We have identified the following risks and uncertainties that may have
a material adverse effect on our business, financial condition or results of operations. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are not material may also
significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our Class A common stock could decline due to any of these risks, and you may lose all or part of your investment. In
assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our consolidated financial statements and related notes.
We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks
described in our Quarterly Report on Form 10-Q for the quarter-ended March 31, 2014.
Risks Related to Our Business and Industry
If our distribution channels or platform providers change their standard terms and conditions for developers in a way that is detrimental to us, our
business will suffer.*
Facebook is currently the largest distribution, marketing, promotion and payment platform for our games. To
date, we have derived a significant portion of our bookings (45% in the six months ended June 30, 2014) and revenue (59% in the six months ended June 30, 2014) and acquired a significant number of our players through Facebook. Except for
certain limited addenda, we are subject to Facebooks standard terms and conditions for application developers, which govern the promotion, distribution between us and Facebook and operation of games and other applications on the Facebook
platform, and which are subject to change by Facebook at its sole discretion at any time. If Facebook changes its standard terms and conditions in a way that is detrimental to us, our business would be harmed and our operating results would be
adversely affected.
Our business may be harmed if:
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Facebook discontinues or limits our access to its platform;
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Facebook terminates or seeks to terminate our contractual relationship altogether;
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Facebook prohibits us from offering our games on the Facebook platform because it determines that we are a competitor or for other reasons;
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Facebook modifies its terms of service or other policies, including fees charged to, or other restrictions on, us, other application developers, or Facebook changes how the personal information of its users is made
available to application developers on the Facebook platform or shared by users;
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Facebook establishes more favorable relationships with one or more of our competitors; or
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Facebook develops or acquires its own competitive offerings.
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In addition, we have benefited
from Facebooks strong brand recognition and large user base. If Facebook loses its market position or otherwise falls out of favor with Internet users or other factors cause its user base to stop growing or to shrink, we would need to identify
alternative channels for marketing, promoting and distributing our games, which would consume substantial resources and may not be effective, or available at all.
Facebook has broad discretion to change its terms of service and other policies with respect to us and other developers, and those changes may
be unfavorable to us. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform, alter how we are able to advertise on the Facebook platform, change how the personal information of its users is
made available to application developers on the Facebook platform or restrict how Facebook users can share information with friends on their platform or across platforms other than Facebook. For instance, beginning in early 2010, Facebook changed
its policies for application developers regarding use of its communication channels. These changes limited the level of communication among users about applications on the Facebook platform. As a result, the number of our players on Facebook
declined. Although our current agreements with Facebook allow our users to use Zynga-branded game cards in our games on Facebook until all such existing game cards are sold, our future bookings and revenue may be negatively impacted during this
transition period and upon the expiration of our game card program. Any such changes in the future could significantly alter how players experience or interact within our games, which may harm our business.
Our social games also leverage the global connectivity and distribution of mobile platforms including Apples App Store for iOS devices
and the Google Play App Store for Android devices. We are subject to the terms of service of these third party platforms,
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which could be changed by such platform providers at any time. Such changes may decrease the visibility or availability of our games, limit our distribution capabilities, prevent access to our
existing games, reduce the amount of revenue we may recognize from in-game purchases, or result in the exclusion of our games on such third party platforms. Any such changes could significantly harm our business in both the short-term and long-term.
Our revenue, bookings and operating margins may decline.
The industry in which we operate is highly competitive and rapidly changing, and relies heavily on successful new product launches and
compelling content, products and services. As such, if we fail to deliver such content, products and services or do not execute our strategy successfully, our revenue and bookings may decline. In addition, we believe that our operating margin will
continue to experience downward pressure as a result of increasing competition. We expect to continue to expend substantial financial and other resources on game development, including mobile games, the expansion of our network, international
expansion and our network infrastructure. Our operating costs will increase and our operating margins may decline if we do not effectively manage costs. In addition, weak economic conditions or other factors could cause our business to contract,
requiring us to implement significant additional cost cutting measures, including a decrease in research and development, which could harm our long-term prospects.
Our quarterly operating results are volatile and difficult to predict, and our stock price may decline if we fail to meet the expectations of securities
analysts or investors.
Our bookings, revenue, player traffic and operating results could vary significantly from
quarter-to-quarter and year-to-year and may fail to match our past performance or the expectations of securities analysts or investors because of a variety of factors, some of which are outside of our control. Any of these events could cause the
market price of our Class A common stock to fluctuate. Factors that may contribute to the variability of our operating results include the risk factors listed in these Risk Factors and the factors discussed in the section titled
Managements Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting Our Performance.
In particular, we recognize revenue from the sale of our virtual goods in accordance with U.S. GAAP, which is complex and based on our
assumptions and historical data with respect to the sale and use of various types of virtual goods. In the event that such assumptions are revised based on new data or there are changes in the historical mix of virtual goods sold due to new
game introductions, reduced virtual good sales in existing games or other factors or there are changes in our estimates of average playing periods and player life, the amount of revenue that we recognize in any particular period may fluctuate
significantly. In addition, changes in the policies of Facebook, Apple or other third party platforms or accounting policies promulgated by the SEC and national accounting standards bodies affecting software and virtual goods revenue recognition
could further significantly affect the way we report revenue related to our products. For example, we recognize revenue net of the amounts retained by Facebook related to Facebook Credits and local-currency transactions sold to the players of our
games on Facebook under the terms of our agreement with Facebook. Such changes could have an adverse effect on our reported revenue, net income and earnings per share under U.S. GAAP. Additionally, NaturalMotion, a company we acquired in February
2014, reported its historical financial statements in accordance with U.K. GAAP, and we may have difficulty in reporting its financial results in accordance with our revenue recognition policies, which could have a negative effect on our reported
financial results. For further information regarding our revenue recognition policy, see the section titled Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting
PoliciesRevenue Recognition in this Quarterly Report on Form 10-Q.
It is difficult to predict when bookings from one of our
games will begin to decline, as well as the decay rate for any particular game. As a result of this decline in the life cycle of our games, our business depends on our ability to consistently and timely launch new games or versions of games that
achieve significant popularity and have the potential to become franchise games. If decay rates are higher than expected in a particular quarterly period and/or we experience delays in the launch of new games that we expect to offset these declines,
we may not meet our expectations or the expectations of securities analysts or investors for a given quarter.
In addition, we have made
in the past and we may make in the future, significant investments or changes in strategy that we think will benefit us in the long term, even if our decision negatively impacts our operating results in the short term. For example, in early 2013, we
decided to discontinue development of certain games that were originally expected to be released in and meaningfully contribute to bookings for the second quarter of 2013, in order to focus on games with the potential of becoming franchise games we
believe that can drive long-term enterprise value. Although these discontinued games may have offered short-term bookings, we determined that they did not contribute meaningfully to the brand and our strategy in the long term.
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Given the rapidly evolving social game industry in which we operate, our historical operating
results may not be useful in predicting our future operating results. In addition, metrics we have developed or those available from third parties regarding our industry and the performance of our games, including DAUs, MAUs, MUUs, MUPs and ABPU may
not be indicative of our financial performance.
Our business will suffer if we are unable to continue to develop successful games for mobile
platforms or successfully monetize mobile games we develop or acquire.
Developing games for mobile platforms is an important
component of our strategy. We have devoted and we expect to continue to devote substantial resources to the development of our mobile games, and we cannot guarantee that we will continue to develop games that appeal to players or advertisers. We may
encounter difficulty in integrating features on games developed for mobile platforms that a sufficient number of players will pay for or otherwise sufficiently monetizing mobile games. Generally, our mobile games monetize at a lower rate than our
web-based games and we may not be successful in our efforts to increase our monetization from mobile games. In addition, mobile games that we develop, or that companies we acquire are developing, may be delayed or may not meet our forecasts, which
may negatively affect our monetization strategy. If we are unable to implement successful monetization strategies for our mobile games, our ability to grow revenue and our financial performance will be negatively affected.
