.2 13.3 116.5 Q4:10 97.7 13.2 18.0 129.0 Q1:11 90.6 12.9 19.2 122.7 Q2:11 91.9 13.7 20.3 126.0 Q3:11 93.7 14.2 18.8 126.7 Q4:11 94.2 13.5 20.6 128.3 Average Quarterly Growth Q2:09-Q1:10 Q2:10-Q4:11 76.3% 0.4% 48.7% 6.4% 32.4% 20.9% 70.2% 2.8%

Source: AppData and Cowen and Company Estimates. Pre-Q4:11 DAUs are adjusted by estimated impact of October 15 reporting change (see p. 2122 for details).

Back to Zynga: Game Cycles Shortening, New Games Cannibalizing Older Games Returning to Zynga, DAUs across almost all of Zyngas existing games are currently in meaningful decline, with most titles 50% or more off peak DAU levels. The main exceptions are CastleVille, which was launched in the last month, Texas Holdem Poker, which despite being one of Zyngas oldest titles is only 20% off its peak DAU level reached nearly two years ago, and Words With Friends, which launched in July 2011 and has steadily grown to its current level of 5.3MM DAUs.

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Game Contributions to Zynga's DAUs

70 CastleVille Mafia Wars 2 60 Adventure World Pioneer Trail 50 Words With Friends Empires and Allies CityVille 40 DAU in Millions FrontierVille Treasure Isle 30 PetVille FishVille Caf World 20 FarmVille Vampire Wars 10 YoVille Mafia Wars Texas Hold'em Poker 12 /4 /0 9 8/ 31 /1 0 9/ 5/ 09 6/ 2/ 10 2/ 27 /1 1 6/ 7/ 09 3/ 4/ 10 5/ 28 /1 1 8/ 26 /1 1 11 /2 4/ 11 11 /2 9/ 10

Source: AppData.

In addition to generally diminishing DAUs (both in aggregate and on a per game basis), the launch-to-peak performance timeframes for Zyngas games have contracted considerably since mid-2009. The table on the next page lists the launch dates, peak DAU levels, and days-to-peak for Zyngas top 17 games. Days to reach peak DAU levels for Zyngas new titles have been getting shorter and shorter; the August release Pioneer Trail grew to its peak in 5 days while October title Mafia Wars 2 peaked just 8 days after its launch. While the recently launched CastleVille got off to a fast start, DAU growth was 6.9MM in the first two weeks vs. just 1.4MM in weeks three and four. Over the past four years, the average days to reach peak DAU levels has contracted from 450 days for games launched through 1H:09, to 72 days for games launched between 2H:09 and 2H:10, down to an average of just 10 days for games launched in 2011 (though we note this excludes two titles, Words With Friends and CastleVille, which have not definitively hit peak DAU levels yet). Additionally, the time that games take to drop 50% from their peak DAU levels is also compressing, from 223 days for games launched through 1H:09, to 164 days for games launched between 2H:09 and 2H:10, down to an average of just 62 days for games launched in 2011. Finally, we note that while Zyngas games launched through 2010 averaged peak DAUs of roughly 10MM, none of the games launched in 2011 has exceeded the 10MM level. One could argue that these trends are partially a result of Zynga successfully leveraging its existing base of gamers to promote and launch new games, thus accelerating ramp time. However, we believe it is more reflective of the fact that while Zynga is highly effective at marketing new games to existing users (which drives cannibalization), they are having a much harder time attracting new users to their games.

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Launch-to-Peak Timeframes, Zynga Titles

Launch Decline Average Days After Peak Average Days DAUs Release Date Current Peak From Peak Days to Peak Days to Peak to Reach 50% of DAUs Peak to 50% Texas Hold'em Poker* 9/24/08 6,300,000 7,719,033 (18.4%) 872 NA YoVille* 9/24/08 260,000 3,751,011 (93.1%) 383 188 450 223 Vampire Wars* 9/24/08 80,000 919,752 (91.3%) 402 189 Mafia Wars 11/5/08 590,000 7,386,908 (92.0%) 369 363 FarmVille 7/2/09 7,300,000 32,479,576 (77.5%) 224 152 Caf World 10/3/09 1,500,000 10,714,586 (86.0%) 62 198 FishVille 11/8/09 190,000 7,459,387 (97.5%) 27 137 PetVille 12/4/09 210,000 5,874,072 (96.4%) 119 81 72 164 Treasure Isle 4/3/10 410,000 7,414,149 (94.5%) 25 105 FrontierVille 6/11/10 230,000 8,960,746 (97.4%) 111 193 CityVille 12/5/10 10,400,000 21,517,312 (51.7%) 88 270 Empires & Allies 6/2/11 3,200,000 7,763,413 (58.8%) 12 168 Words With Friends 7/24/11 5,900,000 5,900,000 0.0% NA NA Pioneer Trail 8/15/11 1,700,000 5,042,808 (66.3%) 5 35 10 62 Adventure World 9/11/11 1,600,000 5,260,002 (69.6%) 16 18 Mafia Wars 2 10/13/11 670,000 2,800,000 (76.1%) 8 26 CastleVille 11/15/11 8,300,000 8,300,000 0.0% NA NA * Launch date was actually before AppData started tracking DAUs on September 24, 2008. We use the beginning of the data series as the launch date. Peak DAU Average

10,451,256

10,323,375

5,844,371

Source: AppData (as of December 15, 2011).

Finally, as noted in our November 29, 2011 report Social Gaming Monthly: Churn Baby Churn, while Zynga DAUs have ticked up slightly over the last month, given the launch of Zyngas most important new title for the year, CastleVille, the modest increase in November must have been disappointing. The lack of real DAU growth appears to be partially a function of general overall erosion in the DAU base for Zyngas older titles and partially an acceleration of user churn since the launch of CastleVille. In the two weeks prior to CastleVilles launch, Zyngas nine other major titles (Zyngas top 10 titles account for 93% of its game app DAUs) lost a combined 1MM DAUs; in the two weeks since CastleVilles launch, those losses accelerated to 2.8MM (significantly offsetting the 6.9MM DAU gain from CastleVille).
Zynga Key Title DAU Gains/Losses Around the Launch of 'CastleVille'
DAU Gains/Losses 11/14/11 to 10/31/11 to 11/28/11 11/14/11 6,900,000 0 400,000 400,000 (200,000) 0 (200,000) 0 (200,000) (100,000) (300,000) (200,000) (400,000) 100,000 (500,000) 0 (600,000) (700,000) (800,000) (500,000) 4,100,000 (1,000,000) (2,800,000) (1,000,000)

CastleVille Words With Friends Texas Holdem Poker Caf World Pioneer Trail Adventure World FarmVille Empires & Allies Mafia Wars 2 CityVille Total ex-CastleVille
Source: AppData.

We note that while Zynga has struggled to grow DAUs over the past two years, some other publishers have been more successful, including wooga (now the third-largest Facebook game publisher by DAUs), King.com (fourth largest), and Tetris Online (sixth largest). Notably, none of these companies was among the early-stage leaders in Facebook gaming. We believe that the success of these companies in maintaining steady user growth has been driven by the fact that their content has proven to have better long-term staying power than that of many of Zyngas games. For instance,

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each of woogas three key titles, Diamond Dash, Bubble Island, and Monster World, continue to grow users more than one year after their initial launches.
DAU Trends for Top Six Facebook Gaming Companies
Q4:09 60.8 14.0 0.3 3.3 0.1 Q1:10 65.6 13.5 1.3 0.0 7.1 0.1 Quarter-End DAU (in Millions; Q4 as of 12/12/11) Q2:10 Q3:10 Q4:10 Q1:11 Q2:11 49.1 47.3 56.9 54.2 51.1 13.7 14.2 13.0 11.3 9.1 1.2 1.8 2.3 3.1 5.6 0.1 0.2 0.2 0.3 1.9 6.2 5.0 3.4 2.1 4.8 0.1 0.2 0.4 0.6 1.1 Q3:11 45.7 17.6 6.9 2.5 4.8 1.7 Q4:11 48.3 11.6 7.2 5.4 3.2 2.9

Zynga EA wooga King.com Playdom Tetris Online

Source: AppData.

We think the evidence is very strong that Zyngas new title releases are largely attracting new users from previous Zynga games, and that few new users are entering the Zynga ecosystem. Although Zynga is promising a reacceleration of growth on the back of a full pipeline next year, we believe there is a very real risk that the expansion of output will spur increased costs without a proportional payoff in bookings. We note that the acceleration in game output from 1H:11 to 2H:11 has not significantly altered the downward trend in DAUs during the year. We think the fact that well-funded competitors EA/Playfish/PopCap and Disney/Playdom are also promising increased social gaming output in 2012 and beyond only increases the risk that Zynga will have difficulty growing its user base on Facebook. To the extent that Zynga seeks to drive increased bookings on Facebook, then, we think Zyngas growth will lean much more heavily on increasing monetization of its user base than on growing its user base. We cover the prospects for increased monetization later in this report. Sidebar: Impact of Facebook Measurement Change on DAUs Not That Significant. One final note on DAU measurement: On October 15, Facebook changed how it counts users, no longer counting a few classes of passive users (for instance, users who visit the app but do not log in). As a result, there is a significant discontinuity in the Monthly Average User (MAU) counts for games and developers around that time; we estimate the average impact to MAU metrics was around a 25% decline. It is important to note that this does not reflect any actual change to the underlying traffic, just the way it is being counted by Facebook. Importantly, the discontinuity in daily average user (DAU) counts appears to be much less, generally in the low-single digit percentage range depending on title. We believe the DAU metric is more important than the MAU metric, as it is a better measure of player engagement and stickiness, and thus, a better proxy for monetization. The difference between the small drop in DAUs and larger drop in MAUs is that the MAU count magnifies that daily DAU discontinuity over an entire month, to the extent that each days DAUs do not represent the same users. Some management teams of companies involved in social gaming have highlighted the measurement change as a primary driver of user declines on certain games; we think these assertions significantly overstate the impact of the change, and conversely, tend to gloss over real and significant declines in game audiences; we leave it up to the reader to decide whether this was due to management misunderstanding of the metrics, or something else.

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The table below shows the change in DAUs for the top 25 game apps on Facebook for the week before and after the measurement change. While the aggregate change for the top 25 titles was a -4.3% decline, this was significantly influenced by large drops in a few of the largest games. The average (unweighted) drop was only -1.8%, while the median drop was -2.3%. In our time series analyses across the reporting change period where a consistent measure of DAU is important, we are using the -2.3% median decline to adjust pre-change DAU counts.
DAU Changes for Top 25 Facebook Games Around Facebook Reporting Change (October 15)
Average Week Before Developer Change Zynga 13,523,198 EA 9,351,067 Zynga 7,427,185 Zynga 6,402,768 Zynga 4,960,524 Zynga 3,995,610 Disney 3,077,597 Zynga 3,109,808 EA 2,658,747 wooga 2,316,023 Zynga 2,345,094 wooga 2,082,696 Zynga 1,945,390 GSN 1,811,432 wooga 1,760,904 Tetris Online 1,633,978 Happy Elements 1,374,140 Playtika 1,458,884 King.com 1,247,656 King.com 1,009,216 EA 1,081,577 ELEX 1,022,816 Nordeus 984,984 Doubledown Interactive 1,013,242 SNS Plus 996,503 78,591,039 Average Week After Change 12,114,286 8,571,429 7,500,000 6,400,000 4,571,429 4,157,143 2,942,857 2,285,714 2,700,000 2,257,143 2,171,429 2,100,000 1,814,286 1,742,857 1,685,714 1,671,429 1,500,000 1,442,857 1,271,429 1,328,571 1,057,143 1,014,286 902,857 1,007,143 970,000 75,180,000 Difference Difference DAU % (1,408,913) (10.4%) (779,638) (8.3%) 72,815 1.0% (2,768) (0.0%) (389,096) (7.8%) 161,533 4.0% (134,740) (4.4%) (824,093) (26.5%) 41,253 1.6% (58,880) (2.5%) (173,665) (7.4%) 17,304 0.8% (131,104) (6.7%) (68,575) (3.8%) (75,190) (4.3%) 37,450 2.3% 125,860 9.2% (16,027) (1.1%) 23,773 1.9% 319,355 31.6% (24,434) (2.3%) (8,531) (0.8%) (82,127) (8.3%) (6,099) (0.6%) (26,503) (2.7%) (3,411,039) (4.3%) (1.8%) (2.3%)

Name CityVille The Sims Social FarmVille Texas HoldEm Poker Empires & Allies Words With Friends Gardens of Time Adventure World Bejeweled Blitz Diamond Dash Pioneer Trail Bubble Island Cafe World Games Monster World Tetris Battle Happy Aquarium Slotomania - Slot Machines Bubble Saga Bubble Witch Saga Pet Society Happy Farm Top Eleven DoubleDown Casino Happy Nurse Home Total Average (Unweighted) Median
Source: AppData.

