Market Overview

Zynga Enters Into Agreement to Acquire Small Giant Games, Creator of Hit Mobile Game Franchise Empires & Puzzles

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  • Adds a Proven Studio, Another Forever Franchise and Expands New Game
    Pipeline
  • Acquisition Expected to Close Effective as of January 1, 2019
  • Zynga Raises Q4 2018 Financial Guidance Driven by Strength of its
    Existing Live Services
  • Management will Host a Live Q&A Session Today at 2:00 p.m. Pacific Time

Zynga Inc. (NASDAQ:ZNGA), a leading social game developer, today
announced it has entered into an agreement to acquire Helsinki-based
mobile game studio, Small Giant Games ("Small Giant"), creator of the
hit franchise Empires & Puzzles. Small Giant adds an
experienced team and another innovative Forever Franchise to Zynga's
live service portfolio while also expanding its new game pipeline. Small
Giant is expected to be accretive to Zynga's profitability and be a
meaningful growth driver in 2019 and beyond.

This press release features multimedia. View the full release here:
https://www.businesswire.com/news/home/20181220005883/en/

Zynga Acquires Small Giant Games (Graphic: Business Wire)

Zynga Acquires Small Giant Games (Graphic: Business Wire)

Founded in 2013, Small Giant is a mobile gaming studio based in
Helsinki, Finland that developed the hit franchise Empires & Puzzles. The
game successfully blends approachable Match-3 battles with deeper
gameplay elements including Hero Collection, Base Building and Social
Alliances. Since its launch 18 months ago, Empires & Puzzles
has repeatedly broken into the Top 10 Grossing Games on the Google Play
Store and Apple App Store. The game has been downloaded over 26 million
times and expands Zynga's international and Android audiences.

"We've been impressed by the quality and momentum of Empires &
Puzzles
as we add another Forever Franchise into Zynga's portfolio,"
said Frank Gibeau, Zynga CEO. "Small Giant has created an innovative
game that delivers a unique player experience that engages over the long
term. We are excited that Small Giant is joining Zynga as they enhance
our next phase of growth."

"Our studio was founded on the idea that small, skillful teams can
accomplish giant things, and I am confident that partnering with Zynga
is the right next step in our evolution," stated Timo Soininen, Small
Giant Games CEO. "We will now operate as a separate studio within Zynga,
maintaining our identity, culture and creative independence. By
leveraging the expertise and support from the wider Zynga team, we will
amplify the reach of Empires & Puzzles and the new games in
our development pipeline."

Zynga will acquire 80% of Small Giant for $560 million, comprised of
approximately $330 million in cash and $230 million of unregistered
Zynga common stock (issued at the average closing price per share over
the thirty-day trading period ended December 19, 2018). The final
upfront transaction consideration will also include customary closing
adjustments and will be partially funded by a newly established $200
million revolving credit facility. The transaction is expected to close
effective as of January 1, 2019 and Zynga will purchase the remaining
20% of Small Giant over the next three years at valuations based on
specified profitability goals.

Q4 2018 Guidance Update

Zynga is raising its fourth quarter 2018 guidance based on the strong
performance of holiday bold beats across its live service portfolio – in
particular, Words With Friends, Merge Dragons! and CSR2.
In addition, Wonka's World of Candy is off to a
promising start since its launch in early November.

As a reminder, this performance does not include any contributions from
Small Giant as the transaction is expected to close effective as of
January 1, 2019.

Updated Q4 2018 guidance is as follows:

               
Original Raised
Q4'18 Zynga Q4'18
(in thousands, except per share data)       Guidance     Update     Guidance
 
GAAP
Revenue $ 235,000 $ 8,000 $ 243,000

(B)

Net increase in deferred revenue(1) $ (15,000 ) $ (2,000 ) $ (17,000 )
Net (loss) income $ (2,000 ) 500 $ (1,500 )
Basic share count 867,000 - 867,000
Diluted net (loss) income per share $ (0.00 ) - $ (0.00 )
 
Non-GAAP
Bookings $ 250,000 $ 10,000 $ 260,000

(A)

Adjusted EBITDA $ 32,000 $ 1,000 $ 33,000
 
Management Reporting = (A) - (B)
 

Footnote:

(1) For clarity, a net release of deferred revenue results in
revenue being higher than bookings and is a positive impact to
Adjusted EBITDA as reported; a net increase in deferred revenue
results in revenue being lower than bookings and is a negative
impact to Adjusted EBITDA as reported.
 

Live Q&A Session

Zynga management will host a live Q&A session at 2:00 p.m. Pacific Time
(5:00 p.m. Eastern Time) today, Thursday, December 20, to discuss it has
entered into an agreement to acquire Small Giant Games.

The live Q&A session can be accessed at http://investor.zynga.com
– a replay of which will be available through the website after the call
– or via the below conference dial-in number:

  • Toll-Free Dial-In Number: (800) 537-0745
  • International Dial-In Number: (253) 237-1142
  • Conference ID: 2365758

About Zynga Inc.

Since its founding in 2007, Zynga's mission has been to connect the
world through games. To date, more than 1 billion people have
played Zynga's games across mobile and web, including FarmVille, Zynga Poker, Words
With Friends, Hit it Rich! Slots
 and CSR Racing. Zynga's games
are available on a number of global platforms including Apple iOS,
Google Android and Facebook. The company is headquartered in San
Francisco, Calif., and has additional offices in the U.S., Canada, U.K.,
Ireland, India, Turkey and Finland. Learn more about Zynga at Zynga.com or
follow us on Twitter and Facebook.