Our ability to successfully develop games for mobile platforms will depend on our ability to:
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effectively market new mobile and multi-platform games across multiple mobile devices to our existing web-based players and players of our current mobile games;
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execute our network strategy and expand our network to mobile;
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acquire players and market and advertise our games, effectively and without excess costs;
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anticipate and effectively respond to the growing number of players switching from web-based to mobile games, the changing mobile landscape and the interests of players on mobile platforms;
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attract, retain and motivate talented game designers, product managers and engineers who have experience developing games for mobile platforms;
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partner with mobile platforms and obtain featuring opportunities;
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minimize launch delays and cost overruns on the development of new games;
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expand on our current mobile games;
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effectively monetize mobile games without degrading the social game experience for our players;
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develop games that provide for a compelling and optimal user experience through existing and developing third party technologies, including third party software and middleware utilized by our players; and
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acquire and successfully integrate high quality mobile game assets, personnel or companies, including, but not limited to, our integration of NaturalMotion which we acquired in February 2014.
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These and other uncertainties make it difficult to know whether we will succeed in continuing to develop successful mobile games. If we do not
succeed in doing so, our business will suffer.
If our top games do not maintain their popularity, our results of operations could be
harmed.
In addition to creating new games that are attractive to a significant number of players, we must extend the life of our
existing games, in particular our most successful games. Traditionally, bookings from existing games decline over time. For a game to remain popular, we must constantly enhance, expand or upgrade the game with new features that players find
attractive. Such constant enhancement requires the investment of significant resources, particularly with older games, and such costs on average have increased. We may not be able to successfully enhance, expand or upgrade our current games. Any
reduction in the number of players of our most popular games, any decrease in the popularity of our games or social games in general, any breach of game-related security or prolonged server interruption, any loss of rights to any intellectual
property underlying such games, or any other adverse developments relating to our most popular games, could harm our results of operations.
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A small number of games have generated a majority of our revenue, and we must continue to launch, innovate
and enhance games that players like and attract and retain a significant number of players in order to grow our revenue and sustain our competitive position.*
Historically, we have depended on a small number of games for a majority of our revenue and we expect that this dependency will continue for
the foreseeable future. Bookings and revenue from many of our games tend to decline over time after reaching a peak of popularity and player usage. We often refer to the speed of this decline as the decay rate of a game. As a result of this natural
decline in the life cycle of our games, our business depends on our ability to consistently and timely launch new games across multiple platforms and devices that achieve significant popularity and have the potential to become franchise games. For
example, in April 2014 we launched a mobile version of
FarmVille 2
called
FarmVille 2: Country Escape
. While we are encouraged by its early performance, there is a risk that the game will not ultimately attract and retain a significant
number of players, monetize well or otherwise perform satisfactorily, which would lead to a negative effect on our business.
Each of our
games requires significant engineering, marketing and other resources to develop, launch and sustain via regular upgrades and expansions, and such costs on average have increased over the last several years. Our ability to successfully launch,
sustain and expand games and attract and retain players largely will depend on our ability to:
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anticipate and effectively respond to changing game player interests and preferences;
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anticipate or respond to changes in the competitive and technological landscape;
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attract, retain and motivate talented game designers, product managers and engineers;
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develop, sustain and expand games that our players find fun, interesting and compelling to play;
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develop games that can build upon or become franchise games;
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effectively market and advertise new games and enhancements to our existing players and new players;
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acquire players in a cost-effective manner;
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minimize the launch delays and cost overruns on new games and game expansions;
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minimize downtime and other technical difficulties; and
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acquire and integrate high quality assets, personnel and companies.
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It is difficult to
consistently anticipate player demand on a large scale, particularly as we develop games in new categories or new markets, including international markets and mobile platforms. If we do not successfully launch games that attract and retain a
significant number of players and extend the life of our existing games, our market share, brand and financial results will be harmed.
We operate
in a new and rapidly changing industry, which makes it difficult to evaluate our business and prospects.*
The social game
industry, through which we derive substantially all of our revenue, is a new and rapidly evolving industry. The growth of the social game industry and the level of demand and market acceptance of our games are subject to a high degree of
uncertainty. Our future operating results will depend on numerous factors affecting the social game industry, many of which are beyond our control, including:
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our ability to extend our brand and games to mobile platforms and the timing and success of such mobile game launches;
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continued worldwide growth in the adoption and use of Facebook and other social networks on which our platform relies;
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our ability to maintain the popularity of our games on Facebook;
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changes in consumer demographics and public tastes and preferences;
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the availability and popularity of other forms of entertainment;
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the worldwide growth of mobile devices, broadband Internet and personal computer users, and the rate of any such growth;
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the transition of our players from the web to mobile devices, and our ability to effectively monetize games on mobile devices and across multiple platforms and devices; and
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general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending.
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Our ability to plan for game development, distribution and promotional activities will be significantly affected by our ability to anticipate
and adapt to relatively rapid changes in the tastes and preferences of our current and potential players. New and different types of entertainment may increase in popularity at the expense of social games. A decline in the popularity of social games
in general, or our games in particular, would harm our business and prospects.
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Our acquisition of NaturalMotion is significant, and the anticipated benefits of the acquisition could be
impacted by a number of risks specific to NaturalMotions business, as well as by risks related to the integration process.
On February 11, 2014, we completed our acquisition of NaturalMotion. The process of integrating NaturalMotions operations into our
operations could result in unforeseen operating difficulties, absorb significant management attention, and require significant resources that would otherwise have been available for the ongoing development of our existing operations. Particular
significant risks and challenges include, but are not limited to:
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the potential lack of employee retention stemming from the acquisition;
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that NaturalMotions games may not succeed or perform as we anticipated;
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that NaturalMotions pipeline of future products under development may take longer than predicted to develop and launch or may fail to launch at all;
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the difficulty of integrating NaturalMotions tools and technology into our current and future mobile products; and
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the risk that the implementation of our existing models and mechanics fails to enhance NaturalMotions products.
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If we are unsuccessful in addressing these risks and challenges, our business and prospects would be harmed.
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Our business will suffer if we are unable to successfully acquire or integrate acquired companies into our business or otherwise manage the growth
associated with multiple acquisitions.
We have acquired businesses, personnel and technologies in the past and we intend to
continue to evaluate and pursue acquisitions and strategic investments. These acquisitions and strategic investments could be material to our financial condition or results of operations.
