znga-10q_20160331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                   

Commission File Number: 001-35375

 

Zynga Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

42-1733483

(State of or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

699 Eighth Street

 

San Francisco, CA

94103

(Address of principal executive offices)

(Zip Code)

 

(855) 449-9642

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

x

 

Accelerated filer

o

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  o    No  x

As of April 15, 2016, there were 738,160,216 shares of the Registrant’s Class A common stock outstanding, 113,461,445 shares of the Registrant’s Class B common stock outstanding and 20,517,472 shares of the Registrant’s Class C common stock outstanding.

 

 

 

 


Zynga Inc.

Form 10-Q Quarterly Report

TABLE OF CONTENTS

 

 

 

 

 

Page

Special Note Regarding Forward-Looking Statements

 

1

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

 

4

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015

 

5

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2016 and 2015

 

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

 

30

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

30

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

31

 

 

 

 

 

 

Item 1A.

Risk Factors

 

31

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Issuer Purchase of Equity Securities

 

55

 

 

 

 

 

 

Item 6.

Exhibits

 

55

 

 

 

 

 

 

 

Signatures

 

56

 

 

 

 

 

 

 

Exhibit Index

 

57

Zynga, the Zynga logo and other trademarks or service marks of Zynga appearing in this report are the property of Zynga. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders.

References in this report to “DAUs” mean daily active users of our games, “MAUs” mean monthly active users of our games, “MUUs” mean monthly unique users of our games, “ABPU” means average daily bookings per average DAU and “MUPs” mean monthly unique payers of our games. Unless otherwise indicated, these metrics are based on internally-derived measurements across all platforms on which our games are played. For further information about ABPU, DAUs, MAUs, MUPs, and MUUs as measured by us, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics.”

 

 

 

 


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “might,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “should,” “would,” “project,” “plan,” “outlook,” “target,” “expect,” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

·

our future spend, including spend on R&D and marketing and our future margins;

 

·

our future operational plans, use of cash, strategies and prospects;

 

·

the breadth and depth of our game slate for 2016 and the success of this slate and future launches from this slate;

 

·

the timely launch and success of our games

 

·

our ability to change our mix of R&D and unlaunched game slate to live games;

 

·

our ability to increase the predictability of our business and to continue to transition to mobile;

 

·

our planned launch of mobile first games and new features for existing games;

 

·

our ability to grow mobile bookings in 2016 and beyond;

 

·

our cost structure and cost reduction plans and estimated savings and charges, including our reduction in workforce and reduction in centralized services costs and spend;

 

·

our ability to accelerate execution, drive profitability and nurture creativity and innovation while reducing costs and lowering discretionary spend;

 

·

our ability to execute against our turnaround strategy and deliver long-term value to our shareholders, employees and players and fulfill our mission to connect the world through games;

 

·

our ability to accurately forecast our upcoming game launches and bookings and revenue related to upcoming game launches and our existing games;

 

·

our ability to accurately forecast our bookings, revenue and performance of our existing games;

 

·

our relationship or agreements with key licensing partners, additional platform providers or any other key partners;

 

·

our ability to launch and monetize successful new games and features for web and mobile in a timely manner and the success of these games and features;

 

·

our ability to sustain player engagement, optimize our games to increase long-term player retention and monetize our live games and games in geo-lock testing;

 

·

our ability to renew our existing brand, technology and content licenses as they expire and secure new licenses for top brands;

 

·

the success of our acquisitions;

 

·

the process of integrating newly acquired businesses with ours, including but not limited to our expected ability to expand our creative pipeline, accelerate our growth on mobile and deliver hit games on schedule from such newly acquired businesses;

 

·

the effectiveness of our marketing program and initiatives and our ability to obtain game featuring from partners;

 

·

our strategy of backing proven teams to develop or expand our game offerings in the content categories where we are focused, the timely launch of our games in these categories and the success of these games;

 

·

our relationship with Facebook, changes in the Facebook platform or changes in our agreement with Facebook;

 

·

our relationship with Apple, Google and other Android platform providers, changes to the Android or iOS platforms and /or changes in our agreements with Apple, Google or other Android platform providers;

 

