UBS Global Research analysts Eric J. Sheridan, Vishal J. Patel and Timothy E. Chiodo rate Zynga Inc (NASDAQ:ZNGA) as Neutral as the company’s Q4 EPS beat guidance and the Street’s expectations.

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Zynga’s EBITDA and EPS beat guidance and street

Zynga reported Q4 2013 bookings of $147mm (vs. our est. of $143mm, Street est. of $139mm, and guidance of $130-$140mm) for a decline of 44% YoY. Revenue was $176mm (vs. our est. of $187mm and guidance of $175-185mm), down 43% YoY. Adjusted EBITDA was $2.6mm vs. our est. of a loss of $(13)mm, Street est. of a loss of $(17)mm, and guidance of $(25)-(15)mm. Zynga reported non-GAAP EPS of $(0.03) vs. our est. of $(0.03), Street est. of $(0.04), and guidance of $(0.05)-(0.04).

Zynga announces agreement to acquire NaturalMotion

Zynga also announced an agreement to acquire NaturalMotion – a mobile game and technology developer – for $527mm in cash and equity (based on Zynga’s Jan 29th closing price). NaturalMotion expands Zynga’s creative pipeline into two new categories – racing (CSR) and people simulation (Clumsy Ninja) – and brings along proprietary technology, tools, and talent. At closing, NaturalMotion’s shareholders will receive $391mm in cash & approx. 39.8mm shares of Zynga stock. The deal is expected to be accretive to non-GAAP earnings, generating bookings of $70-80mm and adjusted EBITDA of $15-25mm in 2014. Zynga also announced plans to implement a 15% global workforce reduction (expects $33-35mm in pre-tax savings in 2014) and noted its victory in a patent lawsuit alleging I/P infringement on the part of Zynga.

Q1 and full-year 2014 guidance

Zynga issued the following guidance (assumes mid-Feb closing date for the acquisition): Q1 bookings of $128-$148mm, adjusted EBITDA of $5-$10mm, EPS of $(0.01); FY2014 bookings of $760-810mm, adjusted EBITDA of $65-$100mm, and EPS in the range of $0.01-$0.03. Given the pulled-forward timing of the release (Jan 30th vs. scheduled Feb 6th) and the complexity of the deal, we continue to review our estimates.

Zynga valuation

Our $4.00 PT is based on our weighted avg. framework (EV/Sales, EV/EBITDA, EV/FCF). We view Zynga’s net cash following the deal consideration (est. $1.2bn total) and land/asset (PPE of $0.43/sh) as downside supportive.