Challenges and risks from such investments and acquisitions include:
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negative effects on products and product pipeline from the changes and potential disruption that may follow the acquisition;
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diversion of our managements attention away from our business;
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declining employee morale and retention issues resulting from changes in compensation, or changes in management, reporting relationships, or future prospects;
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significant competition from other game companies as the social game industry consolidates;
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the need to integrate the operations, systems, technologies, products and personnel of each acquired company, the inefficiencies and lack of control that may result if such integration is delayed or not implemented, and
unforeseen difficulties and expenditures that may arise in connection with integration;
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the difficulty in determining the appropriate purchase price of acquired companies may lead to the overpayment from certain acquisitions and the potential impairment of intangible assets and goodwill acquired in the
acquisitions;
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the difficulty in successfully evaluating and utilizing the acquired products, technology or personnel;
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the potential incurrence of debt, contingent liabilities, amortization expenses or restructuring charges in connection with any acquisition;
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the need to implement controls, procedures and policies appropriate for a larger public company at companies that prior to acquisition had lacked such controls, procedures and policies;
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the difficulty in accurately forecasting and accounting for the financial impact of an acquisition transaction, including accounting charges and integrating and reporting results for acquired companies that do not
historically follow U.S. GAAP;
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risks associated with our expansion into new international markets and doing business internationally, including those described under the risk factor caption Expansion into international markets is important for
our strategy, and as we expand internationally, we will face additional business, political, regulatory, operational, financial and economic risks, any of which could increase our costs and hinder our efforts elsewhere in this Quarterly Report
on Form 10-Q;
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in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific
countries;
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in some cases, the need to transition operations and players onto our existing or new platforms and the potential loss of, or harm to, our relationships with employees, players and other suppliers as a result of
integration of new businesses;
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in certain instances, the ability to exert control of acquired businesses that include earnout provisions in the agreements relating to such acquisitions or the potential obligation to fund an earnout for a product that
has not met expectations;
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our dependence on the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives, when conducting due diligence and evaluating the results of such
due diligence; and
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liability for activities of the acquired company before the acquisition, including intellectual property and other litigation claims or disputes, information security vulnerabilities, violations of laws, rules and
regulations, commercial disputes, tax liabilities and other known and unknown liabilities.
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The benefits of an acquisition
or investment may also take considerable time to develop, and we cannot be certain that any particular acquisition or investment will produce the intended benefits, which could adversely affect our business and operating results. Our ability to grow
through future acquisitions will depend on the availability of suitable acquisition and investment candidates at an acceptable cost, our ability to compete effectively to attract these candidates and the availability of financing to complete larger
acquisitions. Acquisitions could result in potential dilutive issuances of equity securities, use of significant cash balances or incurrence of debt (and increased interest expense), contingent liabilities or amortization expenses related to
intangible assets or write-offs of goodwill and/or intangible assets, which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders. For example, in the third quarter of 2012, we made the
decision to discontinue the development of certain games associated with technology and other intangible assets previously acquired from OMGPOP and we recorded an asset impairment charge of $95.5 million. For more information, see Note 3
Fair Value Measurements in the notes to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Our prospects may suffer if our network is unsuccessful.
We aspire to expand our network to leverage our existing and new games to bring the best social playing experiences to our audience and further
broaden to other games to ultimately create the best experience for play that includes mobile and web players. If our network fails to engage players or attract advertisers, we may fail to generate sufficient revenue or bookings to justify our
investment in the development and operation of our network. We may also encounter technical and operational challenges operating a network.
We are subject to the terms of service of third party social networks and platforms such as Facebook, Apple and Google, where our games are
distributed, which may limit our ability to operate or promote our network. For example, under the current terms of service with Facebook, we are limited in our ability to use a Facebook users friends list and Facebooks communication channels
to promote our network. This may limit our ability to reach Facebook users from our network and may limit the number of players that use our network. In December 2012, Facebook amended its standard terms of service to prohibit (i) apps on the
Facebook canvas from promoting or linking to game sites other than Facebook and (ii) the use of emails obtained from Facebook to promote or link to desktop web games on platforms other than Facebook. We now are prohibited from cross-promoting
traffic to games that are offered on platforms other than Facebook from our games on Facebook. Moreover, we are no longer permitted to use e-mail addresses obtained from Facebook to promote desktop web games that are not on the Facebook platform,
subject to certain limited exceptions. If we are not successful in operating, growing and generating revenue from our network, we may not be able to maintain or grow our revenue as anticipated and our financial results could be adversely affected.
Some of our players may make sales or purchases of virtual goods used in our games through unauthorized or fraudulent third-party websites, which
may reduce our revenue.
Virtual goods in our games have no monetary value outside of our games. Nonetheless, some of our players
may make sales and/or purchases of our virtual goods, such as
Zynga Poker
virtual poker chips, through unauthorized third-party sellers in exchange for real currency. These unauthorized or fraudulent transactions are usually arranged on
third-party websites and the virtual goods offered may have been obtained through unauthorized means such as exploiting vulnerabilities in our games, from scamming our players with fake offers or virtual goods or other game benefits, or from credit
card fraud. We do not generate any revenue from these transactions. These unauthorized purchases and sales from third-party sellers could impede our revenue and profit growth by, among other things:
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decreasing revenue from authorized transactions;
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creating downward pressure on the prices we charge players for our virtual currency and virtual goods;
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increasing chargebacks from unauthorized credit card transactions;
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causing us to lose revenue from paying players as our partners increase their credit card fraud prevention efforts;
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causing us to lose revenue from paying players who stop playing a particular game;
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increasing costs we incur to develop technological measures to curtail unauthorized transactions;
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generating legal claims relating to the diminution of value of our virtual goods;
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result in negative publicity or harm our reputation with players and partners; and
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increasing customer support costs to respond to dissatisfied players.
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To discourage
unauthorized purchases and sales of our virtual goods, we state in our terms of service that the buying or selling of virtual currency and virtual goods from unauthorized third-party sellers may result in bans from our games or legal action. We have
banned players as a result of such activities. We have also filed lawsuits against third parties attempting to sell virtual goods from our games, particularly poker chips from
Zynga Poker
, outside of our games. We have also
employed technological measures to help detect unauthorized transactions and continue to develop additional methods and processes by which we can identify unauthorized transactions and block such transactions. However, there can be no assurance that
our efforts to prevent or minimize these unauthorized or fraudulent transactions will be successful.
Any failure or significant interruption in our
infrastructure could impact our operations and harm our business.
Our technology infrastructure is critical to the performance of
our games and to player satisfaction. Our games run on a complex distributed system, or what is commonly known as cloud computing. We own, operate and maintain the primary elements of this system, but some elements of this system are operated by
third parties that we do not control and which would require significant time to replace. We have experienced, and may in the future experience, website disruptions, outages and other performance problems due to a variety of factors, including
infrastructure changes, human or software errors and capacity constraints. For example, the operation of
CityVille
was interrupted for several hours in April 2011 and the operation of most of our games was interrupted for several hours in
January 2013, in each case due to network outages. If a particular game is unavailable when players attempt to access it or navigation through a game is slower than they expect, players may stop playing the game and may be less likely to return to
the game as often, if at all. A failure or significant interruption in our game service would harm our reputation and operations. We expect to continue to make significant investments to our technology infrastructure to maintain and improve all
aspects of player experience and game performance. To the extent we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate increasing traffic, our
business and operating results may suffer. We do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance. Furthermore, our disaster recovery systems may not function as intended or
may fail to adequately protect our critical business information in the event of a significant business interruption, which may cause interruption in service of our games, security breaches or the loss of data or functionality, leading to a negative
effect on our business.
Security breaches, computer viruses and computer hacking attacks could harm our business, reputation, brand and results of
operations.
Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry, have
occurred on our systems in the past and may occur on our systems in the future. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or
corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could harm our business, financial condition and operating results. We have experienced and will continue to experience hacking
attacks, including denial-of-service attacks. Because of our prominence in the social game industry, we believe we are a particularly attractive target for hackers.
In addition, our games involve the storage and transmission of players personal information in our facilities and on our equipment,
networks and corporate systems. Security breaches could expose us to litigation, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation and potential liability. Our player data and corporate systems and
security measures may be breached due to the actions of outside parties, employee error, malfeasance, a combination of these, or otherwise, and, as a result, an unauthorized party may obtain access to our data or our players data.
Additionally, outside parties may attempt to fraudulently induce employees or players to disclose sensitive information in order to gain access to our players data. We must continuously examine and modify our security controls and business
policies to address the use of new devices and technologies enabling players to share data and communicate in new ways, and the increasing focus by our players and regulators on controlling and protecting user data.
