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RESEARCH REPORT

Created: 11-23-10 Authored by: NeXt Up! This report has been downloaded from SharesPost, Inc., but was prepared by Global Silicon Valley Partners under the NeXt Up! Research brand ("NeXt Up! Research"), and any opinions contained herein are solely the opinions of NeXt Up! Research. Information contained herein, including but not limited to research, valuations, calculations, estimates and any other material or sources, is believed to be reliable, however its accuracy and completeness is not warranted or guaranteed, and past performance is not indicative of future results. These materials are provided for informational purposes only and should not be used or construed as an offer to sell or a solicitation of an offer to buy any security. SharesPost, Inc. is not acting as nor is it registered as an investment adviser.

Investment Highlights One of the largest developers of social games: With over 203 million in monthly active users on Facebook alone, Zynga is one of the largest developers of social entertainment widgets and games. The company, a pure play on the social gaming segment, is poised to grow at a CAGR of 23% from 2010 to 2014 in our estimate. The widget segment, mostly aided by new entrants should grow at 30%. Ability to Cross Promote: Zynga games FarmVille, Caf World, Texas HoldEm Poker, FishVille and Mafia Wars rank in the top 10 applications on Facebook. The company is able to quickly ramp its games in popularity by cross promoting to its existing user base of over 200 million. Diversified Distribution: In addition to Facebook, Zynga also has a significant presence on other platforms such as MySpace, Bebo, Friendster, Tagged, Yahoo and iPhone. Many of Zyngas games such as Mafia Wars, and Texas HoldEm Poker are also popular on MySpace.

Social Networking: Zynga


Leader in Social Games
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www.nextupresearch.com

November 23, 2010


Valuation: We have used two methods: a) steady-state target EV/Revenue multiple, and b) comparative EV/Revenue multiple based on a peer group to arrive at a market cap of $5.112 - $5.220 billion for Zynga, and an estimated price per share of $16.48 - $16.83 for common shares. Investment Concerns Growth in Users May Not Correlate to Revenues: Only a small fraction (about 2 - 3%, in our estimate) of users actually makes any form of payment to Zynga. As with most social networking sites, future growth in user base could come from emerging economies, where revenue opportunity per user is often a fraction of what it is for the US.

Crowded Widget Space: We expect the revenue growth of the widget space (especially the social gaming sector) to have a CAGR of over 40% for the next several years. But the industry growth is likely to come primarily from the entry of more developers. We note that Facebook now has over a million registered developers, up from 650k only six months ago. We expect the vast majority of these developers to have low growth rates and compete for the same user base. Other platforms such as iPad could emerge as a competitive threat.

This report has been downloaded from SharesPost, Inc., but was prepared by NeXt Up Research, and any opinions contained herein are solely the opinions of NeXt Up Research. Information contained herein, including but not limited to research, valuations, calculations, estimates and any other material or sources, is believed to be reliable, however its accuracy and completeness is not warranted or guaranteed, and past performance is not indicative of future results. These materials are provided for informational purposes only and should not be used or construed as an offer to sell or a solicitation of an offer to buy any security. SharesPost, Inc. is not acting as nor is it registered as an investment adviser. This report issued subject to important legal disclaimers contained on last page of report.

INVESTMENT THESIS
Leader in Social-Networking Games With over 203 million in monthly active users on Facebook alone, Zynga is one of the largest developers of social entertainment widgets and games. The company, a pure play on the social gaming segment is poised to grow at a CAGR of 23% from 2010 to 2014 in our estimate. The growth in the future is likely to be at a slower pace, primarily because the company is already one of the largest in the widget space. The widget segment, mostly aided by new entrants should grow at 30%. Exhibit 1: Monthly Active Users of Application Developers on Facebook

250

200

150

Users, M

100

50

Source: AppData Ability to Cross Promote Games is a Competitive Advantage: The company continues to promote new games to its existing user base. Zynga launched FrontierVille only in June 2010. Thanks to strong cross promotion to its existing users, FrontierVille reached 20M users within 36 days of its launch on Facebook. FrontierVille is currently the fourth most popular application on Facebook. We believe its large user base could be a competitive advantage in bringing out new games even as some of the older games may lose their luster. In many instances, Zynga has created its products well after a competitor had established itself. However, thanks to its formidable size and the ability to add new features, Zynga is able to achieve a high level of penetration. For instance, Farm Town was started by Slashkey in early 2009. But the product peaked at

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19M users (now down to 15M users). Within six weeks of launch, Farmville overtook Farm Town. Caf World, a clone of Restaurant City, achieved a user base of 8M within a week of its launch. It now has twice the number of users that Restaurant City has. Zynga launched Treasure Isle in April 2010. Within a month of its launch, Treasure Isle increased its MAU to 27 M because of cross promotion by Zynga. Exhibit 2: Monthly Active Users of Zynga Games on Facebook

300

250

200

Users, M

150

100

50

Source: AppData

Valuation: We use the following methods namely a) Multiple of EV/Revenue, b) Target EV based on steady state revenues, normalized net margins, and a growth multiple to arrive at an enterprise valuation of $5112 - $5220 million for Zynga.

