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.

Zynga Inc (ZNGA) Earnings And NaturalMotion Acquisition Details

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.