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Because the techniques used to obtain unauthorized access, disable or degrade service, or
sabotage systems change frequently or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative
measures. Though it is difficult to determine what harm may directly result from any specific interruption or breach, any failure to maintain performance, reliability, security and availability of our network infrastructure to the satisfaction of
our players may harm our reputation and our ability to retain existing players and attract new players.
If an actual or perceived breach
of our security occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose players, and we could suffer financial exposure due to such events or in connection with remediation efforts, investigation
costs, changed security, and system protection measures.
The value of our virtual goods is highly dependent on how we manage the economies in our
games. If we fail to manage our game economies properly, our business may suffer.
Paying players purchase virtual goods in our
games because of the perceived value of these goods which is dependent on the relative ease of securing an equivalent good via non-paid means within the game. The perceived value of these virtual goods can be impacted by Facebooks offering of
free or discounted Facebook Credits, local currency-based payments, and/or other incentives to our players, or by various actions that we take in the games including offering discounts for virtual goods, giving away virtual goods in promotions or
providing easier non-paid means to secure these goods. If we fail to manage our virtual economies properly, players may be less likely to purchase virtual goods and our business may suffer.
We rely on a small portion of our total players for nearly all of our revenue.*
Compared to all players who play our games in any period, only a small portion are paying players. During the three months ended June 30,
2014, we had approximately 1.7 million MUPs (excluding payers who use certain payment methods for which unique payer data is not available), who represent approximately two percent of our total players. We lose players in the ordinary course of
business. In order to sustain our revenue levels, we must attract, retain and increase the number of players or more effectively monetize our players. To retain players, we must devote significant resources so that the games they play retain their
interest and attract them to our other games. If we fail to grow or sustain the number of our players, or if the rates at which we attract and retain players declines or if the average amount our players pay declines, our business may not grow and
our financial results will suffer.
Any restructuring actions and cost reduction initiatives that we undertake may not deliver the expected results
and these actions may adversely affect our business.
In 2013 and in early 2014, we implemented certain restructuring actions and
cost reduction initiatives to better align our operating expenses with our revenue, including reducing our headcount, rationalizing our product pipeline, reducing marketing and technology expenditures and consolidating and closing certain
facilities, and we plan to continue to manage costs to better and more efficiently manage our business. This most recent restructuring plan and other such efforts could result in disruptions to our operations and adversely affect our business.
To effectively manage our business and operations, we will need to continue to focus on spending significant resources to improve our
technology infrastructure, our operational, financial and management controls, and our reporting systems and procedures by, among other things:
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monitoring and updating our technology infrastructure to maintain high performance and minimize down time;
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enhancing information and communication systems to ensure that our employees and offices around the world are well-coordinated and can effectively communicate with each other; and
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enhancing our internal controls to ensure timely and accurate reporting of all of our operations.
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These enhancements and improvements will require capital expenditures and allocation of valuable management and employee resources.
We expect to continue to actively monitor our costs, however, if we do not fully realize or maintain the anticipated benefits of any
restructuring actions and cost reduction initiatives, our business could be adversely affected. In addition, we cannot be sure that the cost reduction initiatives will be as successful in reducing our overall expenses as expected or that additional
costs will not offset any such reductions. If our operating costs are higher than we expect or if we do not maintain adequate control of our costs and expenses, our operating results will suffer.
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If we fail to effectively manage our human resources, our business may suffer.
Our ability to compete and grow depends in large part on the efforts and talents of our employees. Such employees, particularly game designers,
product managers, engineers and executives are in high demand, and we devote significant resources to identifying, recruiting, hiring, training, successfully integrating and retaining these employees. We have experienced significant turnover in our
headcount over the last year, including within our senior management team, which has placed and will continue to place significant demands on our management and our operational, financial and technological infrastructure. As of June 30, 2014,
approximately 35% of our employees had been with us for less than one year and approximately 54% for less than two years. Each of our executive officers joined us or was appointed to his respective role in the past 12 months.
We believe that two critical components of our success and our ability to retain our best people are our culture and our competitive
compensation practices. As we continue to develop the infrastructure of a public company, we may find it difficult to maintain our entrepreneurial, execution-focused culture. In addition, our recent operating results, the decline in our revenue and
the current trading price of our Class A common stock may cause our employee base to be more vulnerable to be targeted for recruitment by competitors. Some of our employees may have been motivated to work for us by an expectation that our
Class A common stock would be trading at a higher value and may be less motivated by the equity compensation they receive as a result. Competitors may leverage any resulting disappointment as a tool to recruit talented employees.
We have historically hired a number of key personnel through acquisitions, and as competition with other game companies for attractive target
companies with a skilled employee base increases, we may incur significant expenses in continuing this practice. In addition, our recent operating results, the decline in our revenue and the current trading price of our Class A common stock may
negatively impact our perceived reputation and make it more difficult and more expensive to recruit new employees. The loss of talented employees or the inability to hire skilled employees as replacements could result in significant disruptions to
our business, and the integration of replacement personnel could be time-consuming and expensive and cause additional disruptions to our business. If we do not succeed in recruiting, retaining, and motivating our key employees to achieve a high
level of success or if we do not attract new key personnel, we may be unable to (i) continue to launch new games and enhance existing games, including in each case on mobile, (ii) expand our network, or (iii) execute our business
strategy, and as a result, our business may suffer.
Our core values of focusing on our players first and acting for the long term may conflict with
the short-term interests of our business.
One of our core values is to focus on surprising and delighting our players, which we
believe is essential to our success and serves the best, long-term interests of Zynga and our stockholders. Therefore, we have made in the past and we may make in the future, significant investments or changes in strategy that we think will benefit
us in the long term, even if our decision negatively impacts our operating results in the short term. For example, in early 2013, we decided to discontinue development of certain games that were originally expected to be released in, and then
meaningfully contribute to bookings for, the second quarter of 2013, in order to focus on games with the potential of becoming franchise games that drive long-term enterprise value. Although these discontinued games may have offered short-term
bookings, we determined that they did not contribute meaningfully to the brand and our strategy in the long-term. This decision to discontinue certain games could negatively impact our operating results in the short term. Our decisions may not
result in the long-term benefits that we expect, in which case the success of our games, business and operating results could be harmed.
If we lose
the services of our Chief Executive Officer or other members of our senior management team, we may not be able to execute our business strategy.
Our success depends in a large part upon the continued service of our senior management team. In particular, our Chief Executive Officer, Don
Mattrick, is critical to our vision, strategic direction, culture, products and technology. We do not maintain key-man insurance for Mr. Mattrick or any other member of our senior management team. The loss of our Chief Executive Officer or
other members of senior management could harm our business.
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An increasing number of individuals are utilizing devices other than personal computers to access the
Internet, and versions of our games developed for these devices might not gain widespread adoption, or may not function as intended.
The number of individuals who access the Internet through devices other than a personal computer, such as smart phones, tablets, televisions
and set-top box devices, has increased dramatically, and we believe this trend is likely to continue. Certain of our games or versions of our games may not be compelling to players on such devices. In addition, each device manufacturer or platform
provider may establish unique or restrictive terms and conditions for developers on such devices or platforms, and our games may not work well or be viewable on these devices as a result. To expand our business, we will need to support a number of
alternative devices and technologies. Once developed, we may choose to port or convert a game into separate versions for alternative devices with different technological requirements. As new devices and new mobile platforms or updates to platforms
are continually being released, we may encounter problems in developing versions of our games for use on these alternative devices and we may need to devote significant resources to the creation, support and maintenance of such devices and
platforms. If we are unable to successfully expand the platforms and devices on which our games are available, or if the versions of our games that we create for alternative platforms and devices are not compelling to our players, our business will
suffer.