About Small Giant Games

Founded in 2013, and headquartered in Helsinki, Small Giant Games is one
of the fastest growing mobile game companies in the world. The company
believes that small, skilled and independent teams can accomplish giant
things. The company's latest game, Empires & Puzzles, has
been downloaded over 26 million times and has attracted a dedicated
mid-core audience globally. For more information, visit SmallGiantGames.com.

Forward-Looking Statements

This letter contains forward-looking statements, including those
statements relating to our updated outlook for the fourth quarter under
the headings "Q4 2018 Guidance Update" and "Reconciliation of GAAP to
Non-GAAP Raised Fourth Quarter 2018 Guidance" and statements relating
to, among other things: the strength of our live service portfolio, the
closing date of the acquisition of Small Giant, our overall growth, and
expanding the reach of Small Giant's games.

Forward-looking statements often include words such as "outlook,"
"projected," "intends," "will," "anticipate," "believe," "target,"
"expect," and statements in the future tense are generally
forward-looking. The achievement or success of the matters covered by
such forward-looking statements involves significant risks,
uncertainties, and assumptions. Our actual results could differ
materially from those predicted or implied and reported results should
not be considered as an indication of our future performance. Particular
uncertainties that could materially affect future results include risks
associated with our acquisition of Small Giant, including (i) our
ability to achieve the anticipated benefits of the transaction; (ii) our
ability to successfully integrate Small Giant's operations and
employees; (iii) potential difficulties in employee retention; (iv)
unexpected costs, charges or expenses; (v) our management of the credit
facility established in connection with the transaction; and (vi) risks
associated with international operations. Undue reliance should not be
placed on such forward-looking statements, which are based on
information available to us on the date hereof. We assume no obligation
to update such statements. More information about factors that could
affect our operating results are described in greater detail in our
public filings with the Securities and Exchange Commission (the "SEC"),
copies of which may be obtained by visiting our Investor Relations web
site at http://investor.zynga.com
or the SEC's web site at www.sec.gov.

In addition, the preliminary financial results set forth in this letter
are estimates based on information currently available to us. While we
believe these estimates are meaningful, they could differ from the
actual amounts that we ultimately report in our Annual Report on Form
10-K for the quarter and year ended December 31, 2018. We assume no
obligation and do not intend to update these estimates prior to filing
our Annual Report on Form 10-K.

Non-GAAP Financial Measures

We have provided in this letter certain non-GAAP financial measures to
supplement our consolidated financial statements prepared in accordance
with U.S. GAAP (our "GAAP financial statements"). Management uses
non-GAAP financial measures internally in analyzing our financial
results to assess operational performance and liquidity. Our non-GAAP
financial measures may be different from non-GAAP financial measures
used by other companies.

The presentation of our non-GAAP financial measures is not intended to
be considered in isolation or as a substitute for, or superior to, our
GAAP financial statements. We believe that both management and investors
benefit from referring to our non-GAAP financial measures in assessing
our performance and when planning, forecasting and analyzing future
periods. We believe our non-GAAP financial measures are useful to
investors because they allow for greater transparency with respect to
key financial measures we use in making operating decisions and because
our investors and analysts use them to help assess the health of our
business.

We have provided reconciliations of our non-GAAP financial measures used
in this letter to the most directly comparable GAAP financial measures
in the following tables. Because of the following limitations of our
non-GAAP financial measures, you should consider the non-GAAP financial
measures presented in this letter with our GAAP financial statements.

Key limitations of our non-GAAP financial measures include:

  • Bookings does not reflect that we defer and recognize online game
    revenue and revenue from certain advertising transactions over the
    estimated average playing period of payers for durable virtual items
    or as consumed for consumable virtual items;
  • Adjusted EBITDA does not include the impact of stock-based expense,
    acquisition-related transaction expenses, and contingent consideration
    fair value adjustments;
  • Adjusted EBITDA does not reflect provisions for or benefits from
    income taxes and does not include other income (expense) net, which
    includes foreign exchange gains and losses, and interest income; and
  • Adjusted EBITDA excludes depreciation and amortization of tangible and
    intangible assets. Although depreciation and amortization are non-cash
    charges, the assets being depreciated and amortized may have to be
    replaced in the future.
     

ZYNGA INC.

RECONCILIATION OF GAAP TO NON-GAAP RAISED FOURTH QUARTER 2018
GUIDANCE

(In thousands, except per share data, unaudited)
 
Fourth Quarter 2018
Reconciliation of Revenue to Bookings  
Revenue $ 243,000
Change in deferred revenue   17,000
Bookings $   260,000
 
Reconciliation of Net Loss to Adjusted EBITDA
Net loss $

(1,500)

Provision for income taxes 5,000
Other income, net

(3,000)

Interest income

(1,500)

Depreciation and amortization 12,000
Acquisition-related transaction expenses 1,000
Contingent consideration fair value adjustment 2,000
Stock-based compensation expense   19,000
Adjusted EBITDA $   33,000
 
GAAP basic shares 867,000
Basic net loss per share $

(0.00)

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