·

our ability to attract and retain key employees in light of business challenges, including employees key to franchise games and planned launches and senior management;

 

·

the impact of change in our senior management team and management teams, new hires and other changes in our organization;

1


 

·

the strength of our balance sheet and our ability to effectively manage our cost structure and investments;

 

·

our ability to efficiently deploy employees and leverage our teams and talent, including shifting resources when necessary to prioritize more important projects;

 

·

our ability to use data analytics to improve our player experience, gameplay and monetization;

 

·

our ability to manage new IP costs;

 

·

competition in our industry;

 

·

our ability to maintain technology infrastructure and employees that can efficiently and reliably handle increased player usage, changes in mobile devices and game platforms, fast load times and the rapid deployment of new features and products;

 

·

our ability to anticipate and address technical challenges that may arise;

 

·

our ability to protect our players’ information and adequately address privacy concerns;

 

·

our ability to maintain reliable security services and infrastructure to protect against security breaches, computer malware and hacking attacks;

 

·

market opportunity in the social gaming market, including the mobile market, the advertising market, the market for social game categories in which we invest, and our ability to capitalize on and contribute to this market opportunity;

 

·

the success of our advertising offerings, and our ability to grow advertising bookings;

 

·

our ability to successfully monitor and adapt to changes in gaming platform and consumer demand as the industry continues to evolve;

 

·

our ability to develop, identify, market and launch hit games and new features and content for our existing games in a timely manner;

 

·

the ability of our games to generate revenue and bookings for a significant period of time after launch and the timing for market acceptance of new games;

 

·

attrition or decline in existing games’ audience and financial performance, including franchise games;

 

·

our ability to utilize, protect, defend and enforce our intellectual property;

 

·

our exposure to intellectual property disputes and other litigation;

 

·

our exposure to illegitimate credit card activity and other security risks, including sales or purchases of virtual goods used in our games through unauthorized or illegitimate third-party websites;

 

·

our ability to manage risks, costs and other challenges associated with international expansion;

 

·

the impact of laws and regulations on our business;

 

·

our evaluation of new business opportunities and acquisitions by us, including integration of newly acquired businesses;

 

·

changes in corporate strategy or management;

 

·

our ability to understand industry trends, such as seasonality, and position our business to take advantage of these trends;

 

·

our ability to build on our social legacy in both our web games and our new mobile games and build a player network across mobile games;

 

·

our ability to operate in an entrepreneurial manner, successfully invest in and innovate on game mechanics and successfully invest in and leverage data and analytics in our operations; and

 

·

the effectiveness of our cost cutting activities and our ability to control and reduce expenses, including our estimated savings and charges associated with our restructuring efforts.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Part II. Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and industry. New risks may also emerge from time to time. It is not possible for our management to predict all of the risks related to our business and operations, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. The achievement or success of the matters covered by such forward-looking statements involves significant

2


risks, uncertainties and assumptions.  In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated, predicted or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur, and reported results should not be considered as an indication of future performance.  Factors that could cause or contribute to such differences include, but are not limited to, those described in the section titled “Risk Factors.”  Except as required by law, we undertake no obligation to update any forward-looking statements for any reason to conform these statements to actual results or to changes in our expectations.

 

 

3


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Zynga Inc.

Consolidated Balance Sheets

(In thousands, except par value)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

731,451

 

 

$

742,217

 

Marketable securities

 

 

126,010

 

 

 

245,033

 

Accounts receivable, net of allowance of $0 at March 31, 2016 and December 31, 2015

 

 

72,393

 

 

 

79,610

 

Income tax receivable

 

 

4,638

 

 

 

5,233

 

Restricted cash

 

 

2,082

 

 

 

209

 

Other current assets

 

 

41,065

 

 

 

39,988

 

Total current assets

 

 

977,639

 

 

 

1,112,290

 

Goodwill

 

 

652,436

 

 

 

657,671

 

Other intangible assets, net

 

 

58,406

 

 

 

64,016

 

Property and equipment, net

 

 

271,590

 

 

 

273,221

 

Restricted cash

 

 

250

 

 

 

986

 

Other long-term assets

 

 

17,298

 

 

 

16,446

 

Total assets

 