We have a new business model and a short operating history, which make it difficult to evaluate our prospects and future financial results
and may increase the risk that we will not be successful.
We began operations in April 2007, and became publicly listed in
December 2011, and we have a short operating history and a new business model, which make it difficult to effectively assess our future prospects. Our business model is based on offering games that are free to play. To date, only a small portion of
our players pay for our products. We cannot assure that any of our efforts will be successful or result in the development or timely launch of additional products, or ultimately produce any material revenue.
We may choose to exit the real money gaming market completely to focus on our core business and, if we elect to participate in this market, our efforts
may not be successful.
In October 2012, we entered into an agreement with Bwin.Party Digital Entertainment plc
(bwin.party) to develop, test and operate certain real money online poker and casino games in the United Kingdom. In the second quarter of 2013, we launched our first real money gaming (RMG) offerings,
ZyngaPlusPoker
and
ZyngaPlusCasino
, in the United Kingdom in connection with this agreement. We are evaluating our RMG products in the United Kingdom to determine whether or not they are on strategy and aligned with our near term market opportunities and
priorities. We may decide these products and participation in regulated markets globally is consistent with near term market opportunities and priorities or we may decide to exit the market. We cannot provide assurance that our RMG products, or any
products or partnerships we may launch in the future will be successful, or ultimately produce any material revenue.
In 2013, we decided
to withdraw our application from the Nevada Gaming Control Board and made the focused choice not to pursue a license for real money gaming in other U.S. jurisdictions at this time in order to focus our resources and priorities on what we believe is
our biggest opportunity, free to play social games. Our decision may not result in the long-term benefits that we expect, in which case the success of our business and operating results could be harmed. In connection with our decision to refocus on
our core free to play business, we are evaluating our participation in global RMG markets. If we elect to participate in global regulated markets, gaming laws may require us, each of our subsidiaries engaged in gaming operations, certain of our
directors, officers and employees, and in some cases, our stockholders, to obtain licenses or findings of suitability from gaming authorities. Gaming authorities have very broad discretion in determining whether an applicant qualifies for a license
or should be deemed suitable. If we are required to obtain a license to participate in a global RMG market, we cannot provide assurance that we will be able to obtain a license in a timely fashion or that we will be able to obtain a license at all.
In addition, regulatory and legislative developments, including excessive taxation, may prevent or significantly limit our ability, or
the ability of any entity with which we may partner in the future, to enter into or succeed in RMG. Becoming familiar with and complying with these requirements will increase our costs and subject our business to greater scrutiny by regulators in
many different jurisdictions. If our brand becomes associated with RMG we may lose current players, advertisers or partners or have difficulty attracting new players, advertisers or partners, which could adversely impact our business.
In addition, if we or our partners operate our RMG games in a negative manner, if players are less satisfied than expected with the games
provided or if we or our partners fail to comply with regulatory requirements, our reputation could be adversely affected and we may not realize the anticipated benefits of this line of business or we may lose players and we may curtail our efforts
in the RMG market.
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Expansion into international markets is important for our strategy, and as we expand internationally, we
will face additional business, political, regulatory, operational, financial and economic risks, any of which could increase our costs and hinder our efforts.
Continuing to expand our business to attract players in countries other than the United States is a critical element of our business strategy.
An important part of targeting international markets is developing offerings that are localized and customized for the players in those markets. We have a limited operating history as a company outside of the United States. We expect to continue to
devote significant resources to international expansion through acquisitions, the establishment of additional offices and development studios, and increasing our foreign language offerings. For example, in February 2014, we completed the acquisition
of NaturalMotion, a company domiciled in the United Kingdom. Our ability to expand our business and to attract talented employees and players in an increasing number of international markets will require considerable management attention and
resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures.
We have experienced difficulties in the past and have not been successful in all the countries we have entered. We may not be able to offer our games in certain countries. Expanding our international focus may subject us to risks that we have not
faced before or increase risks that we currently face, including risks associated with:
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recruiting and retaining talented and capable management and employees in foreign countries;
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challenges caused by distance, language and cultural differences;
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developing and customizing games and other offerings that appeal to the tastes and preferences of players in international markets;
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competition from local game makers with intellectual property rights and significant market share in those markets and with a better understanding of player preferences;
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utilizing, protecting and enforcing our intellectual property rights;
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negotiating agreements with local distribution platforms that are sufficiently economically beneficial to us and protective of our rights;
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the inability to extend proprietary rights in our brand, content or technology into new jurisdictions;
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implementing alternative payment methods for virtual goods in a manner that complies with local laws and practices and protects us from fraud;
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compliance with applicable foreign laws and regulations, including privacy laws and laws relating to content;
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compliance with anti-bribery laws including without limitation, compliance with the Foreign Corrupt Practices Act;
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credit risk and higher levels of payment fraud;
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currency exchange rate fluctuations;
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protectionist laws and business practices that favor local businesses in some countries;
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double taxation of our international earnings and potentially adverse tax consequences due to changes in the tax laws of the United States or the foreign jurisdictions in which we operate;
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foreign exchange controls or U.S. tax restrictions that might restrict or prevent us from repatriating income earned in countries outside the United States;
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political, economic and social instability;
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higher costs associated with doing business internationally;
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export or import regulations; and
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trade and tariff restrictions.
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Entering new international markets will be expensive, our
ability to successfully gain market acceptance in any particular market is uncertain, and the distraction of our senior management team could harm our business.
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Competition within the broader entertainment industry is intense and our existing and potential players may
be attracted to competing forms of entertainment such as offline and traditional online games, television, movies and sports, as well as other entertainment options on the Internet.
Our players face a vast array of entertainment choices. Other forms of entertainment, such as offline, traditional online, personal computer
and console games, television, movies, sports, RMG and the Internet, are much larger and more well-established markets and may be perceived by our players to offer greater variety, affordability, interactivity and enjoyment. These other forms of
entertainment compete for the discretionary time and income of our players. If we are unable to sustain sufficient interest in our games in comparison to other forms of entertainment, including new forms of entertainment, our business model may no
longer be viable.
Competition in our industry is intense.
Our industry is highly competitive and we expect more companies to enter the sector and a wider range of social games to be introduced. Our
competitors that develop games for networks, on both web and mobile, vary in size and include companies such as DeNA Co. Ltd. (Japan), Electronic Arts Inc., Gameloft SA, GREE International, Inc., Glu Mobile Inc., King.com Inc., Rovio Mobile Ltd.,
Supercell Inc., GungHo Online Entertainment, Inc., Kabam and The Walt Disney Company. In addition, online game developers and distributors who are primarily focused on specific international markets, such as Tencent Holdings Limited in Asia, and
high-profile companies with significant online presences that to date have not developed social games, such as Facebook, Apple Inc., Google Inc. and Microsoft Corporation, may decide to develop social games. Some of these current and potential
competitors have significant resources for developing or acquiring additional games, may be able to incorporate their own strong brands and assets into their games, have a more diversified set of revenue sources than we do and may be less severely
affected by changes in consumer preferences, regulations or other developments that may impact our industry. In addition, we have limited experience in developing games for mobile and other platforms and our ability to succeed on those platforms is
uncertain. We expect new game competitors to enter the market and existing competitors to allocate more resources to develop and market competing games and applications.
Our revenue may be harmed by the proliferation of cheating programs and scam offers that seek to exploit our games and players affects the
game-playing experience and may lead players to stop playing our games.