Other Growth Opportunities May Not Pan Out

Given what we believe are uncertain prospects for overall growth of Zyngas user base on Facebook, the companys growth prospects via other revenue sources and platforms will become more important. However, we believe that the unique circumstances that contributed to Zyngas enormous initial success with driving virtual goods sales on Facebook are unlikely to be replicated elsewhere, and that Zynga faces significant challenges in developing other meaningful revenue streams. Advertising: Additive at the Margin, But Not a Primary Driver Zyngas advertising revenue is derived mainly from branded virtual goods, sponsorships, and engagement ads. Advertising revenue has only been a small portion of Zyngas overall business since its online gaming business took off and the

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company de-emphasized advertising starting in Q4:09 (in part due to controversial issues with some of its advertising partners; we discuss this in more detail later in this report). By our estimates, advertising bookings remained in the single digit millions from Q4:09 through Q4:10, and started to grow again in 2011 to the current $18.4MM level in Q3:11. On a per DAU basis, advertising revenue has grown from a low of $0.06 in Q1:09 to $0.34 per quarter in Q3:11.
Zynga Advertising Bookings, 2009-2011
Q1PFA Mar-09 Advertising Bookings % of Zynga Total Bookings y/y growth Ad Bookings per Average DAU y/y growth $14.7 45.2% $2.94 Q2PFA Jun-09 $18.1 34.4% $2.28 Q3PFA Sep-09 $14.3 14.5% $0.59 Q4PFA Dec-09 $4.6 3.2% $0.08 Q1PFA Mar-10 $3.9 2.2% (73.2%) $0.06 (98.0%) Q2PFA Jun-10 $6.6 3.4% (63.3%) $0.11 (95.2%) Q3PFA Sep-10 $6.7 3.0% (52.9%) $0.14 (76.9%) Q4PFA Dec-10 $9.2 3.8% 100.8% $0.19 142.6% Q1PFA Mar-11 $14.1 4.9% 257.2% $0.23 286.0% Q2PFA Jun-11 $15.0 5.5% 127.0% $0.26 130.8% Q3PFA Sep-11 $18.4 6.4% 173.2% $0.34 147.9%

Source: Cowen and Company

While advertising bookings grew in excess of 100% y/y during the prior 4 quarters, advertising bookings generated in Q3:11 were still just over 6% of Zyngas overall bookings. As comparisons get more difficult, we expect the growth rate to slow to a 52% y/y increase in FY12 and a 35% y/y increase in FY13, and for advertising to remain less than 10% of revenue in FY12-FY13. In general, we believe that gaming is not a very ad-friendly environment given that players are engaged with game play and not likely to be receptive to traditional webbased advertisements. There has been talk for years about how console gaming generates significant numbers of eyeballs that could potentially be monetized through advertising; however, the reality is that any ad which is intrusive enough to be noticed detracts from an immersive game experience, whereas an ad that doesnt get noticed has a low ROI by definition. As a result, advertising revenues in the traditional gaming space have remained very modest. We do not view social gaming as significantly different in this regard, with one exception: players that are unwilling to directly spend money on virtual goods, but are willing to watch ads in order to receive virtual goods, can be monetized through advertising. Zynga is experimenting with new models, such as in-game sponsorships of virtual buildings, objects, or events that allow advertisers to build their brands directly into Zynga games themselves. In a recent example, Best Buy ran a campaign in CityVille that allowed players to build and operate virtual Best Buy stores that produced eight million virtual stores and more than one million new fans on Best Buys Facebook fan page. However, while we think these efforts are interesting, and potentially additive at the margin, we believe that sales of virtual goods are likely to remain by far the most significant part of Zyngas business. Mobile: No Inherent Advantages in a Competitive Space We believe that the mobile gaming market has several years of attractive growth ahead due to the continued expansion of the installed base of smartphones and tablets. However, there are many firms competing for this market, and Zynga will lack most of the competitive advantages it has enjoyed on the Facebook platform. Key to these are: (1) lack of dominating market share, (2) the lesser importance of the social graph in mobile, and the lack of viral customer acquisitions, and (3) the higher importance of high quality content to drive title acceptance.

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Zynga has been aggressively building its capabilities in the space with nine mobilerelated acquisitions over the past 15 months. Newtoy, Inc., the maker of Words With Friends, was acquired in December 2010 for $53.3MM, making it Zyngas largest single acquisition. Other acquisitions in the space brought titles GodFinger, Parking Wars, MoPets and most recently Desert Heroes and Monsterz Revenge into Zyngas mobile gaming portfolio.
Zynga Acquisitions in the Mobile Gaming Space
1 2 3 4 5 6 7 8 9 Target Unoh Games Newtoy, Inc. Area/Code Floodgate Entertainment Wonderland Software cocos2d (team acquisition) Sapus Media (certain assets of) Five Mobile (certain assets of) Astro Ape Date 8/1/2010 12/2/2010 1/1/2011 3/18/2011 4/27/2011 5/1/2011 5/1/2011 7/8/2011 8/16/2011 Location Tokyo, Japan McKinney, TX New York, NY Boston, MA UK NA NA Toronto, Canada New Jersey, NJ Description Developer, Web and mobile games, photo sharing apps Mobile developer, Games With Friends Web and mobile developer, Parking Wars , Drop7 Web and mobile developer, MoPets, Madden 2005&06, Nascar mobile developer, GodFinger iPhone open source project Professional tools for mobile game developers Mobile app developer Mobile developer, Desert Heroes, Office Heroes, Monsterz

Source: Company reports.

However, it is not yet clear whether these acquisitions will pay off in the mobile gaming space. As of December 5, 2011, Zynga was responsible for just three of the top 25 grossing mobile games on the iOS platform: Poker by Zynga and Dream Zoo, which are both free-to-play with in-app purchases similar to many of Zyngas online games, and Words With Friends, which requires a one-time purchase decision to download the game to a phone.
Top Grossing iOS Games, December 5
Top Grossing iOS Games As of 5 December 2011 Game 1 Infinity Blade II 2 Call of Duty: Black Ops Zombies 3 Poker by Zynga 4 DragonVale 5 Dream Zoo 6 Tetris 7 Angry Birds Seasons 8 Angry Birds 9 Texas Poker 10 Smurfs' Village 11 Modern War 12 My Town 2 13 Infinity Blade 14 Flick Home Run ! 15 Blood & Glory 16 Crime City 17 Bejeweled 2 + Blitz 18 High Noon 19 Tap Pet Hotel 20 Fruit Ninja 21 Card Ace: Casino 22 Words With Friends 23 Battle Nations 24 Amazing Breaker 25 The Oregon Trail: American Settler Source: AppAnnie Source: App Annie. Publisher Chair Entertainment Group Activision Blizzard Zynga Backflip Studios Zynga EA Clickgamer.com Clickgamer.com Kama Games Beeline Interactive Funzio Booyah Chair Entertainment Group infinity pocket Glu Games Funzio EA Happylatte Pocket Gems Halfbrick Studios Self Aware Games Zynga Z2Live Dekovir Gameloft Free-to-Play $ $ Free-to-Play Free-to-Play Free-to-Play $ $ $ Free-to-Play Free-to-Play Free-to-Play Free-to-Play $ $ Free-to-Play Free-to-Play $ Free-to-Play Free-to-Play $ Free-to-Play $ Free-to-Play $ Free-to-Play Type In-App Purchases $ NA $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ NA $ NA $ NA $

While Zynga has grown its exposure to mobile, with the company reporting around 13MM DAUs as of last week, we note that much of this growth has been acquired (with Words With Friends the most significant example). Zynga has yet to show it can grow this business organically. Zynga lacks the dominating market share it enjoys
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on Facebook, which means relatively higher customer acquisition costs compared with competitors in mobile than on Facebook. Without Facebooks social graph, Zyngas comparative advantage in reaching consumers is also diminished. We believe that success in the mobile space is driven more by having high-quality hit content, such as Angry Birds, Infinity Blade, or Plants vs. Zombies, than the viral friend-based word of mouth that has driven success on Facebook. Given that we do not believe that Zynga has distinguished itself to-date as a developer of high-quality content, and that we do not believe the companys culture is geared towards producing high-quality content (see more on this below), we believe that Zyngas prospects for breakout success in mobile gaming remain in question. Stand-alone ZYNGA Social Gaming Platform: We Think the Value is on Facebook On October 11, 2011 Zynga announced the creation of Zynga Direct, its new online distribution service which CEO Mark Pincus described as a platform for a direct relationship with consumers. The platform will give Zynga a means to deliver its games to players on computers or mobile devices, without having to go through Facebook, thus eliminating reliance on Facebook and presumably eliminating the need to abide by Facebooks rules and pay the 30% tax for using Facebook Credits. According to comments made by CTO Cadir Lee on November 28, Zynga Direct will offer only Zynga games to start with but will later offer games from independent developers. However, we believe that the success of Zyngas social games, and the value created thereby, has been highly dependent on Facebooks social graph. We believe people play Zynga games on Facebook primarily because they are on Facebook and not primarily because they are Zynga games. Thus we are skeptical that Zyngas games can have comparable success on a proprietary platform (and we believe the modest success of Zyngas Ville games on mobile platforms tends to support this). Additionally, even if Zynga has some success with its own platform, we think that the supposed advantage of having a new direct relationship with consumers is being overstated. Zynga already has nearly complete knowledge of exactly who their consumers are through Facebook, including the opportunity for direct email communication. Contrast this with Electronic Arts decision to launch Origin; previously, EAs customers were completely intermediated through services like Xbox Live or Steam, and EA had very little idea of who its end consumers were at all. While Zynga would at least reap the advantage of no toll on its on platform, this needs to be offset against the cost of running such a platform. In total, we are skeptical that Zynga Direct is likely to significantly enhance the companys revenue growth. International: Zynga Just One of Many Competitors in a Complex Space We dont believe Zynga has any significant advantages over its competition in key international markets given the discontinuity of most personal social networks across national cultural and language boundaries. Specifically: (1) Facebook is not the preferred social network in many core international growth markets, taking away Zyngas first mover advantage, (2) Zynga must build localization capabilities in many international markets to satisfy demand for localized gaming content specific to each country/culture, and (3) foreign gaming companies have had little success gaining traction in key Asian markets which we view as the main untapped international geography for growth in casual digital gaming over the next five years.

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First, although Facebook is by far the largest international social network (if we categorize Tencents QQZone, with over 530 million registered users, as predominantly a mainland China network), the most widely used social networks differ by country. This is especially true in key international growth markets like Brazil, where Googles Orkut is a clear leader, as well as in Russia (V Kontakte), India (Orkut), Japan (Mixi), and China (QQZone). In these key international growth markets the first mover advantage which Zynga enjoys on Facebook is of little help. Second, localization is very important in international emerging markets. A one size fits all strategy in taking Zyngas existing games to these markets may not work well in countries where cultural preferences and behaviors differ substantially from Zyngas existing base (and from one another). We believe that a key reason wooga has been able to achieve its recent success in European markets is because it has customized its games for each specific country including gaming types and item preferences, as well as building games from the ground up in different languages rather than just translating in-game text. Additionally, Zyngas existing core demographic of mature, affluent females doesnt necessarily exist to a significant extent in most emerging markets. Finally, US gaming companies have almost never achieved real success in Asias largest markets (Japan, Korea, and China); Blizzard is the one major exception. Blizzards World of Warcraft has done exceptionally well in China, a place where MMORPGs have thrived over the past decade, while the companys Starcraft real time strategy series has gained mainstream popularity in Korea, where professional Starcraft players can make six figure salaries playing in publicly broadcast tournaments. It is our view that Blizzards success in both Korea and China is a direct result of its best-in-class gaming content. We do not believe Zyngas games to date have reached this level of quality (whether perceived or realized by gamers) and therefore we think they will struggle to generate the robust demand that Blizzards titles have achieved in key Asian markets.

Costs Increasing, Margins Compressing As Zynga Reaches for Growth and Competition Increases
Online social gaming enjoyed a short period of extremely rapid user growth, attracting new gamers through relatively cost-efficient marketing (basically spamming Facebook friends lists of existing gamers and constantly reminding existing players through updates and notifications) and low development costs due to graphically simplistic games. However, at its core online social gaming is still a hit-driven business, one that currently has relatively low barriers to entry and remains subject to the normal pressures of competition. The space has become increasingly competitive in recent years, with many new entrants spending everincreasing budgets on research, development, and marketing to attract and engage new players. Over the last several quarters, as Zyngas user and bookings growth has slowed, the company has significantly ramped its expenses. As a result, the companys margins have collapsed; non-GAAP gross margins have declined from a peak of 86.3% in Q1:09 to 72.1% in Q3:11, while non-GAAP EBIT margins have declined from a peak of 51.8% in Q3:09 to just 12.2% in Q3:11.

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Zynga Non-GAAP Margins, Q1:09 - Q3:11

Non-GAAP Margins

100% 80% 60% 40% 20% 0%

Gross margin
Source: Company reports.

EBIT margin

Zyngas total operating expense as a percentage of bookings more than doubled from 32.7% in Q3:09 to 67.8% in Q3:11. In particular, R&D expense has gone from 14.5% of bookings to 39.9% of bookings over that period. We believe this is to support an expanded lineup of title launches on both social and mobile platforms. However, we note that the companys expanded launch lineup in 2H:11 has thus far not driven a significant amount of user growth.
Zynga Operating Expenses as a Percentage of Bookings
Op exp as % of Bookings Research and Development Sales and Marketing General and Administrative Total operating expense Q109 20.3% 14.4% 5.0% 39.7% Q209 17.4% 12.0% 7.0% 36.4% Q309 14.5% 11.2% 7.1% 32.7% Q409 14.5% 14.0% 8.3% 36.8% Q110 15.6% 9.8% 9.2% 34.6% Q210 15.6% 15.2% 7.8% 38.5% Q310 17.9% 13.0% 8.0% 38.9% Q410 21.1% 15.7% 9.1% 46.0% Q111 25.0% 14.0% 9.5% 48.5% Q211 34.8% 13.9% 19.7% 68.5% Q311 39.9% 15.2% 12.7% 67.8%

Source: Company reports.

Weve seen similar dynamics play out in the China online gaming space over the past five years as competition for market share and well-funded balance sheets have driven increases in R&D and marketing across the industry and put pressure on margins. R&D and marketing spend as a percentage of revenue for the industry (exTencent) rose from 17.9% in Q4:07 to 26.3% by Q3:11, steadily increasing every quarter along the way until a slight 10bp decline in the most recent quarter. (See our reports on Netease (Nasdaq: NTES) and Shanda Games (Nasdaq: GAME) over the past year and specifically our April 19th, 2011 note on NTES Ongoing Market Share War Makes Current Valuation Less Appealing for more details.) The problem for Zynga is that as costs have been ramping up over the past year, bookings havent kept pace. The chart below shows bookings and total operating expense divided by Zyngas total headcount on a quarterly basis. While operating expenses on a per headcount basis have remained relatively stable within a $70K to $90K range, bookings per headcount have dropped significantly from their peak of $251K in Q4:09 to just $103K in Q3:11.

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Bookings and Expenses Relative to Headcount, Q1:09 - Q3:11

$ (Thousands) / Headcount

$300 $250 $200 $150 $100 $50 $-

3.0
Headcount in Thousands

2.5 2.0 1.5 1.0 0.5 0.0

Bookings / Headcount

Total opex / Headcount

Headcount

Source: Company reports and Cowen and Company estimates.

Zynga needs to significantly accelerate bookings growth in order to return to anywhere near historical margin levels. Assuming gross margins remain at 73%, in order for Zynga to improve to a 25% non-GAAP EBIT margin by FY13, we estimate that Zynga would need to drive a 25% CAGR in bookings over the next two years. In order to improve to a 34% non-GAAP EBIT margin by FY13, which we think is roughly equivalent to the 40% non-GAAP EBITDA margin the company is targeting, we estimate that Zynga would need to drive a 38% CAGR in bookings over the next two years.
Estimated Bookings Growth Rates Necessary to Hit Target EBIT Margin Levels
25% Target EBIT Margin FY13E CAGR $1,775.0 24.5% ($479.3) 25.2% ($852.1) 16.1% $443.6 46.5% 25.0% 34% Target EBIT Margin* FY13E CAGR $2,185.0 38.2% ($590.0) 38.9% ($852.1) 16.1% $742.9 89.6% 34.0%

Bookings COGS Non-GAAP Operating Expenses Non-GAAP EBIT Non-GAAP EBIT Margin

FY11E $1,144.6 ($305.7) ($632.2) $206.7 18.1%

* We think this is roughly equivalent to a 40% non-GAAP EBITDA margin.

Source: Cowen and Company estimates.