$

1,977,619

 

 

$

2,124,630

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,398

 

 

$

29,676

 

Other current liabilities

 

 

61,107

 

 

 

77,691

 

Deferred revenue

 

 

123,920

 

 

 

128,839

 

Total current liabilities

 

 

198,425

 

 

 

236,206

 

Deferred revenue

 

 

27

 

 

 

204

 

Deferred tax liabilities

 

 

6,461

 

 

 

6,026

 

Other non-current liabilities

 

 

95,928

 

 

 

95,293

 

Total liabilities

 

 

300,841

 

 

 

337,729

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.00000625 par value, and additional paid in capital - authorized

   shares: 2,020,517 shares outstanding: 872,192 shares (Class A, 738,213, Class B,

   113,462 Class C, 20,517) as of March 31, 2016 and 903,617 (Class A, 769,533,

   Class B, 113,567, Class C, 20,517) as of December 31, 2015

 

 

3,270,310

 

 

 

3,234,551

 

Treasury stock

 

 

(102,130

)

 

 

(98,942

)

Accumulated other comprehensive income (loss)

 

 

(69,581

)

 

 

(52,388

)

Accumulated deficit

 

 

(1,421,821

)

 

 

(1,296,320

)

Total stockholders’ equity

 

 

1,676,778

 

 

 

1,786,901

 

Total liabilities and stockholders’ equity

 

$

1,977,619

 

 

$

2,124,630

 

 

See accompanying notes.

 

 

4


Zynga Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

Online game

 

$

137,057

 

 

$

147,963

 

Advertising and other

 

 

49,664

 

 

 

35,330

 

Total revenue

 

 

186,721

 

 

 

183,293

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenue

 

 

57,139

 

 

 

57,622

 

Research and development

 

 

87,737

 

 

 

107,520

 

Sales and marketing

 

 

46,344

 

 

 

31,839

 

General and administrative

 

 

22,384

 

 

 

40,381

 

Total costs and expenses

 

 

213,604

 

 

 

237,362

 

Income (loss) from operations

 

 

(26,883

)

 

 

(54,069

)

Interest income

 

 

705

 

 

 

794

 

Other income (expense), net

 

 

2,100

 

 

 

8,359

 

Income (loss) before income taxes

 

 

(24,078

)

 

 

(44,916

)

Provision for (benefit from) income taxes

 

 

2,480

 

 

 

1,580

 

Net income (loss)

 

$

(26,558

)

 

$

(46,496

)

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

 

$

(0.05

)

Diluted

 

$

(0.03

)

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

Weighted average common shares used to compute net income (loss) per share

   attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

 

871,093

 

 

 

898,344

 

Diluted

 

 

871,093

 

 

 

898,344

 

 

See accompanying notes.

 

 

5


Zynga Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Net income (loss)

 

$

(26,558

)

 

$

(46,496

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

(17,329

)

 

 

(22,613

)

Net change on unrealized gains (losses) on available-for-sale investments, net of tax

 

 

136

 

 

 

438

 

Other comprehensive income (loss):

 

 

(17,193

)

 

 

(22,175

)

Comprehensive income (loss):

 

$

(43,751

)

 

$

(68,671

)

 

See accompanying notes.

 

 

6


Zynga Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(26,558

)

 

$

(46,496

)

Adjustments to reconcile net income (loss) to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,812

 

 

 

17,722

 

Stock-based expense

 

 

29,608

 

 

 

41,462

 

(Gain) loss from sales of investments, assets and other, net

 

 

11

 

 

 

(6,056

)

Accretion and amortization on marketable securities

 

 

259

 

 

 

2,087

 

Deferred income taxes

 

 

1,422

 

 

 

998

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

7,217

 

 

 

10,090

 

Income tax receivable

 

 

595

 

 

 

(1,198

)

Other assets

 

 

(1,812

)

 

 

(7,687

)

Accounts payable

 

 

(12,818

)

 

 

1,063

 

Deferred revenue

 

 

(5,096

)

 

 

(15,883

)

Other liabilities

 

 

(6,945

)

 

 

(43,104

)

Net cash provided by (used in) operating activities

 

 

(3,305

)

 

 

(47,002

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

 