Unrelated third parties have developed, and may continue
to develop, cheating programs that enable players to exploit vulnerabilities in our games, play them in an automated way or obtain unfair advantages over other players who do play fairly. These programs harm the experience of players who
play fairly and may disrupt the virtual economies of our games. In addition, unrelated third parties attempt to scam our players with fake offers for virtual goods or other game benefits. We devote significant resources to discover and disable these
programs and activities, and if we are unable to do so quickly our operations may be disrupted, our reputation damaged and players may stop playing our games. This may lead to lost revenue from paying players, increased cost of developing
technological measures to combat these programs and activities, legal claims relating to the diminution in value of our virtual currency and goods, and increased customer service costs needed to respond to dissatisfied players.
We may be required to record impairment related to our goodwill, intangible assets or other long-lived assets if our market capitalization declines
below our net asset value or if our financial performance and/or condition deteriorates.*
As of June 30, 2014, we had $1.12
billion of goodwill, intangible assets and other long-lived assets. Our February 2014 acquisition of NaturalMotion increased our reported goodwill and intangible assets. If our market capitalization declines below our net asset value or if our
financial performance and/or condition deteriorates, we may have to impair our goodwill, intangible assets or other long-lived assets, which could adversely impact our results of operations and financial position. For example, in the third quarter
of 2012, we made the decision to discontinue the development of certain games associated with technology and other intangible assets previously acquired from OMGPOP, Inc. and we recorded an asset impairment charge of $95.5 million. In addition, in
the third quarter of 2013 we recorded an intangible asset impairment charge of $10.2 million related to various prior acquisitions. For more information, see Note 6 Goodwill and Other Intangible Assets in the notes to the
consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Failure to protect or enforce our intellectual property
rights or the costs involved in such enforcement could harm our business and operating results.
We regard the protection of our
trade secrets, copyrights, trademarks, service marks, trade dress, domain names, patents, and other product rights as critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights,
as well as contractual restrictions. We enter into confidentiality and invention assignment agreements with our
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employees and contractors and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However,
these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.
We pursue the registration of our domain names, copyrights, trademarks, service marks, and patents in the United States and in certain
locations outside the United States. We are seeking to protect our trademarks, service marks, copyrights, patents and domain names in multiple jurisdictions, a process that is expensive and time-consuming and may not be successful or which we may
not pursue in every location. We may, over time, increase our investment in protecting our innovations through increased patent filings that are expensive and time-consuming and may not result in issued patents that can be effectively enforced. The
Leahy-Smith America Invents Act (the Leahy-Smith Act) was adopted in September 2011. The Leahy-Smith Act includes a number of significant changes to United States patent law, including provisions that affect the way patent
applications will be prosecuted, which could be detrimental to investors, and may also affect patent litigation. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of our issued patents, all of which could harm our business.
Litigation may be necessary to
enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs,
adverse publicity or diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating
results may be harmed.
We are, and may in the future be, subject to intellectual property disputes, which are costly to defend and could require us
to pay significant damages and could limit our ability to use certain technologies in the future.
From time to time, we have
faced, and we expect to face in the future, allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including from our competitors, non-practicing entities and former employers
of our personnel. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict. As the result of any court judgment or settlement we may be obligated to cancel the launch of a new game,
stop offering a game or certain features of a game, pay royalties or significant settlement costs, purchase licenses or modify our games and features, or develop substitutes.
In addition, we use open source software in our games and expect to continue to use open source software in the future. From time to time, we
may face claims from companies that incorporate open source software into their products, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or
otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our
games, any of which would have a negative effect on our business and operating results.
We are involved in legal proceedings that may result in
adverse outcomes.
We may be involved in claims, suits, government investigations, and proceedings arising in the ordinary course
of our business, including actions with respect to intellectual property claims, privacy, data protection or law enforcement matters, tax matters, labor and employment claims, commercial claims, as well as stockholder derivative actions, class
action lawsuits, and other matters. Such claims, suits, government investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, such legal proceedings can have an adverse
impact on us because of legal costs, diversion of management and other personnel, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in liability, penalties, or sanctions, as well as
judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business practices, products or technologies, which could in the future materially and adversely
affect our business, operating results, and financial condition. See the section titled Legal Matters included in Note 12 Commitments and Contingencies in the notes to the consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q.
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Programming errors or flaws in our games could harm our reputation or decrease market acceptance of our
games, which would harm our operating results.
Our games may contain errors, bugs, flaws or corrupted data, and these defects may
only become apparent after their launch, particularly as we launch new games and rapidly release new features to existing games under tight time constraints. We believe that if our players have a negative experience with our games, they may be less
inclined to continue or resume playing our games or recommend our games to other potential players. Undetected programming errors, game vulnerabilities that may be exploited by cheating programs and other forms of misappropriation, game defects and
data corruption can disrupt our operations, adversely affect the game experience of our players by allowing players to gain unfair advantage, misappropriate virtual goods, harm our reputation, cause our players to stop playing our games, divert our
resources and delay market acceptance of our games, any of which could result in legal liability to us or harm our operating results.
Evolving
regulations, industry standards and practices by platform providers concerning data privacy could prevent us from providing our games to our players, or require us to modify our games, thereby harming our business.
The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices
regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet and mobile platforms are under increased public scrutiny, and civil claims alleging liability for the breach of data
privacy have been asserted against us. The U.S. government, including the Federal Trade Commission, the Department of Commerce, U.S. Congress, and various State Attorneys General are continuing to review the need for greater regulation for the
collection of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. There is also increased attention being given to the collection of data from minors. For
instance, the Childrens Online Privacy Protection Act requires companies to obtain parental consent before collecting personal information from children under the age of 13. In addition, the European Union has proposed reforms to its existing
data protection legal framework, which may result in a greater compliance burden for companies with users in Europe. Various government and consumer agencies have also called for new regulation and changes in industry practices.
We began operations in 2007. While our administrative and technical systems have developed rapidly, during our earlier history our practices
relating to intellectual property, data privacy and security, and legal compliance may not have been as robust as they are now, and there may be unasserted claims arising from this period that we are not able to anticipate. In addition, our
business, including our ability to operate and expand internationally, could be adversely affected if laws or regulations are adopted, interpreted, or implemented in a manner that is inconsistent with our current business practices and that require
changes to these practices, the design of our website, games, features or our privacy policies. In particular, the success of our business has been, and we expect will continue to be, driven by our ability to responsibly use the data that our
players share with us. Therefore, our business could be harmed by any significant change to applicable laws, regulations or industry practices or the requirements of platform providers regarding the use or disclosure of data our players choose to
share with us, age verification, underage players or the manner in which the express or implied consent of consumers for such use and disclosure is obtained. Such changes may require us to modify our game features and advertising practices, possibly
in a material manner, and may limit our ability to use the data that our players share with us.
We process, store and use personal information and
other data, which subjects us to governmental regulation and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.
We receive, store and process personal information and other player data, and we enable our players to share their personal information with
each other and with third parties, including on the Internet and mobile platforms. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal
information and other player data on the Internet and mobile platforms, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We generally comply with industry
standards and are subject to the terms of our own privacy policies and privacy-related obligations to third parties (including voluntary third-party certification bodies such as TRUSTe). We strive to comply with all applicable laws, policies, legal
obligations and certain industry codes of conduct relating to privacy and data protection, to the extent reasonably attainable. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one
jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to players or other third parties, or our privacy-related legal
obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other player data, may result in governmental enforcement actions, litigation or public statements against us
by consumer advocacy groups or others and could cause our players to lose trust in us, which could have an adverse effect on our business. Additionally, if third parties we work with, such as players, vendors or developers, violate applicable laws
or our policies, such violations may also put our players information at risk and could in turn have an adverse effect on our business.