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Other Considerations
Increased Monetization Appears to Be the Key to Facebook Gaming Bookings Growth
While DAU trends give us a view into overall player engagement in Zyngas games, monetization of those gamers is essential to Zyngas success. Zynga reports both bookings and net revenue (bookings less deferred revenue); we believe bookings are the most relevant and use them as our measure of monetization. Additionally, from July 2010 to April 2011, Zynga switched all of its games to the Facebook Credits payment platform, and in doing so was compelled to surrender 30% of all bookings to Facebook. Therefore, in order to compare historical trends with bookings since April 2011, we look at the normalized bookings data (i.e. bookings adjusted as if Facebook Credits had been in effect throughout Zyngas operating history) provided in Zyngas roadshow presentation released on December 2, 2011. Since 2009, normalized bookings had been growing at an average of 21.6% sequentially to $272MM in Q1:11. Since March 2011, however, normalized bookings have been relatively flat. Management attributed this to a lack of new game launches in the first half of 2011, though we note that several new games that were launched in late Q2:11 and Q3:11 did not contribute to a significant reacceleration of bookings in Q3:11. Notwithstanding this, normalized bookings per average DAU have grown as the base of DAUs has been steadily shrinking. In Q1:11 normalized bookings per DAU dropped by (8.0%) sequentially to $4.39. However, growth in per DAU normalized bookings returned to 4.3% and 16.5% in Q2:11 and Q3:11, respectively, and as of Q3:11 the company was collecting $5.33 per DAU per quarter, or $1.78 per month.
Normalized Zynga Bookings, Adjusted for Facebook Credits Change
2009 Q4PFA $145 $103 Q1PFA $178 $129 448.3% 25.2% 67.0 $1.93 8.4% Q2PFA $195 $145 270.5% 12.4% 60.0 $2.42 25.5% 2010 Q3PFA $222 $185 125.9% 27.6% 49.0 $3.78 56.2% Q4PFA $243 $229 68.5% 23.8% 48.0 $4.77 26.4% Q1PFA $287 $272 60.7% 18.8% 62.0 $4.39 (8.0%) 2011 Q2PFA $275 $270 41.1% (0.7%) 59.0 $4.58 4.3% Q3PFA $288 $288 29.4% 6.7% 54.0 $5.33 16.5%

Reported Bookings Normalized Bookings ($MM)* y/y growth q/q growth Average DAUs Normalized Bookings / DAU q/q growth

58.0 $1.78

* Normalized bookings for the impact of the Facebook credits change per Zynga's S-1A.

Source: Company reports and Cowen and Company estimates.

In switching to Facebook Credits (Zynga didnt really have a choice) Zynga was compelled to give up 30% of its top line to Facebook, essentially a rental expense (in the economic sense of the term) for using the Facebook platform. However, we believe the switch also brought significant benefits to Zyngas ability to monetize. By having one central ubiquitous currency that is integrated into the gaming platform, it has become much easier for potential gamers to translate their cash into credits they can spend in Zynga games. From Q1:10 to Q1:11, the period in which most of the conversion was completed, Zyngas normalized bookings per DAU more than doubled from $1.93 to $4.39. Thus, Zynga has enjoyed significant growth in monetization over the past two years on an apples-to-apples basis.

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Monetization is comprised of two variables: the conversion rate (number of total users who are paying users) and the ARPPU (average revenue per paying user). Fortunately, Zynga has provided us with data that allow us to analyze these two metrics. Zyngas increased monetization has been driven by both increases in the conversion rate and in the normalized ARPPU. The conversion rate has increased from the 3-4% range in late 2009 and early 2010 to the 5-6% range in late 2010 and 2011. Normalized unique payer bookings per unique payer (not all of Zyngas bookings are allocable to a single payer, however roughly 80% are) increased from the low $70 range in late 2009 and early 2010 to the $90-$100 range in late 2010 and 2011. For both measures, there was a fairly significant positive discontinuity in Q3:10, which is when Zynga began its switch to Facebook Credits. Both metrics have appeared to be generally growing since the switch, but at decelerating rates. (We note that the conversion and ARPPU metrics do not foot to the normalized bookings/DAU metric as the latter includes bookings from non-unique payers.)
Monetization Trends for Conversion and ARPPU
2009 Q4PFA $1.78 3.3% (106 bp) $73.41 (11.2%) Q1PFA $1.93 3.5% (220 bp) 20 bp $75.05 (3.0%) 2.2% Q2PFA $2.42 2010 Q3PFA $3.78 5.6% 128 bp 133 bp $90.61 9.7% 24.4% Q4PFA $4.77 6.3% 303 bp 69 bp $95.36 29.9% 30.9% Q1PFA $4.39 5.9% 245 bp (38 bp) $92.17 22.8% (3.3%) 2011 Q2PFA $4.58 5.7% 136 bp (27 bp) $100.16 37.5% 8.7% Q3PFA $5.33 6.3% 69 bp 66 bp $103.90 14.7% 3.7%

Normalized Bookings / DAU Unique Payers/DAU y/y growth q/q growth Norm. Bookings/Unique Payer y/y growth q/q growth

4.3% (149 bp) 82 bp $72.83 (23.2%) (3.0%)

Source: Company reports and Cowen and Company estimates.

We believe that, in general, conversion rates will continue to increase over time as Western audiences get more accustomed to the virtual goods model. We believe that some games in Asia convert at rates of 10% or more; we note however that the virtual goods model in Asia is over a decade old. We believe that increasing the conversion rate is vital to managements stated goal of doubling paying users, given the difficulties of growing total users that we have seen over the last 18 months. Similarly, we expect ARPPU to increase over time, if for no other reason than inflation, but also because we expect Zynga to continue to develop new game mechanics of convincing gamers to fork over money for virtual goods. However, we expect growth in this metric to be slower than growth in the conversion metric, because we believe that new virtual goods payers will likely initially monetize at a lower rate than seasoned virtual goods payers; in other words, as the conversion rate goes up, we expect it to be a slight drag on the ARPPU rate.

Zynga Has Been a Serial Acquirer

Zynga has made 24 business acquisitions since its first (YoVille) in July 2008, adding gaming IP and expanding its development capabilities within the United States as well as overseas in Korea, China, Japan, Germany, UK, and Canada (five of the 24 locations were undisclosed). The pace of acquisitions has picked up over the years with one in 2008, two in 2009, seven in 2010, and 14 in 2011 as the company has aggressively sought to consolidate development teams with successful games, and as mentioned earlier, become focused on building capabilities in the mobile gaming space.

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Zynga Acquisition History

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Target YoVille MyMiniLife Gopets Serious Business XPD Media Challenge Games Conduit Labs Unoh Games Dextrose AG Bonfire Studios Newtoy, Inc. Area/Code Flock Floodgate Entertainment Wonderland Software JamLegend MarketZero Inc. cocos2d (team acquisition) Sapus Media (certain assets of) DNA Games Five Mobile (certain assets of) Astro Ape Undisclosed target Undisclosed target Date 7/22/2008 8/7/2009 10/31/2009 2/11/2010 5/1/2010 6/3/2010 8/1/2010 8/1/2010 9/1/2010 10/5/2010 12/2/2010 1/1/2011 1/5/2011 3/18/2011 4/27/2011 4/1/2011 4/5/2011 5/1/2011 5/1/2011 5/18/2011 7/8/2011 8/16/2011 10/1/2011 11/1/2011 Location NA Palo Alto, CA Seoul, Korea San Francisco, CA Beijing, China Austin, TX Boston, MA Tokyo, Japan Frankfurt, Germany Dallas, TX McKinney, TX New York, NY Palo Alto, CA Boston, MA UK San Francisco, CA Austin, TX NA NA San Francisco, CA Toronto, Canada New Jersey, NJ NA NA Description Virtual world app Virtual world app PC desktop application developer, GoPet Web developer, Friends For Sale , Rock Legends Web developer Developer, Warstorm, Ponzi Music games, LoudCrowd.com Developer, Web and mobile games, photo sharing apps Creator of Aves Engine , 2D and 2.5D game engine Developer, Age of Empires Mobile developer, Games With Friends Web and mobile developer, Parking Wars, Drop7 Social web browser Web and mobile developer, MoPets, Madden 2005&06, Nascar 07 mobile developer, GodFinger Team acquisition, music genre Online poker tracker PokerTableRatings.com iPhone open source project Professional tools for mobile game developers Developer, Casino City, Slot City, Barworld ; founders of Bazaar Advertising Mobile app developer Mobile developer, Desert Heroes, Office Heroes, Monsterz Revenge Expansion of SW development and engineering teams Expansion of SW development and engineering teams

Source: Company reports.

While many of these acquisitions were deemed too small to be significant and thus financial details were not disclosed, aggregate amounts paid have been provided in Zyngas S-1A which we summarize below. Most of Zyngas acquisitions have included payment in a combination of cash and shares in various forms of Zynga stock. According to the prospectus, from the beginning of 2009 to the end of September 2011 Zynga paid out $119MM in cash ($112.4MM + $6.7MM bonus) and $332MM in Zynga restricted stock units (ZSUs) and Series Z convertible preferred stock for a total of $452MM in acquisition-related compensation.
Total Compensation for Zynga Acquisitions ($MM)
CASH and SHARES 2009 2010 2011 (9 Mo.) Cash Paid 0.5 66.4 45.5 $112.4 Shares 21.1 6.3 NA Shares 16.0 26.6 2.9 45.5 $ Value 135.8 39.7 6.7 $182.2 Share Value 5.3 112.7 34.5 $152.5 Unit Series Z ZSU Cash Share Price $0.33 $4.24 $11.77 $3.35
1

BONUS PAYMENTS 2010 2010 2010 Total 2010

Implied Share Price $6.44 $6.30

$451.5 Total cost of acquisitions to date2 1. Price per share from Zynga S-1A, F-31: weighted-average assumptions "Fair value of common stock" 2. Includes transaction costs of $2.1MM and $2.3MM for 2010 and 2011, respectively
Source: Company reports.

In general, we view acquisition-heavy strategies as a source of risk, particularly in the intellectual property space. Typically the most valuable assets are the talent associated with development; dependency on personnel raises significant concerns about integration risk and cultural fit. We also believe that serial acquirers tend to make the investors in the target companies rich at the expense of their own shareholders. The media space went through a period of aggressive acquisitions

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about 10-15 years ago that was a source of significant value destruction. Gaming company Electronic Arts has also been heavily involved in M&A activity for many years; we believe over-reliance on M&A was a significant contributor to the companys collapsing returns on capital between 2004 and 2009.

Zyngas Controversial Culture

While many web startup companies have been known for aggressive cultures, Zynga has received an exceptionally high amount of press regarding its business practices and employee relations. In general, we believe the general tone of the negative press Zynga has received for some of its business practices can be summed up by the following quote from an ex-employee (FarmVillains, SFWeekly, September 8, 2010): "Zynga's motto is 'Do Evil,'" he says. "I would venture to say it is one of the most evil places I've run into, from a culture perspective and in its business approach. I've tried my best to make sure that friends don't let friends work at Zynga." We believe it is worthwhile to review some of the various controversies that Zynga has faced in its young existence. Imitation Vs. Innovation Zynga has been described on several occasions as a company whose success has been driven by aggressive imitation rather than creativity. Perhaps the most memorable allegation was from the FarmVillains article: "I don't [colorful language redacted] want innovation," the ex-employee recalls [CEO Mark] Pincus saying. "You're not smarter than your competitor. Just copy what they do and do it until you get their numbers." The article suggested that it was standard practice for Zynga to duplicate game ideas from other companies and then use Zyngas market clout to crowd the competitor out of the market. Examples cited included Mafia Wars, which was highly similar to Psycho Monkeys Mob Wars, and FarmVille, which was highly similar to Slashkeys FarmTown. While no illegal behavior was alleged (though in the case of Mafia Wars, Zynga was eventually sued and settled with the Mob Wars creator), the companys ethos was described in the article as predatory. Zynga has been involved in other lawsuits involving misappropriation of intellectual property. Nissan threatened Zynga with legal action in September 2009 due to the use of Nissan trademarks in Zyngas Street Racing game; Zynga subsequently removed the car names/images in question. In May 2011, The Learning Company, owners of the trademark for the name Oregon Trail (which was originally a PC game in the 1980s), sued Zynga for its planned use of the same name in a FrontierVille expansion. Zynga subsequently changed the name of the expansion to Pioneer Trail. On the other hand, Zynga has been very aggressive about protecting its own perceived rights. The company has sued the creators of both Blingville and Dungeonville, claiming that use of the term -ville violated Zyngas trademarks. (We wonder what Zynga will make of THQs upcoming Margaritaville game. The game is based on the hit 1977 Jimmy Buffet song, written before many Zynga employees were born.) Zynga has also attempted to trademark the use of virtual currencies in

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gambling games, despite the fact that prior art for this application clearly existed (for instance, in Second Life, which launched in 2003). Revenue Generation In Zyngas early days, the company generated roughly 1/3 of its revenue from what was known as lead generation advertising. Essentially, this involved things like giving in-game currency to a player for accepting an offer from a non-Zynga commercial entity. Benevolent examples included, for instance, signing up for a Netflix subscription. However, other offers included less ethical behavior, such as the following (Scamville: The Social Gaming Ecosystem of Hell, Techcrunch, October 31, 2009): Another scam: Video Professor. Users are offered in game currency if they sign up to receive a free learning CD from Video Professor. The user is told they pay nothing except a $10 shipping charge. But the fine print, on a different page from checkout, tells them they are really getting a whole set of CDs and will be billed $189.95 unless they return them. Most users never return them because they dont know about the extra charge. Woot. Again, sites like Offerpal and SuperRewards flow these offers through to game developers. Shortly after the article was written, Zynga took steps to remove all lead generation ads from their games; the company claimed that they had been taken advantage of by unscrupulous middlemen, and that they would not have accepted the ads if they had realized they were scams. However, comments by Pincus suggest that Zyngas attitude towards revenue generation was essentially by any means necessary (speech at Startup@Berkeley, February 25, 2009): I knew that I wanted to control my destiny, so I knew I needed revenues, right, [colorful language redacted], now. Like I needed revenues now. So I funded the company myself but I did every horrible thing in the book to, just to get revenues right away. I mean we gave our users poker chips if they downloaded this zwinky toolbar which was like, I dont know, I downloaded it once and couldnt get rid of it. *laughs* We did anything possible just to just get revenues so that we could grow and be a real business. Employee Treatment In a recent article in the New York Times (Zyngas Tough Culture Risks a Talent Drain, November 27, 2011), Zynga was pictured as having an extremely adversarial culture, even compared to a typical web startup. The article blamed the culture, in part, for Zyngas failure to complete a deal to acquire digital gaming company PopCap (which was later bought by Electronic Arts) as PopCap employees vetoed the idea of working for Zynga management. The article described another situation where aggressive behavior nearly scuttled the acquisition of MyMiniLife, the company whose technology was central to FarmVille: During one meeting, the topic turned to compensation. A Zynga senior vice president, clad in jeans and leather cowboy boots, whipped out his wallet and a stack of hundred-dollar bills. He chucked the money at a MyMiniLife founder and asked him if that was enough, said one person present at the meeting.