 

 

(101,091

)

Sales and maturities of marketable securities

 

 

118,900

 

 

 

234,555

 

Acquisition of property and equipment

 

 

(2,654

)

 

 

(2,112

)

Business acquisitions, net of cash acquired

 

 

(12,500

)

 

 

 

Proceeds from sale of property and equipment

 

 

398

 

 

 

 

Proceeds from sale of equity method investment

 

 

 

 

 

10,507

 

Net cash provided by (used in) investing activities

 

 

104,144

 

 

 

141,859

 

Financing activities:

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of equity awards

 

 

(919

)

 

 

(1,008

)

Repurchases of common stock

 

 

(112,392

)

 

 

 

Proceeds from employee stock purchase plan and exercise of stock options

 

 

2,476

 

 

 

3,390

 

Acquisition-related contingent consideration payment

 

 

 

 

 

(10,790

)

Net cash provided by (used in) financing activities

 

 

(110,835

)

 

 

(8,408

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(770

)

 

 

(297

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(10,766

)

 

 

86,152

 

Cash and cash equivalents, beginning of period

 

 

742,217

 

 

 

131,303

 

Cash and cash equivalents, end of period

 

$

731,451

 

 

$

217,455

 

 

See accompanying notes.

 

 

7


Zynga Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Overview and Summary of Significant Accounting Policies

Organization and Description of Business

Zynga Inc. (“Zynga,” “we” or “the Company”) develops, markets, and operates social games as live services played over the Internet and on social networking sites and mobile platforms. We generate revenue through the in-game sale of virtual goods and through advertising. Our operations are headquartered in San Francisco, California, and we have several operating locations in the U.S., as well as various international office locations in North America, Asia and Europe.

We completed our initial public offering in December 2011 and our Class A common stock is listed on the NASDAQ Global Select Market under the symbol “ZNGA.”

Basis of Presentation and Consolidation

The accompanying consolidated financial statements are presented in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The consolidated financial statements include the operations of us and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation.

The accompanying interim consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Unaudited Interim Financial Information

The accompanying interim consolidated balance sheet as of March 31, 2016, the interim consolidated statements of operations, the interim consolidated statements of comprehensive income (loss) for the three months ended March 31, 2016 and 2015, the interim consolidated statements of cash flows for the three months ended March 31, 2016 and 2015 and the related footnote disclosures are unaudited. These unaudited consolidated interim financial statements have been prepared in accordance with U.S. GAAP. In management’s opinion, the unaudited consolidated interim financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s statement of financial position and operating results for the periods presented. The results for the three months ended March 31, 2016 are not necessarily indicative of the results expected for the full fiscal year or any other future period.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and notes thereto. Significant estimates and assumptions reflected in the financial statements include, but are not limited to, the estimated lives of virtual goods that we use for revenue recognition, useful lives of property and equipment and intangible assets, accrued liabilities, income taxes, accounting for business combinations, stock-based expense and evaluation of goodwill, intangible assets, and long-lived assets for impairment. Actual results could differ materially from those estimates.

Changes in our estimated average life of durable virtual goods during the three months ended March 31, 2016 for various games resulted in an increase in revenue and income from operations of $2.6 million, which is the result of adjusting the remaining recognition period of deferred revenue generated in prior periods at the time of a change in estimate. We also recognized $1.3 million of revenue and income from continuing operations in the three months ended March 31, 2016 due to changes in our estimated average life of durable virtual goods for games that have been discontinued as there is no further service obligation after the closure of these games. These changes in estimates resulted in a $0.01 per share impact on our reported earnings per share for the three months ended March 31, 2016.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU

8


2014-09 supersedes the existing revenue recognition guidance in Revenue Recognition (Topic 605). In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as allowing early adoption as of the original effective date. Accordingly, the Company may adopt the standard in either the first quarter of 2017 or 2018. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the implementation guidance on principal versus agent consideration in determining whether an entity controls a specified good or service before it is transferred to the customer. We are currently in the process of evaluating the timing of adoption of ASU 2014-09 and ASU 2016-08 as well as the impact on our consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which requires an acquirer in a business combination to recognize measurement-period adjustments during the period in which adjustment amounts are determined rather than retrospectively, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed as of the acquisition date. This standard will be applied prospectively to adjustments to provisional amounts that occur after the effective date. This standard was effective for the Company beginning in the first quarter of 2016 and did not have an impact on our financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. For lessors, accounting for leases will remain substantially the same as in prior periods. The standard is effective in the first quarter of 2019 and early adoption is permitted. While the Company expects adoption of this new standard to increase reported assets and liabilities, we are currently in the process of evaluating the timing of adoption of ASU 2016-02 as well as the full impact on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” to simplify the accounting for share-based payment transactions, including income taxes and classification in the statement of cash flows. It also provides an option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur. The standard is effective in the first quarter of 2017 and early adoption is permitted. We are currently in the process of evaluating the timing of adoption of ASU 2016-09 as well as the impact on our consolidated financial statements. 

 

2. Marketable Securities

The following tables summarize our amortized cost, gross unrealized gains and losses and fair value of our available-for-sale investments in marketable securities (in thousands):

 

 

 

March 31, 2016

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Aggregate

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government and government agency debt securities

 

$

68,006

 

 

$

9

 

 

$

(1

)

 

$

68,014

 

Corporate debt securities

 

 

57,994

 

 

 

6

 

 

 

(4

)

 

 

57,996

 

Total

 

$

126,000

 

 

$

15

 

 

$

(5

)

 

$

126,010

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Aggregate

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government and government agency debt securities

 

$

145,066

 

 

$

 

 

$

(80

)

 

$

144,986

 

Corporate debt securities

 

 

100,093

 

 

 

12

 

 

 

(58

)

 

 

100,047

 

Total

 

$

245,159

 

 

$

12

 

 

$

(138

)

 

$

245,033

 

 

For more detail on our method for determining the fair value of our assets, see Note 3 – “Fair Value Measurements”.

The estimated fair value of available-for-sale marketable securities, classified by their contractual maturities was as follows (in thousands):

 

 

 

March 31, 2016

 

Due within one year

 

$

126,010

 

After one year through three years

 

 

 

Total

 

$

126,010

 

 

9


Changes in market interest rates and bond yields caused certain investments to fall below their cost basis, resulting in unrealized losses on marketable securities. As of March 31, 2016, we had unrealized losses of $5 thousand related to marketable securities that had a fair value of $29.8 million. As of December 31, 2015, we had unrealized losses of $0.1 million related to marketable securities that had a fair value of $199.1 million. None of these securities were in a material continuous unrealized loss position for more than 12 months.

As of March 31, 2016 and December 31, 2015, we did not consider any of our marketable securities to be other-than-temporarily impaired. When evaluating our investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer, our ability and intent to hold the security to maturity and whether it is more likely than not that we will be required to sell the investment before recovery of its cost basis.

 

 

3. Fair Value Measurements

Our financial instruments consist of cash equivalents, short-term marketable securities and accounts receivable. Accounts receivable, net is stated at its carrying value, which approximates fair value.

Cash equivalents and short-term marketable securities, consisting of money market funds, U.S. government and government agency debt securities and corporate debt securities, are carried at fair value, which is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between knowledgeable and willing market participants.

Our contingent consideration liability represents the estimated fair value of the additional consideration payable in connection with our acquisitions of Rising Tide Games, Inc. (“Rising Tide Games”) and Zindagi Games, Inc. (“Zindagi Games”). The amount payable is contingent upon the achievement of certain performance milestones. We estimated the acquisition date fair value of the contingent consideration payable using discounted cash flow models, and applied a discount rate that appropriately captured a market participant’s view of the risk associated with the obligations. The significant unobservable inputs used in the fair value measurement of the acquisition-related contingent consideration payable were forecasted future cash flows and the timing of those cash flows and the risk-adjusted discount rate. Significant changes in actual and forecasted future cash flows may result in significant charges or benefits to our future operating expenses.