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In the area of information security and data protection, many states have passed laws requiring
notification to players when there is a security breach for personal data, such as the 2002 amendment to Californias Information Practices Act, or requiring the adoption of minimum information security standards that are often vaguely defined
and difficult to practically implement. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant
liabilities.
Our business is subject to a variety of other U.S. and foreign laws, many of which are unsettled and still developing and which could
subject us to claims or otherwise harm our business.
We are subject to a variety of laws in the United States and abroad,
including state and Federal laws regarding consumer protection, taxation, intellectual property, export and national security, that are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to
us are often uncertain and may be conflicting, particularly laws outside the United States. There is a risk that these laws may be interpreted in a manner that is not consistent with our current practices, and could have an adverse effect on our
business. For example, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other
torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted or the content provided by users. It is also likely that as our business grows and evolves
and our games are played in a greater number of countries, we will become subject to laws and regulations in additional jurisdictions. We are potentially subject to a number of foreign and domestic laws and regulations that affect the offering of
certain types of content, such as that which depicts violence, many of which are ambiguous, still evolving and could be interpreted in ways that could harm our business or expose us to liability. In addition, certain of our casino-themed games,
including
Zynga Poker
, may become subject to gambling-related rules and regulations and expose us to civil and criminal penalties if we do not comply. Our business includes real money online poker and casino games offerings in the United
Kingdom through an agreement with bwin.party. RMG is subject to stringent, complicated and rapidly changing licensing and regulatory requirements, both federally and in each state, as well as internationally. Although we are not planning to
seek any direct licenses in Nevada or other jurisdictions in the U.S., our partnership with bwin.party in the United Kingdom continues as we evaluate its results.
It is difficult to predict how existing laws will be applied to our business and the new laws to which we may become subject. If we are not
able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be directly harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend
substantial resources or to modify our games, which would harm our business, financial condition and results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could
harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business and operating results.
It is possible that a number of laws and regulations may be adopted or construed to apply to us in the United States and elsewhere that could
restrict the online and mobile industries, including player privacy, advertising, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of electronic commerce and virtual goods may prompt calls
for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through the Internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase and we
will be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the regulation of currency, banking institutions and money transmission may be interpreted to cover virtual
currency, goods or payments that we receive. If that were to occur we may be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements
and we may be subject to additional regulation and oversight, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere
regarding these activities may lessen the growth of social game services and impair our business. In addition, some concern has been expressed in Europe and in certain countries that social gaming should be regulated to protect consumers, in
particular minors and persons susceptible to addiction to social games. This concern could lead to the adoption of legislation or regulations that may impose additional burdens upon us, prohibit the offering of our games to certain users or
territories, increase our costs or require changes to our games.
Companies and governmental agencies may restrict access to Facebook, our website,
mobile applications or the Internet generally, which could lead to the loss or slower growth of our player base.
Our players
generally need to access the Internet and in particular Facebook and our website to play our games. Companies and governmental agencies could block access to Facebook, our website, mobile applications or the Internet generally for a number of
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reasons such as security or confidentiality concerns or regulatory reasons, or they may adopt policies that prohibit employees from accessing Facebook, our website or other social platforms. For
example, the government of the Peoples Republic of China has blocked access to Facebook in China. If companies or governmental entities block or limit such or otherwise adopt policies restricting players from playing our games, our business
could be negatively impacted and could lead to the loss or slower growth of our player base.
Failure in pursuing or executing new business
initiatives could have a material adverse impact on our business and future strategy.
Our strategy includes evaluating,
considering and effectively executing new business initiatives, which can be difficult. Management may not properly ascertain or assess the risks of new initiatives, and subsequent events may alter the risks that were evaluated at the time we
decided to execute any new initiative. Entering into any new initiatives can also divert our managements attention from other business issues and opportunities. Failure to effectively identify, pursue and execute new business initiatives,
including RMG, may adversely affect our reputation, business, financial condition and results of operations. We believe RMG could have risks that are different than those associated with other new initiatives. In particular, RMG is subject to
stringent, complicated and rapidly changing licensing and regulatory requirements. Regulatory and legislative developments, including excessive taxation, may prevent or significantly limit our ability, or the ability of any entity with which we may
partner in the future, to enter into or succeed in RMG. Becoming familiar with and complying with these requirements will increase our costs and subject our business to greater scrutiny by regulators in many different jurisdictions. If our brand
becomes associated with RMG we may lose current players, advertisers or partners or have difficulty attracting new players, advertisers or partners, which could adversely impact our business.
In addition, if we or our partners operate our RMG games in a negative manner, if players are less satisfied than expected with the games
provided or if we or our partners fail to comply with regulatory requirements, our reputation could be adversely affected and we may not realize the anticipated benefits of this line of business or we may lose players and we may curtail our efforts
in the RMG market.
Fluctuations in foreign currency exchange rates will affect our financial results, which we report in U.S. dollars.
As we continue to expand our international operations, such as our recent acquisition of NaturalMotion, a company domiciled in the U.K., we
become more exposed to the effects of fluctuations in currency exchange rates. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency, and an increasing percentage of our
international revenue is from players who pay us in currencies other than the U.S. dollar. Fluctuations in the exchange rates between the U.S. dollar and those other currencies could result in the dollar equivalent of such expenses being higher
and/or the dollar equivalent of such foreign-denominated revenue being lower than would be the case if exchange rates were stable. This could have a negative impact on our reported operating results.
The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies
could materially impact our financial position and results of operations.
The current U.S. administration has made public
statements indicating that it has made international tax reform a priority, and key members of the U.S. Congress have conducted hearings and proposed new legislation. Recent changes to U.S. tax laws, including limitations on the ability of taxpayers
to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact
the tax treatment of our foreign earnings. Any changes in the U.S. taxation of our international business activities may impact our worldwide effective tax rate, our financial position and results of operations.
The intended tax benefits of our corporate structure and intercompany arrangements depend on the application of the tax laws of various jurisdictions
and on how we operate our business.
Our corporate structure and intercompany arrangements, including the manner in which we
develop and use our intellectual property and the transfer pricing of our intercompany transactions, are intended to reduce our worldwide effective tax rate. The application of the tax laws of various jurisdictions, including the United States, to
our international business activities is subject to interpretation and depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in
which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business is not consistent with the manner in which
we report our income to the jurisdictions, which could increase our worldwide effective tax rate and harm our financial position and results of operations.
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Our corporate structure includes legal entities located in jurisdictions with income tax rates
lower than the U.S. statutory tax rate. Our intercompany arrangements allocate income to such entities in accordance with arms-length principles and commensurate with functions performed, risks assumed and ownership of valuable corporate
assets. We believe that income taxed in certain foreign jurisdictions at a lower rate relative to the U.S. statutory rate will have a beneficial impact on our worldwide effective tax rate.
Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of
business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower
statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations.
As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different
countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arms length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. In
addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of existing laws are issued or applied. In particular, there is uncertainty in relation to the U.S. tax legislation in terms of the future corporate
tax rate but also in terms of the U.S. tax consequences of income derived from income related to intellectual property earned overseas in low tax jurisdictions.
Our existing corporate structure and intercompany arrangements have been implemented in a manner we believe is in compliance with current
prevailing tax laws. However, the tax benefits which we intend to eventually derive could be undermined due to changing tax laws or if we are unable to adapt the manner in which we operate our business.
Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other natural disaster could cause damage to our
facilities and equipment, which could require us to curtail or cease operations.