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Recently, Zynga also came under fire for allegedly demanding that some employees surrender pre-IPO shares that they had already been granted, or risk losing their jobs (Zynga Leans on Some Workers, Wall Street Journal, November 10, 2011). The article claimed that Zynga management had decided that some people had been too highly compensated relative to their actual contributions and thus decided to claw back shares. Top executive attitudes towards employees they considered less productive were described in the article: One list that Mr. Pincus kept, said people familiar with it, was known as his MIA list, for executives who did so little he considered them missing in action. . . . On an office whiteboard, Mr. Pincus kept a smaller tally, his MIA list, according to people familiar with it, usually with six or eight names. In early 2010, Mr. Pincus was rotating the list frequently, said one person familiar with the situation, as people on it were reassigned, asked to leave or told they had to give up some unvested shares or face dismissal. In meetings, according to people familiar with them, [HR director Colleen] McCreary referred to certain people seen as too highly compensated for their contributions as broken toys. One Might Say So What? We understand that many investors may react to all these controversies with a shrug of indifference. After all, it was the companys aggressive culture that helped propel Zynga to its leading position in the social games space. To make an omelet, you have to break a few eggs, etc. However, we think the manner in which the company has, at times, treated employees, competitors, partners, and consumers ought to give investors some pause. Given the companys highly aggressive behavior to-date, is there any reason to believe that Zynga will be particularly shareholder-friendly? We note that Zynga has already implemented a multi-class share system that is a real outlier in the degree to which it concentrates voting power in the hands of CEO Mark Pincus (see more on this below). Additionally, we think there are two key business areas in which Zynga could be directly hurt as a result of its aggressive culture. Employee Retention. We believe that Zyngas reputation as a difficult place to work is earned. In our conversations with industry insiders, there is a definite sense that many (though not all) people who work at Zynga are only hanging around for a big equity payday, and that as soon as that is realized they are likely out the door. Obviously there are lockups, vesting schedules, non-compete agreements, and the like which will limit an immediate talent exodus in the weeks and months following Zyngas IPO. Still, we think Zynga may have difficult retaining top creative talent. Equally, with a high equity valuation now on the books following the IPO, it may be difficult to attract new talent given the significantly diminished likelihood of rapid and significant equity wealth creation. Creative Excellence. We believe that the culture of a firm is absolutely critical to delivering high quality products on a consistent basis. With competition in the social games space increasing, we believe social gaming companies will increasingly have to differentiate themselves creatively in order to continue to attract and retain customers. Being a consistently creative IP company is extremely difficult; the few companies which attain that level of success, for instance Pixar and Blizzard, are

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laser-beam focused on fostering a culture that promotes total creative excellence. We believe these cultures tend to be collaborative in nature. Zyngas culture, in contrast is competitive and adversarial. We believe this may prove an impediment to Zyngas ability to continue to produce hit gaming titles, particularly as other companies catch up to Zynga on the analytical side (which we think is inevitable).

Multiclass Share Structure Poses Issues for Public Shareholders

The companys 699.3MM basic share count will consist of 100MM class A shares (offered to public, and worth 1 vote per share), 579.9MM class B shares (belonging to pre-IPO investors and employees, and worth 7 votes per share, and 20.5MM class C shares (owned in total by CEO Mark Pincus, and worth 70 votes per share). As a result, CEO Mark Pincus will control 37.2% of the voting rights, despite only owning 16.1% of outstanding shares. Other employees and pre-IPO investors will control 61.0% of the voting rights, while public shareholders will only control 1.8% of the voting rights.
Zynga Share Classes and Ownership
Share Class Votes Per Share Shares (MM) CEO Mark Pincus Other employees and pre-IPO investors Public shareholders Total
Source: Company reports.

A 1 0.0 0.0 100.0 100.0

B 7 91.7 487.1 0.0 578.9

C 70 20.5 0.0 0.0 20.5

% of vote 37.2% 61.0% 1.8% 100.0%

% of shares 16.1% 69.7% 14.3% 100.0%

The multiple class share structure effectively embeds Pincus as the CEO with shareholders having little leverage in the event that they become dissatisfied with his performance. While nominally the board has a fiduciary duty to act in the best interest of all shareholders, in practice CEO/owner-controlled boards tend to be very weak. We have covered News Corp, Viacom, and CBS for many years, and so we have seen the negative impact that CEO/owner-controlled boards can have on capital allocation, corporate culture, and other business decisions (with the ongoing cell phone hacking scandal at News Corp a particularly egregious example). We believe that having a CEO/owner-controlled board is particularly dangerous for investors in young companies. History is littered with examples of CEOs who were quite adept at building a company up from nothing into a mature ongoing concern, but were then utterly unable to manage the company past a certain point of growth. Most entrepreneurial founder/CEOs tend to have shall we say an extraordinarily high degree of confidence in their ability to manage through any situation, and thus are unlikely to voluntarily step aside even when it is obvious to all impartial observers that the time has come for a change. Shareholders ought to demand the ability to replace the CEO if the company has outgrown his ability to manage it; when a CEO/owner controls the board, this is nigh impossible. We also note that the share structure will most likely have the effect of increasing Pincus control as time goes on. Whenever employees and pre-IPO investors sell class B shares to the public, the shares automatically convert to class A shares, which concentrates Pincus share of the total vote. If 50% of the existing class B shares were to be sold through a secondary, Pincus share of the total vote would increase to slightly over 50% (assuming Pincus was not among the sellers). We note

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that Pincus class C shares comprise nearly 70% of his own voting stake, so in the event he wishes to sell, he can sell class his B shares without diluting his own vote to a significant degree. In fact, the company has already had some governance issues that should be of note to potential shareholders. In March 2011, the company repurchased 7.8MM class B shares from Pincus at a total price of $109MM, and another 6.6MM shares from preIPO investors for a price of $92MM. This equates to a price per share of $13.96 nearly 40% above todays IPO price. The price difference between the repurchase and the IPO stock sale directly represents $57MM of value destroyed by the company.

Tight Float Will Likely Impact Trading in Near Term

As mentioned above, according to Zyngas S-1A the company plans to sell just 14.3% of its stock to the public in its IPO, a relatively small portion of company shares available for trading. This limited supply of public shares (or tight float) can have the effect of distorting the free market trading in a stock; for instance, the cost to borrow can be very high, limiting the ability of shares to be shorted. We believe there is a chance that Zynga stock could trade somewhat independently of its fundamentals as long as the float remains limited. Conversely, there are a substantial number of insider shareholders (both employees and venture capital investors) that will be subject to lock-up periods in which they must hold the stock. We believe that once these lock-up periods end, there could be downside pressure on Zyngas stock price due to a large number of new sellers being let loose into the market.

Why Go Public Now?

We do think the timing of Zyngas IPO is somewhat peculiar, given that the most recently filed financial results are raising questions about the sustainability of growth at the company. Had the company gone public in late 2010 or early 2011, it would have been able to show a nice, consistent trend of sequential bookings growth (though the flat/down user trends would likely still have raised some questions). Valuations in the $10-20B range were being floated during the spring and early summer of this year. However, Q2 and Q3 financial results marked a significant deceleration in growth on the revenue side and a significant acceleration on the cost side. We believe the degree to which the IPO valuation has come down from earlier speculated levels is a reflection of the fact that the companys near-term optics have gotten significantly less attractive. Given this, we are a bit puzzled as to why the company has chosen now to go public. Presumably, if they believe that revenue growth will reaccelerate, then waiting a few more quarters could secure a much more attractive valuation for the company, and less dilution for current shareholders. There is no financial need to raise capital, as the company has nearly $1B in cash and marketable securities on the balance sheet, and the company has been cash flow positive YTD despite a slight drain in the last two quarters. We do not believe that a desire for an M&A currency is driving the IPO either, given Zyngas ability to complete 24 acquisitions over the past 40 months. Although were not sure there is an obvious conclusion to draw from the decision to go public now, we think it is noteworthy and should add more than the normal dose of buyer beware.

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Model and Forecasts

Non-GAAP Accounting Metrics: The Good, The Bad, and The Ugly Zynga has encouraged analysts to use a number of non-GAAP accounting metrics in analyzing the company. Principal among these are (1) substituting bookings for revenue, (2) excluding stock compensation costs from expenses, and (3) using nonGAAP EBITDA as a measure of profitability. We have differing opinions on the appropriateness of these metrics. Bookings Our Preferred Metric for Revenue. Because Zyngas games represent an on-line service, Zyngas accountants have required that Zynga amortize the revenue for virtual goods across the expected life of those goods. This is very similar to the deferred revenue accounting that Electronic Arts and Activision Blizzard use for their online console and PC games. Bookings just represent revenue ex-the revenue deferrals in other words, the actual sales generated by Zyngas products during a given period. This is exactly like the non-GAAP revenue metric we use to evaluate the traditional gaming companies. In general, we think that the decision to require revenue deferrals for gaming companies unnecessarily complicates analysis of those companies, and we wish the accountants would change their approach. While Zyngas games do represent a service, we note that the company makes no particular warranties to the customer about its virtual goods. In other words, if you dont like your Farmville virtual cow, or it doesnt perform to your expectations, you cant return it for a refund. If Zynga decided for whatever reason to turn off its Farmville servers tomorrow, we do not believe customers would be entitled to any refund for virtual goods they had purchased. Essentially, once Zynga has its customers money, there are very few (if any) circumstances we could envision that would result in the customer ever getting it back. As a result, we think that using bookings as the primary metric of sales is the appropriate course of action. Stock Compensation Yes, This Is A Real Cost. But Not a Battle We Can Win. Like the traditional video gaming companies, Zynga wants investors to omit stock compensation costs from expenses when assessing profitability. We dont love this practice from the traditional video game companies, because although stock compensation is not a cash cost, and thus does not reduce the overall value of the company, it does represent a reallocation of value from current shareholders to employees. Given Zyngas much more aggressive stock compensation policies (compared to the traditional video gaming companies) to-date, we like excluding these costs even less for Zynga. However, not excluding the costs will result in an EPS metric that is non-comparable to our Street peers, which would result in our estimates being excluded from consensus. So, we will play along and exclude stock compensation from our non-GAAP EPS metric (as we do for the traditional video game companies) but we plan to remind investors regularly that a lot of whatever value Zynga generates is going into the pockets of employees. Non-GAAP EBITDA Zynga Is Not a Cable/Satellite Company, So Asking Investors to Use EBITDA Is Misleading. The EBITDA metric was originally invented (by John Malone, we believe) to help guide investors to a measure of cash flow for businesses that (1) had seen a significant upfront investment in capital expenditures, and hence had significant associated depreciation costs, but that (2) were unlikely to see comparable levels of cap ex in the future. In other words, cable

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and satellite companies have very high upfront cap ex costs for laying pipes or launching birds, but after those costs are done, these businesses can theoretically generate a lot of cash flow. After the initial cap ex spend, ongoing cap ex should be much lower than the depreciation resulting from initial cap ex. Zyngas primary cap ex costs, in contrast, are servers and computing equipment (77% of Zyngas property and equipment as of September 30 was classified as either computer equipment or software). These wear out and/or become obsolete on a regular basis, and must constantly be replaced. We expect that over time, Zyngas cap ex and depreciation costs will be relatively convergent; in fact, assuming Zynga continues to grow, we would expect cap ex costs to be above depreciation on average, since having more users requires more servers, and releasing more games requires more computers for development. By proposing to exclude depreciation (and amortization) from the companys primary profitability metric, Zynga is essentially asking investors to ignore a real and significant ongoing cash cost. As a result, we will not typically address non-GAAP EBITDA in our published work on the company; rather, we will focus on non-GAAP EBIT, which is also the primary operational-level profitability metric for the traditional gaming companies we cover. Our Model: Understanding Zyngas Bookings Drivers Zyngas game bookings, and our model for game bookings, can be decomposed into the following equation: Bookings = Total Users * Paying Users per Total Users * Bookings Per Paying User In general, we believe that our financial model for Zynga represents an optimistic case scenario. It assumes stabilization of recent negative user trends on Facebook, meaningful user growth on non-Facebook platforms, an acceleration of growth in the conversion of total users to paying users, and steady upward movement in average bookings per paying user. We are giving Zynga credit for no major missteps in execution and no major market share losses on Facebook despite increasing competition. Below we break down our thought process on each driver of game bookings, and then our separate thoughts on advertising. Users (DAUs): Assume Slow Facebook Market Growth Continues and That Zynga Maintains Share. As already discussed extensively in this report, there is currently very little growth in total Facebook gaming DAUs, particularly at the large-game end of the market, and Zynga has been losing share steadily since early 2010. Our model assumes that these trends reverse in 2012. We assume that Zynga drives 1% sequential quarterly growth in Facebook DAUs throughout 2012; our Q4:11 estimate is based on average DAUs quarter-to-date and assumed flat DAUs vs. current levels for the remainder of December. Our assumptions drive a (6.7%) y/y decline in average Facebook DAUs for FY12 due to comps vs. higher levels in 1H:11. For FY13, we assume 2% y/y growth in average DAUs. While these growth levels may appear conservative, they are better than what Zynga has accomplished recently, and we expect competition to increase next year. Away from Facebook, we expect 50% q/q growth in DAUs to 4.4MM in Q4:11, and 72% y/y growth in FY12 to 6.7MM, followed by 50% y/y growth in DAUs in FY13 to 10.1MM. We note that our calculation of historical non-Facebook DAUs is simply

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equal to Zyngas reported average firmwide DAUs less AppData reported average Facebook DAUs. It is important to point out here that our non-Facebook DAU historicals and estimates, which primarily reflect mobile DAUs, are significantly lower than Zyngas recently reported 13MM mobile DAU count. We note that in October, Facebook launched HTML5 mobile apps for FarmVille (Farmville Express), Zynga Poker, and Words With Friends that connect directly to Facebook. Some of these games have a reduced feature set when played via mobile devices instead of the PC, and are entirely distinct versions of the games from mobile-native versions (such as Farmville Mobile) that do not have connectivity to the Facebook versions of the games. In other words, if you download the new FarmVille Express app on your mobile device, you can access your PC Facebook farm, but with reduced gameplay features; on the other hand, if you play the mobile title FarmVille Mobile, you have more robust gameplay options, but no connectivity to your PC Facebook farm. We believe Zynga is counting these new Facebook-connected apps as mobile DAUs even though players of these games are also being counted as Facebook DAUs. To avoid double counting these DAUs we are counting them in the Facebook bucket. If Zynga does double count these DAUs in its total DAU metrics, it will wash out in lower monetization per DAU.
Zynga DAU Estimates
Q1PFA Mar-10 Total Company Average DAUs (MM) q/q growth y/y growth Facebook Average DAUs (MM) q/q growth y/y growth Other Platforms Average DAUs (MM) q/q growth y/y growth 67.0 15.5% 1240.0% Q2PFA Jun-10 60.0 (10.4%) 656.5% Q3PFA Sep-10 49.0 (18.3%) 104.2% Q4PFA Dec-10 48.0 (2.0%) (17.2%) FY 2010PFA 56.0 36.6% Q1PFA Mar-11 62.0 29.2% (7.5%) Q2PFA Jun-11 59.0 (4.8%) (1.7%) Q3PFA Sep-11 54.0 (8.5%) 10.2% Q4E Dec-11 52.7 (2.5%) 9.7% FY 2011E 56.9 1.6% Q1E Mar-12 54.0 2.6% (12.8%) Q2E Jun-12 55.5 2.6% (6.0%) Q3E Sep-12 56.9 2.6% 5.4% Q4E Dec-12 58.3 2.5% 10.7% FY 2012E 56.2 (1.3%) FY 2013E 60.5 7.8%

65.9 118.1%

58.3 (11.5%)

49.0 (16.0%) 118.1%

47.9 (2.1%) (14.1%)

55.3

59.2 123.5% (10.1%)

53.6 (9.5%) (8.1%)

51.0 (4.8%) 4.2%

48.2 (5.5%) 0.6%

53.0 (4.1%)

48.7 1.0% (17.7%)

49.2 1.0% (8.2%)

49.7 1.0% (2.6%)

50.2 1.0% 4.1%

49.4 (6.7%)

50.4 2.0%

1.1 50.7%

1.7 51.2%

0.0 (97.4%) (97.2%)

0.1 70.5% (96.6%)

0.7

2.8 3746.7% 148.7%

5.4 92.3% 216.2%

3.0 4.4 (45.2%) 50.0% 6636.4% 5828.0%

3.9 428.2%

5.3 20.0% 89.9%

6.3 17.5% 16.0%

7.2 15.0% 143.2%

8.1 12.5% 82.4%

6.7 72.3%

10.1 50.0%

Source: Company reports and Cowen and Company estimates.