In the third quarter of 2015, we acquired Rising Tide Games. Under the terms of the agreement, the contingent consideration may be payable based on the achievement of certain future performance targets during the three year period following the acquisition date. We initially estimated the acquisition date fair value of the contingent consideration payable using discounted cash flow models, and applied a risk-adjusted discount rate that appropriately captured a market participant’s view of the risk associated with the obligations. In the first quarter of 2016, we updated this analysis and recorded the change in estimated fair value of the contingent consideration liability as an expense of approximately $2.0 million within Research and Development in our consolidated statement of operations. The current contingent consideration liability is $20.5 million; however, the maximum contingent consideration that could be earned and payable by us is $140.0 million.

In the first quarter of 2016, we acquired Zindagi Games. Under the terms of the agreement, the contingent consideration may be payable based on the achievement of certain future performance targets during the three year period following the acquisition date. The current contingent consideration liability is $1.3 million, however, the maximum contingent consideration that could be earned and payable by us is $60.0 million.

Fair value is a market-based measurement that should be determined based on assumptions that knowledgeable and willing market participants would use in pricing an asset or liability. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. We use a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Includes inputs, other than Level 1 inputs, that are directly or indirectly observable in the marketplace.

Level 3 — Unobservable inputs that are supported by little or no market activity.

10


The composition of our financial assets and liabilities among the three Levels of the fair value hierarchy are as follows (in thousands):

 

 

 

March 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

533,675

 

 

$

 

 

$

 

 

$

533,675

 

U.S. government and government agency debt securities

 

 

 

 

 

68,014

 

 

 

 

 

 

68,014

 

Corporate debt securities (1)

 

 

 

 

 

124,956

 

 

 

 

 

 

124,956

 

Total

 

$

533,675

 

 

$

192,970

 

 

$

 

 

$

726,645

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

21,780

 

 

$

21,780

 

 

 

 

December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

362,587

 

 

$

 

 

$

 

 

$

362,587

 

U.S. government and government agency debt securities

 

 

 

 

 

184,975

 

 

 

 

 

 

184,975

 

Corporate debt securities (1)

 

 

 

 

 

277,193

 

 

 

 

 

 

277,193

 

Total

 

$

362,587

 

 

$

462,168

 

 

$

 

 

$

824,755

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

18,490

 

 

$

18,490

 

 

(1)

Includes amounts classified as cash and cash equivalents.

 

The following table presents the activity for the three months ended March 31, 2016 related to our Level 3 liabilities:

 

Level 3 Liabilities:

 

Rising Tide Games

 

Zindagi Games

 

Total

 

Contingent consideration –  December 31, 2015

 

$

18,490

 

$

 

$

18,490

 

Additions

 

 

 

 

1,260

 

 

1,260

 

Fair value adjustments

 

 

2,030

 

 

 

 

2,030

 

Contingent consideration –  March 31, 2016

 

$

20,520

 

$

1,260

 

$

21,780

 

 

 

4. Property and Equipment

Property and equipment consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Computer equipment

 

$

36,851

 

 

$

36,373

 

Software

 

 

31,588

 

 

 

30,950

 

Land

 

 

89,130

 

 

 

89,130

 

Building

 

 

195,751

 

 

 

195,372

 

Furniture and fixtures

 

 

10,361

 

 

 

10,348

 

Leasehold improvements

 

 

7,670

 

 

 

7,748

 

 

 

$

371,351

 

 

$

369,921

 

Less accumulated depreciation

 

 

(99,761

)

 

 

(96,700

)

Total property and equipment, net

 

$

271,590

 

 

$

273,221

 

 

During the fourth quarter of 2015, we completed the exit of one of our data centers in Santa Clara, and initiated the sale of certain computer data center equipment, resulting in the assets meeting held for sale criteria. Accordingly, these assets were written down to their fair value and reclassified from property and equipment to other current assets, with $83.9 million and $80.7 million being reclassified from computer equipment and accumulated depreciation respectively, for a net amount of $3.2 million. The $3.2 million reflects the fair value of the assets less estimated costs to sell. During the first quarter of 2016, $0.4 million of the assets meeting held for sale criteria were sold.

 

11


 

5. Acquisitions

On January 1, 2016, we acquired Zindagi Games, a provider of social games, for purchase consideration of approximately $13.8 million, which consisted of cash paid of $12.5 million (net of prepaid compensation expense of $2.5 million) and contingent consideration with a fair value of $1.3 million. The contingent consideration may be payable based on the achievement of certain future performance targets during the three year period following the acquisition date and could be up to $60.0 million. We will record changes in the fair value of contingent consideration liabilities within operating expenses in our consolidated statement of operations each future reporting period.