Our principal offices and network operations
centers are located in the San Francisco Bay Area, an area known for earthquakes, and are thus vulnerable to damage. We are also vulnerable to damage from other types of disasters, including power loss, fire, explosions, floods, communications
failures, terrorist attacks and similar events. If any disaster were to occur, our ability to operate our business at our facilities could be impaired and we could incur significant losses, require substantial recovery time and experience
significant expenditures in order to resume operations.
We may require additional capital to meet our financial obligations and support business
growth, and this capital might not be available on acceptable terms or at all.
We intend to continue to make significant
investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new games and features or enhance our existing games, improve our operating infrastructure or acquire
complementary businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our
existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing that we secure in the
future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including
potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to
support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.
Risks Related to
Our Class A Common Stock
The three class structure of our common stock has the effect of concentrating voting control with those
stockholders who held our stock prior to our initial public offering, including our founder and our other executive officers, employees and directors and their affiliates; this limits our other stockholders ability to influence corporate
matters.*
Our Class C common stock has 70 votes per share, our Class B common stock has seven votes per share and our Class A
common stock has one vote per share. Mark Pincus, our Chairman, beneficially owned approximately 62% of the total voting power of our outstanding capital stock as of June 30, 2014. As a result, Mr. Pincus has significant influence
over the management and affairs
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of the company and control over matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company
or our assets. Mr. Pincus may hold this voting power for the foreseeable future, subject to additional issuances of stock by the company or sales by Mr. Pincus. This concentrated voting control limits the ability of our other stockholders
to influence corporate matters and could adversely affect the market price of our Class A common stock.
Future transfers or sales by
holders of Class B common stock or Class C common stock will result in those shares converting to Class A common stock, which will have the effect, over time, of increasing the relative voting power of those stockholders who retain their
existing shares of Class B or Class C common stock. In addition, as shares of Class B common stock are transferred or sold and converted to Class A common stock, the sole holder of Class C common stock, Mark Pincus, will have greater
relative voting control to the extent he retains his existing shares of Class C common stock, and as a result he could in the future control a majority of our total voting power. Mark Pincus is entitled to vote his shares in his own interests
and may do so.
Certain provisions in our charter documents and under Delaware law could limit attempts by our stockholders to replace or remove our
board of directors or current management and limit the market price of our Class A common stock.
Provisions in our
certificate of incorporation and bylaws may have the effect of delaying or preventing changes in our board of directors or management. Our certificate of incorporation and bylaws include provisions that:
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establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
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prohibit cumulative voting in the election of directors; and
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reflect three classes of common stock, as discussed above.
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These provisions may frustrate or
prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In
addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business
combinations with any interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder.
Our share price has been and will likely continue to be volatile.*
The trading price of our Class A common stock has been, and is likely to continue to be, highly volatile and could be subject to wide
fluctuations in response to various factors, some of which are beyond our control. Between June 30, 2013 and June 30, 2014, the stock price of our Class A common stock has ranged from $2.72 to $5.89. In addition to the factors
discussed in these Risk Factors and elsewhere in this Quarterly Report on Form 10-Q, factors that may cause volatility in our share price include:
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changes in projected operational and financial results;
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issuance of new or updated research or reports by securities analysts;
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market rumors or press reports;
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our announcement of significant transactions;
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announcements related to our stock repurchase program;
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the use by investors or analysts of third-party data regarding our business that may not reflect our actual performance;
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fluctuations in the valuation of companies perceived by investors to be comparable to us;
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the activities, public announcements and financial performance of our commercial partners, such as Facebook;
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fluctuations in the trading volume of our shares, or the size of our public float relative to the total number of shares of our Class A, Class B and Class C common stock that are issued and outstanding;
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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; and
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general economic and market conditions.
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Furthermore, the stock markets have experienced
extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to
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the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes
or international currency fluctuations, may negatively impact the market price of our Class A common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action
litigation. We have been the target of this type of litigation as described in the section titled Legal Matters included in Note 12 Commitments and Contingencies in the notes to the consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q. Securities litigation against us could result in substantial costs and divert our managements attention from other business concerns, which could harm our business.
In addition, in October 2012, we announced that our Board authorized us to repurchase up to $200.0 million of our Class A common stock.
As of June 30, 2014, we had repurchased approximately $21.1 million of our Class A common stock. The timing and amount of any stock repurchases will be determined based on market conditions, share price and other factors. The program does
not require us to repurchase any specific number of shares of our Class A common stock, and may be modified, suspended or terminated at any time without notice. The stock repurchase program will be funded from existing cash on hand. Repurchases
of our Class A common stock in the open market could result in increased volatility in our stock price.
Our Class A common stock price
may be volatile due to third-party data regarding our games.
Third parties, such as AppData, publish daily data about us and other
social game companies with respect to DAUs and MAUs and other information concerning social game usage, in particular on Facebook. These metrics can be volatile, particularly for specific games, and in many cases do not accurately reflect the actual
levels of usage of our games across all platforms and may not correlate to our bookings or revenue from the sale of virtual goods. There is a possibility that third parties could change their methodologies for calculating these metrics in the
future. To the extent that securities analysts or investors base their views of our business or prospects on such third-party data, the price of our Class A common stock may be volatile and may not reflect the performance of our business.
If securities or industry analysts do not publish research about our business, or publish negative reports about our business, our share price and
trading volume could decline.
The trading market for our Class A common stock, to some extent, depends on the research and
reports that securities or industry analysts publish about our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or lower their opinion of our shares, our share price would
likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Future sales or potential sales of our Class A common stock in the public market could cause our share price to decline.
If the existing holders of our Class B common stock particularly our directors and officers, sell a large number of shares, they could
adversely affect the market price for our Class A common stock. Sales of substantial amounts of our Class A common stock in the public market, or the perception that these sales could occur, could cause the market price of our Class A
common stock to decline. For example, in connection with the filing of our Registration Statement on Form S-3 in February 2014, covering the resale of shares issued to the security holders of NaturalMotion prior to our acquisition, we registered
28,178,201 shares of our Class A common stock, which were eligible to be resold immediately thereafter. In addition, in connection with the assumption of certain outstanding equity awards held by the employees of NaturalMotion prior to the
acquisition, we filed a Registration Statement on Form S-8 covering up to 6,850,973 shares of our Class A common stock which vest over three years at a rate of 40% after one year and 30% on each of the second and third anniversaries. In
addition, certain holders of our Class B common stock will be entitled to rights with respect to the registration of such shares under the Securities Act pursuant to an investors rights agreement. If these holders of our Class B common stock,
by exercising their registration rights, sell a large number of shares, they could adversely affect the market price of our Class A common stock. If we file a registration statement for the purposes of selling additional shares to raise capital
and are required to include shares held by these holders pursuant to the exercise of their registration rights, our ability to raise capital may be impaired. Sales of substantial amounts of our Class A common stock in the public market,
following the release of lock-up agreements, the filing of additional registration statements, or otherwise, or the perception that these sales could occur, could cause the market price of our Class A common stock to decline.
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If we are unable to implement and maintain effective internal control over financial reporting in the
future, the accuracy and timeliness of our financial reporting may be adversely affected.
If we are unable to maintain adequate
internal controls for financial reporting in the future, or if our auditors are unable to express an opinion as to the effectiveness of our internal controls as required pursuant to the Sarbanes-Oxley Act, investor confidence in the accuracy of our
financial reports may be impacted or the market price of our Class A common stock could be negatively impacted.
The requirements of being a
public company may strain our resources, divert managements attention and affect our ability to attract and retain qualified board members.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the
NASDAQ Global Select Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult,
time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results.
As a result of disclosure of information in this Quarterly Report on Form 10-Q and in our other public filings with the SEC as required of a
public company, our business and financial condition have become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and
operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our
business and operating results.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future.
Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to
realize any future gains on their investments.