Paying Users Per Total Users (Conversion Rate): Assume Steady Growth, Somewhat Above Recent Trends. We expect Zynga to increase the conversion rates of its overall user base as acceptance of the freemium model grows and more Facebook users adopt Facebook credits. Between Q3:10 and Q3:11, Zyngas quarterly ratio of unique payers to average DAUs has fluctuated in the 5.6% to 6.3% range, rising from lower ranges of 3.3% to 4.3% in 2H:09 and 1H:10. We note the rise in the conversion rate over time needs to be overlaid against the general decline in total DAUs; we believe that non-payer users tend to drop off games faster than paying users due to lower sunk costs and lower engagement levels (and we note this is why Facebook games can continue to monetize well long after they have passed peak user levels). We are modeling Zyngas quarterly conversion rate to reach an all-time high of 6.5% in Q4:11, and to continue climbing into the high-6% range in 1H:12 and low-7% range in 2H:12. We note that historically, Zyngas conversion rate has tended to decline when DAUs have grown (and vice versa); thus, our assumption of rising average DAUs and a rising conversion rate simultaneously goes somewhat against historical norms, and may be aggressive.

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On an annual basis, we expect a conversion rate of 14.0% in FY11, 15.6% in FY12, and 16.6% in FY13. We note that the quarterly conversion rates do not add up neatly to the annual conversion rate due to quarter to quarter differences in who the unique paying customers are; to the degree that the unique payers do not overlap quarter to quarter, they are additive to the annual total, whereas the DAU count is a straight average.
Zynga Conversion Rate Estimates
Q1PFA Mar-10 67.0 2.3 3.5% Q2PFA Jun-10 60.0 2.6 4.3% Q3PFA Sep-10 49.0 2.8 5.6% Q4PFA Dec-10 48.0 3.0 6.3% FY 2010PFA 56.0 6.4 11.4% Q1PFA Mar-11 62.0 3.7 5.9% Q2PFA Jun-11 59.0 3.3 5.7% Q3PFA Sep-11 54.0 3.4 6.3% Q4E Dec-11 52.7 3.4 6.5% FY 2011E 56.9 8.0 14.0% Q1E Mar-12 54.0 3.6 6.7% Q2E Jun-12 55.5 3.8 6.9% Q3E Sep-12 56.9 4.0 7.0% Q4E Dec-12 58.3 4.1 7.1% FY 2012E 56.2 8.8 15.6% FY 2013E 60.5 10.0 16.6%

Average DAUs (MM) Unique payers (MM) Unique payers/DAU

Source: Company reports and Cowen and Company estimates.

Bookings Per Paying User: Assume Continued Growth. Zyngas bookings per unique paying user for the last seven quarters have been generally flat, bouncing between a low of $68.46 in Q2:10 and a high of $72.73 in Q3:11. However, adjusted for the Facebook Credits change that we described above, trends have generally been positive, with the most significant increases coming directly after the Facebook credits change. We think this is due to the fact that implementing Facebook Credits globally has lowered barriers to monetization. Going forward, we assume essentially sequentially flat bookings per unique paying user in Q4:11 vs. Q3:11, and then steady sequential growth of around 0.25% per quarter throughout FY12. On an annual basis, this equates to 4.9% y/y growth in FY11, 5.1% y/y growth in FY12, and 2.2% y/y growth in FY13 (again, the quarterly growth rates dont add to the annual growth rates due to the non-additivity of quarterly to annual users described above). In general, while we expect pricing to rise over time with general inflation levels, we also think that if Zynga is successful in broadening its audience, new paying users may enter the system at lower average ARPPUs than existing, seasoned payers.
Zynga Bookings Per Unique Paying User Estimates
Q1PFA Mar-10 $70.55 2.2% (3.0%) Q2PFA Jun-10 $68.46 (3.0%) (23.2%) Q3PFA Sep-10 $71.58 4.6% (7.8%) Q4PFA Dec-10 $70.99 (0.8%) 2.9% FY Q1PFA 2010PFA Mar-11 $117.96 $69.10 (2.7%) 24.4% (2.1%) Q2PFA Jun-11 $70.11 1.5% 2.4% Q3PFA Sep-11 $72.73 3.7% 1.6% Q4E Dec-11 $72.67 (0.1%) 2.4% FY 2011E $123.69 4.9% Q1E Mar-12 $72.84 0.2% 5.4% Q2E Jun-12 $73.05 0.3% 4.2% Q3E Sep-12 $73.22 0.2% 0.7% Q4E Dec-12 $73.34 0.2% 0.9% FY FY 2012E 2013E $129.99 $132.84 5.1% 2.2%

Bookings/unique payer q/q growth y/y growth

Source: Company reports and Cowen and Company estimates.

Adding in the Last Pieces: Non-Unique Payer Game Bookings and Advertising. Zynga also has revenue that is not directly attributable to identifiable unique payers. Some of this is game payments via certain non-Facebook platforms, such as mobile devices, that are not traceable to individually identifiable users, and the rest is advertising revenue. Non-unique payer game bookings were 7.3% of total game bookings in FY10; we assume this increases to 8.4% in FY11, 9.5% in FY12, and 10.0% in FY13 as mobile revenues increase. Advertising bookings actually declined in FY10 as Zynga transitioned away from relying on certain advertising revenue mechanisms; y/y growth resumed in Q1:11. We assume +163% y/y advertising bookings growth in FY11, +52% y/y in FY12, and +35% y/y in FY13, driven by increasing advertising bookings/DAU.

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In total, we estimate +21.4% y/y bookings growth in Q4:11, +19.2% y/y growth in FY12, and +19.2% growth (again) in FY13. To reiterate: we view our estimates as an optimistic case scenario for Zynga, with our drivers generally performing above the trends experienced by the company over the past year.
Zynga Total Bookings Estimates
Average DAUs (MM) Conversion rate Bookings per unique payer Unique payer game bookings Non-unique game bookings as % of total game bookings Advertising bookings y/y growth Ad bookings per average DAU y/y growth Total bookings y/y growth Q1PFA Mar-10 67.0 3.5% $70.55 $164.4 $10.0 5.7% $3.9 (65.9%) $0.06 (97.5%) $178.3 448.3% Q2PFA Jun-10 60.0 4.3% $68.46 $176.4 $11.6 6.2% $6.6 (40.4%) $0.11 (92.1%) $194.7 270.5% Q3PFA Sep-10 49.0 5.6% $71.58 $197.1 $18.5 8.6% $6.7 (60.7%) $0.14 (80.8%) $222.4 125.9% Q4PFA Dec-10 48.0 6.3% $70.99 $214.9 $19.4 8.3% $9.2 (23.8%) $0.19 (7.9%) $243.5 68.5% FY 2010PFA 56.0 11.4% $117.96 $752.8 $59.6 7.3% $26.5 (48.9%) $0.47 (62.6%) $838.9 155.7% Q1PFA Mar-11 62.0 5.9% $69.10 $254.0 $18.5 6.8% $14.1 257.2% $0.23 286.0% $286.6 60.7% Q2PFA Jun-11 59.0 5.7% $70.11 $233.9 $25.8 9.9% $15.0 127.0% $0.26 130.8% $274.7 41.1% Q3PFA Sep-11 54.0 6.3% $72.73 $247.8 $21.5 8.0% $18.4 173.2% $0.34 147.9% $287.7 29.4% Q4E Dec-11 52.7 6.5% $72.67 $248.8 $24.6 9.0% $22.2 141.4% $0.42 120.0% $295.6 21.4% FY 2011E 56.9 14.0% $123.69 $984.5 $90.4 8.4% $69.6 163.1% $1.22 158.9% $1,144.6 36.4% Q1E Mar-12 54.0 6.7% $72.84 $263.8 $26.7 9.2% $22.1 56.9% $0.41 80.0% $312.6 9.1% Q2E Jun-12 55.5 6.9% $73.05 $279.6 $29.0 9.4% $24.8 64.5% $0.45 75.0% $333.3 21.3% Q3E Sep-12 56.9 7.0% $73.22 $291.6 $31.0 9.6% $27.1 47.5% $0.48 40.0% $349.7 21.6% Q4E Dec-12 58.3 7.1% $73.34 $303.5 $33.0 9.8% $31.9 43.9% $0.55 30.0% $368.4 24.6% FY 2012E 56.2 15.6% $129.99 $1,138.5 $119.7 9.5% $105.8 51.9% $1.88 53.9% $1,364.0 19.2% FY 2013E 60.5 16.6% $132.84 $1,334.8 $148.3 10.0% $142.5 34.7% $2.35 25.0% $1,625.6 19.2%

Source: Company reports and Cowen and Company estimates.

Notes on Other Earnings Assumptions We are assuming a 30% non-GAAP tax rate, roughly consistent with that used by Electronic Arts and Activision Blizzard. Our estimated Q4:11 fully diluted share count of 903MM is based off of the $10 IPO share price. Q4:11 Estimates We forecast that Zynga will report Q4:11E fully diluted EPS of $0.03 (-59.3% y/y) on non-GAAP sales (bookings) of $295.6MM (+21.4% y/y; +2.8% q/q). We expect a +77.2% y/y increase in overall non-GAAP operating expenses to $180.4MM (+4.7% q/q), resulting in non-GAAP EBIT of $35.3MM (-60.8% y/y; +0.4% q/q).
Zynga Q4:11 Estimates
Q4:11 Forecast FY December ($ in millions, except per share da Q4:11E Bookings $295.6 Gross Profit Summary Non-GAAP Gross Profit Non-GAAP Gross Profit Margin Operating Expenses R&D Sales and Marketing G&A Total Operating Expenses Total Non-GAAP Operating Expenses Non-GAAP EBIT Summary Non-GAAP EBIT Non-GAAP EBIT Margin FD non-GAAP EPS FD GAAP EPS
Source: Cowen and Company

Q4:10A $243.5

Q3:11A $287.7

Y:Y % Chg. 21.4%

Q:Q % Chg. 2.8%

$215.8 73.0%

$191.9 78.8%

$207.5 72.1%

12.4% (581 bp)

4.0% 87 bp

$121.2 $45.8 $38.4 $205.4 $180.4

$51.5 $38.3 $22.2 $112.0 $101.8

$114.8 $43.7 $36.4 $194.9 $172.3

135.3% 19.7% 73.0% 83.4% 77.2%

5.6% 4.8% 5.6% 5.4% 4.7%

$35.3 12.0% $0.03 $0.00

$90.1 37.0% $0.07 $0.05

$35.2 12.2% $0.03 $0.02

(60.8%) (2504 bp) (59.3%) (97.9%)

0.4% (28 bp) (0.6%) (93.5%)

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Zynga

FY12 Estimates We forecast that Zynga will report FY12 fully diluted EPS of $0.19 (+14.9% y/y) on non-GAAP sales (bookings) of $1.36B (+19.2% y/y). We expect a +20.3% y/y increase in overall non-GAAP operating expenses to $760.3MM, resulting in non-GAAP EBIT of $235.4MM (+13.9% y/y).
Zynga FY12 Estimates
FY12 Forecast FY December ($ in millions, except per share FY12E Bookings $1,364.0 Gross Profit Summary Gross Profit Gross Profit Margin Operating Expenses R&D Sales and Marketing G&A Total Operating Expenses Total Non-GAAP Operating Expenses Non-GAAP EBIT Summary Non-GAAP EBIT Non-GAAP EBIT Margin FD non-GAAP EPS FD GAAP EPS
Source: Cowen and Company

FY11E $1,144.6

Y:Y % Chg. 19.2%

$995.7 73.0%

$838.9 73.3%

18.7% (29 bp)

$522.6 $195.8 $170.0 $888.3 $760.3

$403.5 $167.8 $156.1 $727.4 $632.2

29.5% 16.7% 8.9% 22.1% 20.3%

$235.4 17.3% $0.19 $0.02

$206.7 18.1% $0.16 $0.03

13.9% (80 bp) 14.9% (33.7%)

Three-Year Outlook From FY11 through FY14, we expect a bookings CAGR of 17.7%, a non-GAAP operating expense CAGR of 14.2%, a non-GAAP EBIT CAGR of 26.7%, and a non-GAAP EPS CAGR of 24.3%. We project non-GAAP EPS of $0.31 in FY14.
Cowen Three-Year Outlook
Three Year Forecast FY December ($ in millions, except per share FY11E Bookings $1,144.6 Gross Profit Summary Gross Profit Gross Profit Margin Operating Expenses R&D Sales and Marketing G&A Total Operating Expenses Total Non-GAAP Operating Expenses Non-GAAP EBIT Summary Non-GAAP EBIT Non-GAAP EBIT Margin FD non-GAAP EPS FD GAAP EPS Source: Cowen and Company FY12E $1,364.0 FY13E $1,625.6 FY14E $1,865.2 3-Year CAGR 17.7%