For further details on our fair value methodology with respect to contingent consideration liabilities, see Note 3 – “Fair Value Measurements”.

The following table summarizes the purchase date fair value of net tangible and intangible assets acquired from Zindagi Games (in thousands, unaudited):

 

 

 

Total

 

Developed technology, useful life of 3 years

 

$

3,257

 

Goodwill

 

 

10,503

 

Total

 

$

13,760

 

 

Goodwill, which is deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, and is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.

 

 

 

6. Goodwill and Other Intangible Assets

Changes in the carrying value of goodwill from December 31, 2015 to March 31, 2016 are as follows (in thousands):

 

Goodwill –  December 31, 2015

 

$

657,671

 

Additions

 

 

10,503

 

Foreign currency translation adjustments (1)

 

 

(15,738

)

Goodwill –  March 31, 2016

 

$

652,436

 

 

(1)

The decrease is related to translation losses on goodwill associated with the acquisition of NaturalMotion denominated in British Pounds.

The details of our acquisition-related intangible assets as of March 31, 2016 are as follows (in thousands):

 

 

 

March 31, 2016

 

 

 

Gross Carrying

Value

 

 

Accumulated Amortization

 

 

Net Book Value

 

Developed technology

 

$

175,549

 

 

$

(124,742

)

 

$

50,807

 

Trademarks, branding and domain names

 

 

16,290

 

 

 

(9,483

)

 

 

6,807

 

Acquired lease intangibles

 

 

5,708

 

 

 

(4,916

)

 

 

792

 

Total

 

$

197,547

 

 

$

(139,141

)

 

$

58,406

 

 

The details of our acquisition-related intangible assets as of December 31, 2015 are as follows (in thousands):

 

 

 

December 31, 2015

 

 

 

Gross Carrying Value

 

 

Accumulated Amortization

 

 

Net Book Value

 

Developed technology

 

$

174,970

 

 

$

(118,940

)

 

$

56,030

 

Trademarks, branding and domain names

 

 

16,290

 

 

 

(9,210

)

 

 

7,080

 

Acquired lease intangibles

 

 

5,708

 

 

 

(4,802

)

 

 

906

 

Total

 

$

196,968

 

 

$

(132,952

)

 

$

64,016

 

 

12


These assets were, and continue to be, amortized on a straight-line basis.

 

As of March 31, 2016, future amortization expense related to the intangible assets is expected to be recognized as shown below (in thousands):

 

Year ending December 31:

 

 

 

 

2016

 

$

21,616

 

2017

 

 

12,071

 

2018

 

 

8,638

 

2019 and thereafter

 

 

9,962

 

Total

 

$

52,287

 

 

 

 

7. Income Taxes

The expense from income taxes increased by $0.9 million in the three months ended March 31, 2016 as compared to the same period of the prior year. This increase was primarily attributable to an increase in foreign tax expense of $0.9 million related to a change in our jurisdictional mix of earnings and uncertain tax positions.

Once the Company is profitable, we expect our global effective tax rate to be less than the U.S. statutory income tax rate.

 

 

8. Other Current Liabilities

Other current liabilities consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Accrued accounts payable

 

$

21,315

 

 

$

31,700

 

Accrued compensation liability

 

 

11,458

 

 

 

16,278

 

Accrued restructuring liability

 

 

9,167

 

 

 

9,859

 

Other current liabilities

 

 

19,167

 

 

 

19,854

 

Total other current liabilities

 

$

61,107

 

 

$

77,691

 

 

Accrued compensation liability represents employee bonus and other payroll withholding expenses. Accrued restructuring liability represents amounts payable related to our restructuring plans. Other current liabilities include various expenses that we accrue for transaction taxes, customer deposits and accrued vendor expenses.

 

9. Restructuring

During the three months ended March 31, 2016, we recorded total restructuring charges of $0.5 million which were classified within our consolidated statement of operations as follows: Research and Development $0.1 million and General and Administrative $0.4 million.