(a) Multiple of EV/Revenue: With no publicly traded companies in the widget or SNS segment, we believe a close proxy would be the publicly traded internet software and services companies.We have used a median EV/Revenue multiple of 4.5x (Appendix A3) assuming long term EBITDA margin of 26% and growth rate of 40% over the next few years. Using a multiple of 4.5x and CY11 revenue estimate of $ 1160 million, we arrive at a target enterprise value of $ 5.220 billion.

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(b) Target EV based on Steady State Revenues: Appendix A details our valuation approach and the choice of our multiple. Assuming steady state revenues of $2120 million in 2014, normalized net margins of 20%, a growth multiple of 25, we arrive at a target enterprise value of $ 5.112 billion. (c) Most-recent M&A/PE transaction multiple: Based on the recent acquisitions in social gaming space namely Googles acquisition of Slide in August 2010 and Disneys acquisition of Playdom in August 2010 as a peg and taking a multiple of 4.45, we arrive at a target enterprise value of $5.166 billion

Investment Concerns Growth in Users May Not Correlate to Revenues: Only a small fraction (about 2 - 3%, in our estimate) of users actually makes any form of payment to Zynga. As with most social networking sites, future growth in user base could come from emerging economies, where revenue opportunity per user is often a fraction of what it is for the US. However, supporting such a user base continues to demand constant upgrade to the companys infrastructure. Accordingly, we are concerned that at some point the increased capital expenditure may not result in commensurate revenue opportunity. Crowded Widget Space: We expect the revenue growth of the widget space to have a CAGR of over 40% for the next several years. But the industry growth is likely to come primarily from the entry of more developers. We note that Facebook now has over a million registered developers, up from 650k only six months ago. We expect the vast majority of these developers to have low growth rates and compete for the same user base. The launch of iPad offers game developers a more interactive platform than a PC based Facebook.

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RECENT DEVELOPMENTS
Acquisitions in Social Gaming Space
Zynga acquires Dextrose and Bonfire studios Zynga acquired Dextrose, a game engine developer based in Germany in October 2010. Dextrose developed the Aves Engine, which enabled high-end game play within a web browser. Zyngas games such as FarmVille have often been criticized for their bad graphics. Using Aves Engine, Zynga will be taking a step up in graphics quality. Zynga acquired Bonfire Studios in October 2010 and the new studio will be known as Zynga Dallas. Bonfire Studios was started by David Rippy, Bill Jackson and Scott Winsett in November 2008, after Microsoft shut down Ensemble Studios (the legendary maker of the Age of Empire games).

Product Launches
RockYou launches ToyLand RockYou launched a new social game ToyLand on Facebook in October 2010. Even though Toy Land is a hodgepodge of virtual space, treasure hunting and board game elements, Toy Land is different from other games. The game is based on the concept of players acting as toymakers. Toy Land is a sort of childrens fantasy premise where cash is replaced by hearts and jobs by promises. SocialVibe Launches SVnetwork, Taps Millions Of Third-Party App Users SocialVibe launched the SVnetwork, a brand advertising network claiming to reach 80 million unique users each month, making it one of the largest on the Internet. The network, which includes its ownedand-operated SocialVibe.com, is affiliated with both Zynga and Causes CrowdStar releasing entire social games catalog in Japan CrowdStar announced an expansion of its partnership with Tokyo-based Drecom to release all of its titles in the Japanese market. CrowdStar believes that this agreement with Drecom accelerates its global strategy, allowing it to quickly tailor game content for Japanese preferences, test new game mechanics, and take advantage of partner marketing capabilities in the local mobile and online gaming market. Zynga Launches First Localized Game Zynga obtained $150 million from Japans SoftBank Capital, acquired Chinese game developer XPD Media and set up a Beijing office in August 2010. This expansion is culminating in the launch of Zyngas first internationally localized game, Zynga Texas Poker, in traditional Chinese. The game is available in China and can be played in traditional Chinese or English.