$838.9 73.3%

$995.7 73.0%

$1,186.7 73.0%

$1,361.6 73.0%

17.5% (29 bp)

$403.5 $167.8 $156.1 $727.4 $632.2

$522.6 $195.8 $170.0 $888.3 $760.3

$591.6 $221.6 $182.3 $995.6 $852.1

$658.5 $246.7 $194.6 $1,099.7 $941.3

17.7% 13.7% 7.6% 14.8% 14.2%

$206.7 18.1% $0.16 $0.03

$235.4 17.3% $0.19 $0.02

$334.5 20.6% $0.26 $0.08

$420.3 22.5% $0.31 $0.14

26.7% 448 bp 24.3% 57.6%

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Zynga

Return on Invested Capital We estimate that the company will earn a ROIC of 114.5% in FY11. We expect ROIC to decline over time to a still very-attractive 63.2% in FY14. However we note this implies that the companys marginal returns on capital over that period will be well below historical levels.
Projected Return on Invested Capital
FY December $ in Millions except per share items LTM ROIC WACC ROIC - WACC Source: Cowen and Company FY 2011E 114.5% 11.9% 102.5% FY 2012E 71.2% 11.9% 59.2% FY 2013E 81.9% 11.9% 70.0% FY 2014E 63.2% 11.9% 51.2%

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Zynga

Valuation
As we stated in the introduction, we believe that the companys valuation of 43x after-tax non-GAAP EBIT (our ex-cash P/E ratio) might be appropriate for a monopolistic platform owner, but is likely to prove inappropriate for a content company. All content businesses are hit driven, and with very few exceptions (i.e., Pixar and Blizzard), no content companies consistently spin out hits. Zynga has already had its share of misfires to-date (Mafia Wars 2 comes to mind recently). While there are many attractive characteristics of the casual digital market Zynga is a part of, these characteristics are equally attractive to current and potential competitors. With relatively low barriers to entry, we think increasing and intense competition is a certainty, and historically this has had negative implications for margin structure. While Zynga is a dominant player on the Facebook platform, it is very important to keep in mind that it is Facebook that owns the platform, not Zynga. Whether Facebook should be awarded a high multiple for its social networking virtual monopoly is a matter for another initiation report, but we believe that confusing the value of the Facebook distribution platform with the value of Zyngas gaming proposition is potentially very dangerous. We think it helps to put Zynga in the context of not just the video game industry, but the content industry as a whole. Forget the debate of Zyngas valuation vs. Electronic Arts. At the IPO valuation we note that Zynga is trading at 40% of the enterprise value of Discovery Communications. Had Zynga gone public at the $15B valuation that was speculated about in prior months, it would have been trading at roughly 75% of Discoverys valuation. Discovery Communications is a global provider of a broad range of high-quality video entertainment that enjoys extremely dependable revenue streams from affiliate fees and advertising. We do not discount the idea that Zynga could have some impressive growth ahead of it. However, to say that a company creating casual games of middling entertainment quality, that has thus far not proven it can expand beyond a gaming market with clear demographic and monetization limits, ought to have a valuation approaching that of Discovery strikes us as a bit absurd.
Enterprise Values of Various Content Companies in Cowen Coverage Universe

Company Disney Time Warner News Corp. Viacom CBS Corp. Discovery Communications Activision Zynga Electronic Arts Lions Gate Entertainment Dreamworks Animation Take Two THQ

Enterprise Value $85,080 $49,307 $40,778 $30,866 $21,455 $17,887 $10,280 $7,103 $6,080 $1,651 $1,327 $1,255 $100

Zynga vs. 8% 14% 17% 23% 33% 40% 69% 100% 117% 430% 535% 566% 7089%

Source: Company reports and Cowen and Company estimates.

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We believe that, given Zyngas growth prospects and investment risks, particularly those relating to culture and content creation, a more appropriate forward earnings multiple would be at most in the 25x range, vs. the current multiple of 43x. At a 25x multiple, Zynga would still trade at nearly 2x Electronic Arts valuation and nearly 3x Activision Blizzards valuation. A 25x target multiple implies significant downside from the $10 IPO price.
Video Game Company Multiple Comparison
Company Activision Blizzard Zynga Electronic Arts Take-Two THQ AVERAGE MEDIAN Ticker ATVI ZNGA ERTS TTWO THQI Price Market Rating 12/16/2011 Cap Outperform (1) $11.86 $13,639.0 Neutral (2) $10.00 $9,029.6 Outperform (1) $20.92 $7,050.0 Neutral (2) $13.76 $1,410.4 Neutral (2) $0.75 $51.3 EV / Revenue 2011E 2012E 2.4x 2.0x 6.2x 5.2x 1.4x 1.3x 1.3x 0.7x 0.1x 0.1x 2.3x 1.9x 1.4x 1.3x Non-GAAP P/E * 2011E 2012E 14.5x 10.9x 61.7x 53.7x 18.6x 14.8x 137.7x 4.6x NM NM 58.1x 21.0x 40.1x 12.9x Mkt Cap Ex-Cash / ATNGOI ** 2011E 2012E 11.0x 8.7x 49.1x 43.1x 16.1x 13.0x 91.5x 4.0x NM NM 41.9x 17.2x 32.6x 10.9x Total Cash Return Yield *** 2011E 2012E 8.7% 10.1% 0.0% 0.0% 3.4% 3.3% 0.0% 0.0% 0.0% 0.0% 2.4% 2.7% 0.0% 0.0%

* Adjusted to exclude the impact of certain non-recurring items and stock option expense. ** ATNGOI = After-Tax Non-GAAP Operating Income. Ex-cash assumes cash left after paying down outstanding debt. *** Sum of dividends and share buybacks, divided by the stock price.

Source: Company reports, Thomson and Cowen and Company estimates.

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Zynga

Zynga Earnings Model

Zynga Inc.
Earnings Model Cowen and Company (in $ millions except per share items) FY year ending December 31 Revised 12/14/11 FY 2008PFA GAAP Revenue Adjustments for revenue deferral Non-GAAP revenue (Bookings) Total COGS Non-GAAP gross profit Operating expenses R&D Sales and marketing G&A Total operating expenses Non-GAAP operating expenses Non-GAAP operating income y/y growth Depreciation & amortization Non-GAAP EBITDA Interest income/(expense) Other income Other non-GAAP adjustments Income before tax (non-GAAP) Provision for income taxes (non-GAAP) Non-GAAP tax rate Provision for income taxes Non-GAAP net income Net income Basic shares (ADSs) outstanding Diluted shares (ADSs) outstanding Non-GAAP Diluted EPS GAAP Basic EPS GAAP Diluted EPS Y/Y Growth (Non-GAAP) Bookings EBIT Net income Diluted EPS Margins (Non-GAAP, on Bookings) Gross margin EBIT Net income 19.4 16.5 35.9 (10.0) 25.9 FY 2009PFA 121.5 206.6 328.1 (56.7) 271.4 Q1PFA Mar-10 100.9 77.4 178.3 (32.9) 145.4 Q2PFA Jun-10 130.1 64.6 194.7 (41.6) 153.1 Q3PFA Sep-10 170.7 51.7 222.4 (49.9) 172.5 Q4PFA Dec-10 195.8 47.7 243.5 (51.6) 191.9 FY 2010PFA 597.5 241.4 838.9 (176.1) 662.8 Q1PFA Mar-11 242.9 43.7 286.6 (67.7) 218.9 Q2PFA Jun-11 279.1 (4.4) 274.7 (78.1) 196.7 Q3PFA Sep-11 306.8 (19.2) 287.7 (80.2) 207.5 Q4E Dec-11 285.1 10.5 295.6 (79.8) 215.8 FY 2011E 1,113.9 30.6 1,144.6 (305.7) 838.9 Q1E Mar-12 294.0 18.6 312.6 (84.4) 228.2 Q2E Jun-12 309.2 24.2 333.3 (90.0) 243.3 Q3E Sep-12 329.2 20.5 349.7 (94.4) 255.3 Doug Creutz (415) 646-7225

Q4E Dec-12 346.4 22.0 368.4 (99.5) 268.9

FY 2012E 1,278.8 85.2 1,364.0 (368.3) 995.7

FY 2013E 1,534.0 91.6 1,625.6 (438.9) 1,186.7

(12.2) (11.0) (1.8) (25.0) (24.3) 1.6 NM 2.9 4.5 0.3 (6.8) 7.0 2.2 (0.6) 30.0% (0.0) 1.5 (22.1) 699.4 903.0 $0.00 ($0.03) ($0.02)

(51.0) (42.3) (24.2) (117.5) (113.5) 157.8 NM 10.4 168.2 0.2 (0.2) 0.0 157.8 (47.3) 30.0% (0.0) 110.4 (52.8) 699.4 903.0 $0.12 ($0.08) ($0.06)

(27.9) (17.4) (16.5) (61.7) (58.4) 87.0 466.0% 6.5 93.6 0.1 0.4 0.0 87.5 (26.3) 30.0% (0.4) 61.3 6.4 699.4 903.0 $0.07 $0.01 $0.01

(30.4) (29.5) (15.1) (75.0) (67.8) 85.3 240.5% 8.5 93.8 0.2 1.1 0.0 86.6 (26.0) 30.0% (0.8) 60.6 14.0 699.4 903.0 $0.07 $0.02 $0.02

(39.8) (29.0) (17.8) (86.5) (81.6) 90.9 78.3% 11.3 102.2 0.4 (1.1) 0.0 90.3 (27.1) 30.0% (6.5) 63.2 27.2 699.4 903.0 $0.07 $0.04 $0.03

(51.5) (38.3) (22.2) (112.0) (101.8) 90.1 35.7% 13.1 103.2 0.5 39.2 (39.3) 90.5 (27.1) 30.0% (28.8) 63.3 43.0 699.4 903.0 $0.07 $0.06 $0.05

(149.5) (114.2) (71.6) (335.2) (309.5) 353.3 123.9% 39.5 392.8 1.2 39.7 (39.3) 354.9 (106.5) 30.0% (36.5) 248.4 90.6 699.4 903.0 $0.28 $0.13 $0.10

(71.8) (40.2) (27.1) (139.0) (124.5) 94.4 8.5% 17.8 112.3 0.5 (0.7) 0.0 94.2 (28.3) 30.0% (19.2) 65.9 16.8 699.4 903.0 $0.07 $0.02 $0.02

(95.7) (38.1) (54.2) (188.1) (155.0) 41.7 (51.1%) 23.4 65.1 (0.4) (0.2) 0.0 41.1 (12.3) 30.0% (12.3) 28.8 0.1 699.4 903.0 $0.03 $0.00 $0.00

(114.8) (43.7) (36.4) (194.9) (172.3) 35.2 (61.3%) 22.9 58.1 1.1 0.7 0.0 37.0 (11.1) 30.0% (19.7) 25.9 13.8 699.4 903.0 $0.03 $0.02 $0.02

(121.2) (45.8) (38.4) (205.4) (180.4) 35.3 (60.8%) 23.5 58.8 1.4 0.0 0.0 36.8 (11.0) 30.0% (0.4) 25.7 0.9 699.4 903.0 $0.03 $0.00 $0.00

(403.5) (167.8) (156.1) (727.4) (632.2) 206.7 (41.5%) 87.6 294.3 2.7 (0.3) 0.0 209.1 (62.7) 30.0% (51.6) 146.3 31.6 699.4 903.0 $0.16 $0.05 $0.03

(125.0) (46.9) (39.7) (211.6) (179.6) 48.6 (48.6%) 22.7 71.3 2.0 0.0 0.0 50.5 (15.2) 30.0% 0.0 35.4 (0.0) 699.4 908.0 $0.04 ($0.00) ($0.00)

(128.3) (48.3) (42.0) (218.7) (186.7) 56.7 35.8% 22.9 79.6 2.0 0.0 0.0 58.7 (17.6) 30.0% (0.8) 41.1 1.8 724.4 913.0 $0.04 $0.00 $0.00

(132.9) (49.0) (43.4) (225.2) (193.2) 62.1 76.4% 23.1 85.2 2.1 0.0 0.0 64.1 (19.2) 30.0% (3.5) 44.9 8.1 749.4 918.0 $0.05 $0.01 $0.01

(136.3) (51.6) (44.9) (232.8) (200.8) 68.1 92.7% 23.3 91.4 2.1 0.0 0.0 70.2 (21.1) 30.0% (4.9) 49.2 11.4 774.4 923.0 $0.05 $0.01 $0.01

(522.6) (195.8) (170.0) (888.3) (760.3) 235.4 13.9% 92.0 327.4 8.1 0.0 0.0 243.6 (73.1) 30.0% (9.1) 170.5 21.2 736.9 915.5 $0.19 $0.03 $0.02

(591.6) (221.6) (182.3) (995.6) (852.1) 334.5 42.1% 98.6 433.1 11.4 0.0 0.0 345.9 (103.8) 30.0% (33.3) 242.1 77.6 799.4 942.9 $0.26 $0.10 $0.08

2560.8% 1834.1% 1769.6% 1769.6%

812.6% 9499.5% 7238.7% 7238.7%

448.3% 466.0% 465.5% 465.5%

270.5% 240.5% 247.0% 247.0%

125.9% 78.3% 77.6% 77.6%

68.5% 35.7% 36.1% 36.1%

155.7% 123.9% 124.9% 124.9%

60.7% 8.5% 7.6% 7.6%

41.1% (51.1%) (52.6%) (52.6%)

29.4% (61.3%) (59.0%) (59.0%)

21.4% (60.8%) (59.3%) (59.3%)

36.4% (41.5%) (41.1%) (41.1%)

9.1% (48.6%) (46.4%) (46.7%)

21.3% 35.8% 42.9% 41.3%

21.6% 76.4% 73.3% 70.5%

24.6% 92.7% 90.9% 86.8%

19.2% 13.9% 16.5% 14.9%

19.2% 42.1% 42.0% 37.9%

72.1% 4.6% 4.2%

82.7% 48.1% 33.7%

81.5% 48.8% 34.4%

78.6% 43.8% 31.1%

77.6% 40.9% 28.4%

78.8% 37.0% 26.0%

79.0% 42.1% 29.6%

76.4% 32.9% 23.0%

71.6% 15.2% 10.5%

72.1% 12.2% 9.0%

73.0% 12.0% 8.7%

73.3% 18.1% 12.8%

73.0% 15.5% 11.3%

73.0% 17.0% 12.3%

73.0% 17.8% 12.8%

73.0% 18.5% 13.3%

73.0% 17.3% 12.5%

73.0% 20.6% 14.9%

Source: Company reports and Cowen and Company estimates.