Q2 2015 Restructuring Plan

During the three months ended June 30, 2015, our board of directors authorized, and we implemented a restructuring plan that included a reduction in work force as part of the overall plan to reduce the Company’s long term cost structure. As a result of ongoing initiatives associated with restructuring, we recorded a charge of $0.5 million in three months ended March 31, 2016, which is included in operating expenses in our consolidated statement of operations and comprised of lease and contract termination costs. The remaining liability related to our Q2 2015 restructuring plan as of March 31, 2016 was $25.1 million and is expected to be paid out over the next 6.2 years.

13


The following table presents the activity for the three months ended March 31, 2016 related to the Q2 2015 restructuring plan (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2016

 

Restructuring liability - beginning of period

 

$

26,406

 

Restructuring expense and adjustments

 

 

456

 

Cash payments

 

 

(1,773

)

Restructuring liability (Q2 2015 Plan) - end of period

 

$

25,089

 

 

Q1 2014 Restructuring Plan

The following table presents the activity for the three months ended March 31, 2016 related to the Q1 2014 restructuring plan (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2016

 

Restructuring liability - beginning of period

 

$

2,290

 

Restructuring expense and adjustments

 

 

16

 

Cash payments

 

 

(781

)

Restructuring liability (Q1 2014 Plan) - end of period

 

$

1,525

 

 

The remaining liability of $1.5 million is expected to be paid out in 2016.

Other Plans

The following table presents the activity for the three months ended March 31, 2016 related to all other remaining historical restructuring plans from prior years (in thousands):

 

 

 

Three Months Ended

 

 

 

 

March 31, 2016

 

 

Restructuring liability - beginning of period

 

$

332

 

 

Restructuring expense and adjustments

 

 

(10

)

 

Cash payments

 

 

(404

)

 

Restructuring liability (2013 Plan) - end of period

 

$

(82

)

(1)

 

The remaining liability of $0.1 million, offset by sublease income receivable of $0.2 million, is expected to be paid out over the next 1.6 years. The sublease income is expected to be received in the second quarter of 2016.

 

(1)

The remaining liability is a net receivable due to the timing of sublease income for restructured data center space in Virginia.

 

 

10. Stockholders’ Equity

We recorded stock-based expense related to grants of employee and consultant stock options, restricted stock and restricted stock units (“ZSUs”) in our consolidated statements of operations as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Cost of revenue

 

$

649

 

 

$

1,072

 

Research and development

 

 

24,203

 

 

 

28,317

 

Sales and marketing

 

 

1,991

 

 

 

1,519

 

General and administrative

 

 

2,765

 

 

 

10,554

 

Total stock-based expense

 

$

29,608

 

 

$

41,462

 

 

14


The following table shows stock option activity for the three months ended March 31, 2016 (in thousands, except weighted-average exercise price and weighted-average contractual term):

 

 

 

Outstanding Options

 

 

 

 

 

 

 

Weighted-

 

 

Aggregate

 

 

Weighted-

 

 

 

 

 

 

 

Average

 

 

Intrinsic Value of

 

 

Average

 

 

 

 

 

 

 

Exercise

 

 

Stock Options

 

 

Contractual Term

 

 

 

Stock Options

 

 

Price

 

 

Outstanding

 

 

(in years)

 

Balance as of December 31, 2015

 

 

23,215

 

 

$

1.93

 

 

$

35,949

 

 

 

5.36

 

Granted

 

 

5,000

 

 

 

2.28

 

 

 

 

 

 

 

 

 

Forfeited and cancelled

 

 

(1,592

)

 

 

2.60

 

 

 

 

 

 

 

 

 

Exercised

 

 

(1,634

)

 

 

0.18

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2016

 

 

24,989

 

 

$

2.07

 

 

$

26,166

 

 

 

5.92

 

 

The following table shows a summary of ZSU activity for the three months ended March 31, 2016 (in thousands, except weighted-average grant date fair value):

 

 

 

Outstanding ZSUs

 

 

 

 

 

 

 

Weighted-

 

 

Aggregate

 

 

 

 

 

 

 

Average Grant Date

 

 

Intrinsic Value of