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Zynga opens new office at Seattle Zynga has opened a new office at Seattle office and has been hiring a team of web engineers for the new location. The area is also home to a number of other major video game developers and publishers, such as Nintendo of America, Microsoft, Sony Online Entertainment, PopCap, Bungie, Valve Software and others. Zynga already has more than 1,200 employees spread out across at least 13 studios around the world. Facebook, Zynga Impose Pre-IPO Share Fees Facebook and Zynga are charging fees of at least $2,500 for each sale of company shares, a move legal experts say discourages employees from putting equity in the hands of large numbers of outside owners before an initial public offering. Phrases application overtakes FarmVille to become the leading application on Facebook Phrases has become the most popular application on Facebook with nearly 54.3 M monthly active users overtaking FarmVille which has 53.4 M monthly active users. Phrases has become the second largest application developer on Facebook while Zynga the leader of the pack, has 200.3 M monthly active users

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MARKET OVERVIEW
Over 75% of the US internet users have used a web widget, sometimes unknowingly. Such applications, which appear on many social networking sites, allow users to integrate their social experiences with their community of friends and acquaintances. Some of the most popular widgets include music lists, videos, photo slide shows, post-it notes and virtual pets that can be fed or dressed. In some cases, widgets are created and customized on another site, such as Slide or Photobucket (owned by MySpace). The site that creates the content generates a string of software codes to be copied and pasted onto a users web page. The widget code can be installed and executed without requiring additional compilation. The widgets usually use DHTML, JavaScript or Adobe Flash for execution. Social network companies such as Facebook and MySpace host these applications and provide the underlying platform services through special-purpose application programming interfaces. The social networks (such as MySpace or Facebook) offer hardware and software infrastructure, as well as access to the social network's end user base. This frees up the resources of the application provider for R&D. Such application providers can range from a single programmer to large established firms such as Slide or RockYou. Exhibit 3: Widgets Ecosystem

Platform

Widgets

Data
Money

Advertiser

Users

Source: NeXt Up Research

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Widgets and applications account for only 5% of the total online social network advertising spending budget. However, increasingly widgets are a key driver of traffic and time spent on a social networking site. Widget providers can gather a variety of information about the user based on the type and frequency of the widget usage. This should allow a potential advertiser to tailor its message to the user. Accordingly, we expect revenue growth for widget creators to significantly outpace that of social networking sites (Exhibit 4). We estimate that advertisers will spend $2.43 billion in 2010, up from $2.2 billion in 2009 on social networks, a 10% increase from 2009 levels. We estimate the revenues earned from widgets will increase from $548 M in 2009 to $1158 M in 2010. Exhibit 4: Worldwide Advertisement Revenues Earned by Social Network Sites
$4 3000

($, billions, SNS)

SNS

Widgets

($, millions, Widgets)

2500 $3 CAGR:10% 2000

CAGR:30%

$2

1500

1000 $1
500

$0
2006 2007 2008 2009 2010E 2011E 2012E 2013E

Source: eMarketer and NeXt Up Research estimates We attribute the rapid revenue growth to the explosion in the number of developers as well as increasing revenue per application. With low barriers to entry, even part time programmers can become developers of applications. We note that Facebook alone has over 1 million registered developers, up from 660k registered developers only a few months ago. Zynga various widgets continue to top the popularity metrics on Facebook with over 203 M users a month. Phrases and CrowdStar occupy the second and third position with 52.4 M and 50 M monthly active users a month (Exhibit 5). We estimate that the number of monthly active users to Zynga has decreased from 232 M in December 2009 to 203 M in November 2010. During the same time frame, CrowdStar has shown an increase in monthly active users from 43 M to 50 M. We believe that the widget

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market for SNS is still in early stages of adoption and that changes over a few months may not necessarily portend a trend. Most users often use multiple networking sites and several widgets on each of them. Exhibit 5: Monthly Active Users of Various Widgets on Facebook (Users in Millions)
300

Zynga 250

RockYou

Electronic Arts

CrowdStar

6 waves

Playdom

Phrases

200

150

100

50

0 01-Dec-09 01-Jan-10 01-Feb-10 01-Mar-10 01-Apr-10 01-May-10 01-Jun-10 01-Jul-10 01-Aug-10 01-Sep-10 01-Oct-10 01-Nov-10