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Zynga Revenue Build

Zynga Inc.
Revenue Build Cowen and Company (in $ millions except per share items) FY year ending December 31 Revised 12/14/11 FY 2008PFA $35.9 2560.8% $16.5 46.0% $19.4 2700.9% FY 2009PFA $328.1 812.6% $206.6 63.0% $121.5 525.8% Q1PFA Mar-10 $178.3 448.3% $77.4 43.4% $100.9 549.8% Q2PFA Jun-10 $194.7 270.5% $64.6 33.2% $130.1 588.2% Q3PFA Sep-10 $222.4 125.9% $51.7 23.3% $170.7 445.1% Q4PFA Dec-10 $243.5 68.5% $47.7 19.6% $195.8 251.3% FY 2010PFA $838.9 155.7% $241.4 28.8% $597.5 391.9% Q1PFA Mar-11 $286.6 60.7% $43.7 15.3% $242.9 140.7% Q2PFA Jun-11 $274.7 41.1% ($4.4) (1.6%) $279.1 114.6% Q3PFA Sep-11 $287.7 29.4% ($19.2) (6.7%) $306.8 79.8% Q4E Dec-11 $295.6 21.4% $10.5 3.6% $285.1 45.6% FY 2011E $1,144.6 36.4% $30.6 2.7% $1,113.9 86.4% Q1E Mar-12 $312.6 9.1% $18.6 5.9% $294.0 21.0% Q2E Jun-12 $333.3 21.3% $24.2 7.3% $309.2 10.8% Q3E Sep-12 $349.7 21.6% $20.5 5.9% $329.2 7.3% Doug Creutz (415) 646-7225

Bookings (as reported) y/y growth Change in deferred revenue % of Bookings Revenues (as reported) y/y growth Online Game Metrics (Zynga Reported) Average DAUs (MM) y/y growth DAU/MUU Average MAUs (MM) MAU/MUU Average MUUs (MM) y/y growth Unique payers (K) Annual/average quarterly unique payers Unique payers/DAU Unique payers/MUU Facebook Game Metrics (AppData) Average DAUs q/q growth y/y growth Non-Facebook Game Metrics Average DAUs q/q growth y/y growth Unique payer bookings Non-unique gaming bookings Non-unique as % of total game bookings Unique payer bookings/unique payer q/q growth y/y growth Online Game Bookings (OGB) y/y growth OGB/DAU OGB/MUU q/q growth y/y growth Change in Def Online Game Revenue Online Game Revenue % of total revenue y/y growth Advertising Bookings y/y growth Ad Bookings per Average DAU y/y growth Change in Def Advertising Revenue Advertising Revenue % of total revenue y/y growth U.S. Revenue y/y growth International Revenue y/y growth

Q4E Dec-12 $368.4 24.6% $22.0 6.0% $346.4 21.5%

FY 2012E $1,364.0 19.2% $85.2 6.2% $1,278.8 14.8%

FY 2013E $1,625.6 19.2% $91.6 5.6% $1,534.0 20.0%

4.0 700.0% 0.57 19.6 2.80 7.0 250.0%

41.0 925.0% 0.48 153.0 1.78 86.0 1128.6% 2888 3.13 7.0% 3.4%

67.0 1240.0% 0.54 236.0 1.90 124.0 726.7% 2330 3.5% 1.9%

60.0 656.5% 0.50 234.0 1.97 119.0 495.0% 2577 4.3% 2.2%

49.0 104.2% 0.45 203.0 1.85 110.0 74.6% 2754 5.6% 2.5%

48.0 (17.2%) 0.43 195.0 1.76 111.0 0.9% 3027 6.3% 2.7%

56.0 36.6% 0.48 217.0 1.87 116.0 34.9% 6382 2.39 11.4% 5.5%

62.0 (7.5%) 0.42 236.0 1.62 146.0 17.7% 3676 5.9% 2.5%

59.0 (1.7%) 0.39 228.0 1.51 151.0 26.9% 3336 5.7% 2.2%

54.0 10.2% 0.36 227.0 1.49 152.0 38.2% 3407 6.3% 2.2%

52.7 9.7% 0.35

56.9 1.6% 0.38

54.0 (12.8%) 0.35

55.5 (6.0%) 0.34

56.9 5.4% 0.34

58.3 10.7% 0.34

56.2 (1.3%) 0.34

60.5 7.8% 0.34

151.3 36.3% 3424 6.5% 2.3%

150.1 29.4% 7960 2.30 14.0% 5.3%

156.0 6.9% 3621 6.7% 2.3%

160.9 6.6% 3827 6.9% 2.4%

165.9 9.1% 3983 7.0% 2.4%

170.8 12.9% 4139 7.1% 2.4%

163.4 8.9% 8758 2.25 15.6% 5.4%

177.9 8.8% 10048 2.25 16.6% 5.6%

65.9 118.1%

58.3 (11.5%)

49.0 (16.0%) 118.1% 0.0 (97.4%) (97.2%) $197.1 $18.5 8.6% $71.58 4.6% (7.8%) $215.7 165.1% $4.40 $1.96 24.1% 51.8% $50.9 $164.7 96.5% 722.1% $6.7 (60.7%) $0.14 (80.8%) $0.8 $5.9 3.5% (47.3%) $115.8 $54.8

47.9 (2.1%) (14.1%) 0.1 70.5% (96.6%) $214.9 $19.4 8.3% $70.99 (0.8%) 2.9% $234.3 76.8% $4.88 $2.11 7.7% 75.2% $46.8 $187.5 95.8% 295.7% $9.2 (23.8%) $0.19 (7.9%) $0.9 $8.3 4.2% (0.8%) $130.4 $65.3

55.3

59.2 123.5% (10.1%) 2.8 3746.7% 148.7% $254.0 $18.5 6.8% $69.10 (2.7%) (2.1%) $272.5 56.3% $4.40 $1.87 (11.6%) 32.7% $42.6 $229.9 94.7% 135.0% $14.1 257.2% $0.23 286.0% $1.1 $13.0 5.3% 321.4% $154.5 130.2% $80.9 139.4%

53.6 (9.5%) (8.1%) 5.4 92.3% 216.2% $233.9 $25.8 9.9% $70.11 1.5% 2.4% $259.7 38.1% $4.40 $1.72 (7.9%) 8.8% ($4.3) $264.0 94.6% 111.9% $15.0 127.0% $0.26 130.8% ($0.1) $15.2 5.4% 174.3% $198.6 124.0% $98.1 136.4%

51.0 (4.8%) 4.2% 3.0 (45.2%) 6636.4% $247.8 $21.5 8.0% $72.73 3.7% 1.6% $269.3 24.9% $4.99 $1.77 3.0% (9.6%) ($18.6) $287.9 93.8% 74.7% $18.4 173.2% $0.34 147.9% ($0.6) $19.0 6.2% 219.5% $185.2 59.9% $111.6 103.4%

48.2 (5.5%) 0.6% 4.4 50.0% 5828.0% $248.8 $24.6 9.0% $72.67 (0.1%) 2.4% $273.4 16.7% $5.19 $1.81 2.0% (14.4%) $10.1 $263.3 92.4% 40.4% $22.2 141.4% $0.42 120.0% $0.4 $21.8 7.6% 162.9%

53.0 (4.1%) 3.9 428.2% $984.5 $90.4 8.4% $123.69 4.9% $1,075.0 32.3% $18.89 $7.16 2.3% $29.9 $1,045.1 93.8% 81.9% $69.6 163.1% $1.22 158.9% $0.7 $68.9 6.2% 201.8%

48.7 1.0% (17.7%) 5.3 20.0% 89.9% $263.8 $26.7 9.2% $72.84 0.2% 5.4% $290.5 6.6% $5.38 $1.86 3.0% (0.3%) $17.9 $272.6 92.7% 18.6% $22.1 56.9% $0.41 80.0% $0.7 $21.4 7.3% 64.8%

49.2 1.0% (8.2%) 6.3 17.5% 16.0% $279.6 $29.0 9.4% $73.05 0.3% 4.2% $308.6 18.8% $5.56 $1.92 3.0% 11.5% $23.3 $285.3 92.3% 8.1% $24.8 64.5% $0.45 75.0% $0.9 $23.9 7.7% 57.3%

49.7 1.0% (2.6%) 7.2 15.0% 143.2% $291.6 $31.0 9.6% $73.22 0.2% 0.7% $322.6 19.8% $5.67 $1.94 1.4% 9.8% $19.7 $302.9 92.0% 5.2% $27.1 47.5% $0.48 40.0% $0.8 $26.3 8.0% 38.6%

50.2 1.0% 4.1% 8.1 12.5% 82.4% $303.5 $33.0 9.8% $73.34 0.2% 0.9% $336.5 23.1% $5.77 $1.97 1.3% 9.0% $21.0 $315.5 91.1% 19.8% $31.9 43.9% $0.55 30.0% $1.0 $30.9 8.9% 42.1%

49.4 (6.7%) 6.7 72.3% $1,138.5 $119.7 9.5% $129.99 5.1% $1,258.2 17.0% $22.40 $7.70 7.5% $81.9 $1,176.3 92.0% 12.6% $105.8 51.9% $1.88 53.9% $3.3 $102.5 8.0% 48.8%

50.4 2.0% 10.1 50.0% $1,334.8 $148.3 10.0% $132.84 2.2% $1,483.1 17.9% $24.50 $8.34 8.3% $87.4 $1,391.6 90.7% 18.3% $142.5 34.7% $2.35 25.0% $4.1 $142.5 9.3% 39.0%

1.1 50.7%

1.7 51.2%

0.7

$273.8 $2.5 0.9% $94.79

$164.4 $10.0 5.7% $70.55 2.2% (3.0%) $174.4 731.9% $2.60 $1.41 16.7% 0.6% $76.5 $97.8 96.9% 1300.0% $3.9 (65.9%) $0.06 (97.5%) $0.9 $3.1 3.1% (63.9%) $67.1 $33.8

$176.4 $11.6 6.2% $68.46 (3.0%) (23.2%) $188.1 354.0% $3.13 $1.58 12.4% (23.7%) $63.5 $124.6 95.7% 998.3% $6.6 (40.4%) $0.11 (92.1%) $1.1 $5.5 4.3% (26.9%) $88.6 $41.5

$752.8 $59.6 7.3% $117.96 24.4% $812.4 194.1% $14.51 $7.00 118.0% $237.8 $574.6 96.2% 570.1% $26.5 (48.9%) $0.47 (62.6%) $3.6 $22.8 3.8% (36.1%) $402.0 354.6% $195.4 491.8%

$17.6 2745.1% $4.40 $2.51 712.9% $12.3 $5.3 27.2%

$276.2 1470.8% $6.74 $3.21 27.9% $190.5 $85.7 70.6% 1526.5% $51.8 182.3% $1.26 (72.5%) $16.1 $35.7 29.4% 152.6% $88.4 427.2% $33.0 1152.9%

$18.4 2405.4% $4.59 213.2% $4.2 $14.1 72.8%

$16.8 $2.6

Source: Company reports and Cowen and Company estimates.

December 16, 2011

47

Zynga

Zynga Cash Flow Statement

Zynga Inc.
Cash Flow Statement
FY December; in $millions Operating cash flows Net income Depreciation and amortization Stock-based compensation expense Inpairment of purchased technologies Loss on equity method of investment Gains from sales of investment, assets, and others, net Common stock warrants issued in connection with services Accretion and amortization on marketable securities Excess tax benefits from stock-based awards Benefit from deferred income taxes Changes in operating assets & liabilities Accounts receivable, net Income tax receivable Other assets Accounts payable Deferred revenue Other liabilities Cash provided by operating activities Purchase of marketable securities Sales of marketable securities Maturities of marketable securities Acquisition of property and equipment Acquisition of purchased technology and other intangible assets Business acquisitions, net of acquired cash Restricted cash Repayment of employee note receivable Proceeds from sale of investment Purchase of other investments Cash provided by investing activities Repurchases of common stock Exercise of stock options Excess tax benefits from stock-based awards Net proceeds from inssuance of preferred stock Proceeds from warrants Net proceeds from issuance of contingent warrant Cash provided by financing activities Effect of foreign exchange Net increase (decrease) in cash BOP cash EOP cash 2009 A (52.8) 10.4 3.7 0.0 0.1 0.0 0.3 0.1 0.0 0.0 2010 A 90.6 39.5 23.8 0.0 0.6 0.0 1.9 1.7 (39.7) (8.5) Doug Creutz (415) 646 7225 2011 E 2012 E 2013 E 31.6 87.6 79.7 0.0 0.0 (1.4) 15.6 2.2 2.0 0.0 21.2 92.0 128.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 77.6 98.6 143.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0

(4.4) (10.5) (3.1) 16.2 206.6 24.3 191.0 (125.1) 0.0 62.4 (38.8) (0.6) (0.5) (0.5) 0.0 0.0 (0.2) (103.4) 0.0 0.0 0.0 14.2 0.0 0.0 14.2 0.0 101.8 25.6 127.3

(69.5) (25.3) (32.5) 10.6 241.4 91.8 326.4 (804.5) 4.2 319.8 (56.8) (1.1) (62.3) (16.5) 0.0 0.0 (0.3) (617.4) (1.5) 3.4 39.7 305.2 0.0 4.6 351.4 0.1 60.5 127.3 187.8

(45.7) 32.6 (22.1) 23.6 30.6 47.1 283.4 (512.6) 12.6 725.3 (229.1) (3.7) (38.0) (7.7) 0.0 2.0 (0.9) (51.9) (283.8) 2.2 (2.0) 1,485.3 0.0 0.0 1,201.7 0.0 1,433.2 187.8 1,621.1

(24.1) 0.0 0.0 11.0 85.2 0.0 313.3 0.0 0.0 0.0 (115.8) 0.0 0.0 0.0 0.0 0.0 0.0 (115.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 197.5 1,621.1 1,818.6

(28.8) 0.0 0.0 13.1 91.6 0.0 395.5 0.0 0.0 0.0 (123.4) 0.0 0.0 0.0 0.0 0.0 0.0 (123.4) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 272.1 1,818.6 2,090.7

COWEN CASH FLOW SUMMARY Cash Flow from Operations Capital Spending Owners' Cash Flow Owners' Cash Flow Excluding Stock Comp Benefit Financing Acquisitions

191.0 (38.8) 152.2 148.4 (49.3) (1.1)

326.4 (56.8) 269.6 245.8 (145.7) (63.4) 127.3 60.5 187.8

283.4 (229.1) 54.3 (25.3) 1,420.6 (41.7) 187.8 1,433.2 1,621.1

313.3 (115.8) 197.5 69.5 0.0 0.0 1,621.1 197.5 1,818.6

395.5 (123.4) 272.1 128.6 0.0 0.0 1,818.6 272.1 2,090.7

Beginning Cash & Equivalent 25.6 Change in Cash & Equivalent 101.8 Ending Cash & Equivalent 127.3 Source: Company reports and Cowen and Company estimates.

48

December 16, 2011

Zynga

Zynga Balance Sheet

Zynga Inc.
Balance Sheet
FY December; in $millions Cash and cash equivalents Marketable securities Accounts receivable Income tax receivable Deferred tax assets Restricted cash Other current assets Current assets Goodwill Other intangible assets Property and equipment Restricted cash Other long term assets Total assets Accounts payable Other current liabilities Deferred revenue Current liabilities Deferred revenue Deferred tax liabilities Other non-current liabilities Total liabilities Convertible preferred stock Common stock Additional paid-in capital Treasury stock Other comprehensive income Retained earnings Total stockholders' equity (deficit) Total liabilities and equity 2009 A 127.3 72.6 7.2 11.3 0.0 0.7 3.1 222.1 0.0 1.0 34.8 0.0 0.8 258.8 21.5 35.0 178.1 234.6 45.7 0.0 0.0 280.3 47.7 0.0 6.6 0.0 0.0 (75.8) (21.5) 258.8 2010 A 187.8 550.3 80.0 36.6 24.4 2.8 24.4 906.2 60.2 44.0 75.0 14.3 12.9 1,112.6 33.4 78.7 408.5 520.7 56.8 14.1 38.8 630.4 394.0 0.0 79.3 (1.5) 0.1 10.2 482.2 1,112.6 Doug Creutz (415) 646 7225 2011 E 2012 E 2013 E 1,621.1 1,818.6 2,090.7 321.4 321.4 321.4 125.9 150.0 178.8 4.0 4.0 4.0 24.5 24.5 24.5 4.1 4.1 4.1 36.2 36.2 36.2 2,137.1 2,358.8 2,659.7 94.7 30.9 245.0 20.7 23.6 2,552.8 57.2 101.2 465.6 624.0 30.3 14.7 70.2 739.2 1,939.2 0.0 114.8 (282.8) 0.5 41.8 1,813.6 2,552.8 94.7 17.9 281.8 20.7 23.6 2,798.2 68.2 101.2 545.7 715.1 35.4 14.7 70.2 835.4 2,067.2 0.0 114.8 (282.8) 0.5 63.0 1,962.8 2,798.2 94.7 9.0 315.6 20.7 23.6 3,123.9 81.3 101.2 631.7 814.2 40.9 14.7 70.2 940.1 2,210.6 0.0 114.8 (282.8) 0.5 140.7 2,183.9 3,123.9

Turnover Assets Non-Cash Assets Days Receivables Leverage Assets/Equity Cash/Assets Returns ROA Non-Cash ROA ROE ROIC Per Share Operating Cash Flow Depreciation Cash Working Capital Book Value Tangible Book Value Source: Company reports and Cowen and Company estimates.

0.47 2.09 21.5

0.87 1.67 26.6

0.61 1.90 33.7

0.48 2.02 39.4

0.52 2.23 36.6

(1205.2%) 77.2%

230.7% 66.3%

140.8% 76.1%

142.6% 76.5%

143.0% 77.2%

85.2% 675.3% (1028.5%) NM

36.1% 119.1% 107.8% NM

7.9% 30.6% 12.7% 114.5%

6.2% 27.0% 9.0% 71.2%

7.9% 35.5% 11.7% 81.9%

$0.21 $0.01 $0.22 ($0.24) ($0.02) ($0.02)

$0.36 $0.04 $0.84 ($0.39) $0.53 $0.47

$0.31 $0.10 $2.18 ($0.48) $2.01 $1.90

$0.34 $0.10 $2.36 ($0.54) $2.14 $2.04

$0.42 $0.10 $2.58 ($0.60) $2.32 $2.22

December 16, 2011

49

Zynga

Zynga ROIC Analysis

Zynga Inc.
ROIC Analysis 12/14/11 FY December $ in Millions except per share items NOPAT CALCULATION EBITDA Plus: R&D expense Less: R&D amortization Less: Depreciation Less: Adjusted Taxes: Tax Provision + Interest Expense Tax Shield + Interest Expense Tax Shield on Op. Lease Total Adjusted Taxes Plus: Adjustment for Operating Lease NOPAT INVESTED CAPITAL (Financing Approach) Adjusted Equity: Stockholders' Equity Capitalized R&D Accumulated Goodwill Amortization Total Adjusted Equity Plus: Interest Bearing Debt: Operating Lease Commitments Total Interest Bearing Debt and Lease Oblig. Plus: Cum. Goodwill Impairment Charges (FAS 142) Less: Excess Cash & Investments Total Invested Capital Less: Goodwill, net Less: Accumulated Goodwill Amortization Less: Cum. Goodwill Impairment Charges (FAS 142) Total Invested Capital (excl. goodwill) RETURN ON INVESTED CAPITAL NOPAT NOPAT Incremental NOPAT Q/Q growth Y/Y growth LTM NOPAT INVESTED CAPITAL Total Invested Capital Increase in Invested Capital Q/Q growth Y/Y growth LTM Average Invested Capital Q/Q growth LTM Average Invested Capital (excl. goodwill) Q/Q growth LTM ROIC WACC ROIC - WACC LTM ROIC (excl. goodwill) WACC ROIC - WACC (excl. goodwill)

Cowen and Company

Doug Creutz (415) 646-7398 FY 2009A 168.2 51.0 21.5 10.4 0.0 0.0 (1.2) (1.2) 4.0 192.5 ----------------------------2010A---------------------------Q1PFA Q2PFA Q3PFA Q4PFA 93.6 27.9 12.8 6.5 0.4 (0.2) (0.3) (0.1) 1.0 103.2 93.8 30.4 23.4 8.5 0.8 (0.4) (0.3) 0.1 1.0 93.2 102.2 39.8 29.8 11.3 6.5 0.2 (0.3) 6.3 1.0 95.6 103.2 51.5 37.4 13.1 28.8 (11.9) (0.3) 16.6 1.0 88.6 FY 2010A 392.8 149.5 103.3 39.5 36.5 (12.3) (1.2) 23.0 4.0 380.6 ----------------------------2011E---------------------------Q1PFA Q2PFA Q3PFA Q4E 112.3 71.8 37.4 17.8 19.2 0.1 (0.5) 18.8 1.7 111.7 65.1 95.7 64.7 23.4 12.3 0.2 (0.5) 11.9 1.7 62.5 58.1 114.8 83.5 22.9 19.7 (0.5) (0.5) 18.7 1.7 49.6 58.8 121.2 100.9 23.5 0.4 (0.4) (0.5) (0.6) 1.7 57.9 FY 2011E 294.3 403.5 286.4 87.6 51.6 (0.7) (2.0) 48.9 6.7 281.6 FY 2012E 327.4 522.6 480.7 92.0 9.1 (2.4) (2.0) 4.6 6.7 279.3 FY 2013E 433.1 591.6 557.1 98.6 33.3 (3.4) (2.0) 27.8 6.7 348.0

(21.5) 39.6 0.0 18.1 15.0 15.0 0.0 134.3 (101.2) 0.0 0.0 0.0 (101.2)

93.7 54.7 0.0 148.4 21.3 21.3 0.0 211.3 (41.7) 15.1 0.0 0.0 (56.7)

208.9 61.7 0.0 270.6 27.5 27.5 0.0 440.0 (141.9) 30.1 0.0 0.0 (172.0)

324.1 71.7 0.0 395.8 33.8 33.8 0.0 440.5 (11.0) 45.2 0.0 0.0 (56.1)

482.2 85.8 0.0 568.1 40.0 40.0 0.0 570.3 37.7 60.2 0.0 0.0 (22.5)

482.2 85.8 0.0 568.1 40.0 40.0 0.0 570.3 37.7 60.2 0.0 0.0 (22.5)

738.8 120.2 0.0 859.0 46.8 46.8 0.0 806.2 99.6 71.7 0.0 0.0 27.9

755.9 151.3 0.0 907.2 53.6 53.6 0.0 759.0 201.8 83.2 0.0 0.0 118.6

787.7 182.6 0.0 970.3 60.4 60.4 0.0 717.4 313.3 94.7 0.0 0.0 218.6

1,813.6 202.9 0.0 2,016.5 67.2 67.2 0.0 1,714.3 369.5 94.7 0.0 0.0 274.8

1,813.6 202.9 0.0 2,016.5 67.2 67.2 0.0 1,714.3 369.5 94.7 0.0 0.0 274.8

1,962.8 244.8 0.0 2,207.6 67.2 67.2 0.0 1,867.9 406.9 94.7 0.0 0.0 312.2

2,183.9 279.3 0.0 2,463.2 67.2 67.2 0.0 2,087.7 442.7 94.7 0.0 0.0 348.0

192.5 177.6 1190.6% 192.5

103.2 22.5 27.8% 408.1% 275.4

93.2 (10.0) (9.7%) 201.0% 337.6

95.6 2.4 2.6% 57.9% 372.7

88.6 (7.0) (7.3%) 9.8% 380.6

380.6 188.0 97.7% 380.6

111.7 23.1 26.1% 8.3% 389.1

62.5 (49.2) (44.0%) (32.9%) 358.4

49.6 (12.9) (20.7%) (48.2%) 312.3

57.9 8.3 16.8% (34.6%) 281.6

281.6 (98.9) (26.0%) 281.6

279.3 (2.3) (0.8%) 279.3

348.0 68.6 24.6% 348.0

(101.2) (116.3) (772.2%) (49.6)

(41.7) 59.5 (58.8%)

(141.9) (100.2) 240.3% 321.8% (84.0) 47.5% (95.3) 57.0% NM 11.9% NM NM 11.9% NM

(11.0) 130.9 (92.3%) (78.6%) (73.9) (12.0%) (96.5) 1.3% NM 11.9% NM NM 11.9% NM

37.7 48.7 (444.5%) (137.3%) (39.2) (47.0%) (76.8) (20.4%) NM 11.9% NM NM 11.9% NM

37.7 139.0 (137.3%) (39.2)

99.6 61.8 163.8%

201.8 102.2 102.6% (242.2%) 82.0 (2214.8%) 17.0 (130.5%) 436.9% 11.9% 425.0% 2113.5% 11.9% 2101.6%

313.3 111.6 55.3% (2959.8%) 163.1 98.8% 85.6 405.1% 191.5% 11.9% 179.6% 364.7% 11.9% 352.8%

369.5 56.1 17.9% 878.9% 246.0 50.8% 160.0 86.8% 114.5% 11.9% 102.5% 176.1% 11.9% 164.2%

369.5 331.7 878.9% 246.0

406.9 37.4 10.1% 392.6

442.7 35.8 8.8% 424.8

(57.0) 14.8% (60.7) 22.4% NM 11.9% NM NM 11.9% NM

(3.9) (90.1%) (55.7) (27.5%) NM 11.9% NM NM 11.9% NM

(49.6)

(76.8)

160.0

300.1

330.1

NM 11.9% NM NM 11.9% NM

NM 11.9% NM NM 11.9% NM

114.5% 11.9% 102.5% 176.1% 11.9% 164.2%

71.2% 11.9% 59.2% 93.1% 11.9% 81.2%

81.9% 11.9% 70.0% 105.4% 11.9% 93.5%

Source: Company reports and Cowen and Company estimates.

50

December 16, 2011

Zynga

Addendum
STOCKS MENTIONED IN IMPORTANT DISCLOSURES
Ticker ATVI ERTS THQI TTWO ZNGA Company Name Activision Blizzard Electronic Arts THQ, Inc. Take-Two Interactive Software Zynga

ANALYST CERTIFICATION Each author of this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the subject securities or issuers, and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. IMPORTANT DISCLOSURES Cowen and Company, LLC and or its affiliates make a market in the stock of ATVI, ERTS, THQI, TTWO, ZNGA securities. Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firm's investor clients. Individual compensation determinations for research analysts, including the author(s) of this report, are based on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources, including revenues from investment banking. Cowen and Company, LLC does not compensate research analysts based on specific investment banking transactions. DISCLAIMER This research is for our clients only. Our research is disseminated primarily electronically and, in some cases, in printed form. Research distributed electronically is available simultaneously to all Cowen and Company, LLC clients. All published research, including required disclosures, can be obtained on the Firms client website, www.cowenresearch.com. Further information on any of the above securities may be obtained from our offices. This report is published solely for information purposes, and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state where such an offer or solicitation would be illegal. Other than disclosures relating to Cowen and Company, LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the available data. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. Notice to UK Investors: This publication is produced by Cowen and Company, LLC, which is regulated in the United States by FINRA and is disseminated in the United Kingdom by Cowen International Limited ("CIL"). In the United Kingdom, Cowen and Company is a Trading Name of CIL. It is communicated only to persons of a kind described in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. It must not be further transmitted to any other person without the consent of CIL. Copyright, User Agreement and other general information related to this report 2011 Cowen and Company, LLC. Member NYSE, FINRA and SIPC. All rights reserved. This research report is prepared for the exclusive use of Cowen clients and may not be reproduced, displayed, modified, distributed, transmitted or disclosed, in whole or in part, or in any form or manner, to others outside your organization without the express prior written consent of Cowen. Cowen research reports are distributed simultaneously to all clients eligible to receive such research prior to any public dissemination by Cowen of the research report or information or opinion contained therein. Any unauthorized use or disclosure is prohibited. Receipt and/or review of this research constitutes your agreement not to reproduce, display, modify, distribute, transmit, or disclose to others outside your organization the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets). All Cowen trademarks displayed in this report are owned by Cowen and may not be used without its prior written consent.

December 16, 2011

51

Zynga

Cowen and Company, LLC. New York (646) 562-1000 Boston (617) 946-3700 San Francisco (415) 646-7200 Chicago (312) 577-2240 Cleveland (440) 331-3531 Atlanta (866) 544-7009 Dallas (214) 978-0107 London (affiliate) 44-207-071-7500 Geneva (affiliate) 41-22-707-6900

COWEN AND COMPANY RATING DEFINITIONS (a)

Rating Outperform (1) Neutral (2) Underperform (3)
(a) Assumptions: Time horizon is 12 months; S&P 500 is flat over forecast period.

Definition Stock expected to outperform the S&P 500 Stock expected to perform in line with the S&P 500 Stock expected to underperform the S&P 500

COWEN AND COMPANY RATING ALLOCATION (a)

Rating Buy (b) Hold (c) Sell (d) Pct of companies under coverage with this rating 51.3% 46.4% 2.3% Pct for which Investment Banking services have been provided within the past 12 months 7.7% 2.3% 0.0%

(a) As of 09/30/2011. (b) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLC's rating definitions (see above). (c) Corresponds to "Neutral" as defined in Cowen and Company, LLC's ratings definitions (see above). (d) Corresponds to "Underperform" as defined in Cowen and Company, LLC's ratings definitions (see above). Note: "Buy," "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in its ratings system and should not be construed as investment options. Rather, these ratings terms are used illustratively to comply with NASD and NYSE regulations.

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