Source: comScore and NeXt Up Research Various versions of widgets have been in existence since the launch of GUI (graphical user interface) in 1981. The earliest form of such an application can be traced to that by Bud Tribble and Andy Hertzfeld, who showcased a concept called "desk ornaments" for the original Macintosh operating system. These ornaments, later renamed accessories, wrapped small computing functions such as a calculator, notepad, or simple games within a single application. In 1996, Netscape offered the PowerStart widget as part of its Navigator browser. Netscape PowerStart was a personal start page application built-in to the Netscape Navigator web browser in 1996. PowerStart gathered various pieces of information such as e-mail, stock quotes and weather reports and displayed them in a single page. Fotki, founded in 1998, started as a site for sharing photos. It has subsequently added other features such as video sharing, photo printing and blogging. In October 2000, Stardock released a new GUI engine for Windows named DesktopX, a widget that displays system information such as CPU, memory utilization, news tickers and live updates from the web. Arlo Rose and Perry Clarke released Konfabulator for Mac OS X as a shareware project in 2003. Konfabulator was subsequently incorporated as Pixoria, which was acquired by Yahoo! in July 2005.

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Exhibit 6: Timeline of prominent Social Application developers

Year 1998

Company Fotki Yahoo! Widgets (Previously known as

Description Started for close circle of friends. Allows photo-sharing, photo-printing, photo-selling and blogging site. Free application platform for Mac OS X and Microsoft Windows. Includes a weather widget, a digital clock, and RSS feed readers Provides RSS feed readers Image hosting, video hosting, slideshow creation and photo sharing website. Leading provider of applications and widgets on the web. Allows user to create greeting cards, scrapbooks, slideshows, and birthday cards using photos, videos, and music. Web application that produces videos from user-selected photos and music. Allows user to create, remix, and share photos, videos, with others via email, on mySpace, or in blog. Allows user to share movie ratings, discover new movies and meet others with similar movie taste. Online service that allows users to download and share music. Allows the users to create animated slideshows Search tools and calculators. Leading provider of applications and widgets on the web. Web widgets for blogging, social networking services, and personal websites. Free to play casual social games Developer of casino games, word games, board games, role playing games and party games Allows user to upload, organize, and share music, photos, and video files. Allows users to create animation with uploaded pictures, music and personalized message.

2003

NewsGator Photobucket Slide

2005 Smilebox Animoto Flektor Flixster iLike Imageloop LabPixies Ltd. RockYou Widgetbox Playfish 2007 Zynga oosah 2008 SAMP2

2006

Source: Company Reports and NeXt Up Research

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COMPETITIVE LANDSCAPE
Most users often use widgets from a variety of suppliers. Accordingly, the demographic distribution of most of the application providers looks similar (Exhibit 7). It is not unusual for a Facebook user to be playing games from Zynga, while simultaneously sending a birthday card to his friend using RockYous applications. Many of the widgets target various needs of a particular user and often do not offer the exact same alternative. With the market in an early adopter stage, over a million developers are competing for the same finite pool of ad dollars as well as a users purse. We attribute Zynga's particularly strong presence to the fact that it has successfully cross promoted its new games to its existing user base that number in tens of millions. Exhibit 7: Revenues of Social Gaming Companies

Revenues of Social Gaming Companies in Mn

3000 Others 2500 $2122 2000 $1696 1500 $1158 1000 $548 500 RockYou Playdom CrowdStar Electronic Arts $2543 Zynga

0 2009 2010 2011 2012 2013

Source: NeXt Up Research Estimates

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RockYou (Private) Redwood City, California http://www.rockyou.com

RockYou (originally NetPickle) was founded by Lance Tokuda and Jia Shen in 2006. The company creates self-expression widgets which can be used to enhance the look and feel of blogs, personal websites on social networks. Users can express themselves by designing their profile page to reflect their personality. They can also connect and discover friends through various RockYou applications. RockYou has over 213 million users worldwide (of which 64 million are active monthly users) and 15 billion global impressions from over 200 countries. RockYou applications seamlessly integrate across all social networks such as Facebook, MySpace, Orkut, Bebo, Friendster, Tag and Hi5. Headquartered in Redwood City, California, RockYou currently has 105 employees. RockYous first product was a slideshow service which was designed to work as an application widget. In 2006, co-Founders Lance Tokuda and Jia Shen were sued by their former employer Iconix on the charge that Tokuda and Shen were working on a slideshow application for Iconix while the pair was engaged in creating RockYou. A preliminary injunction was passed in favor of Iconix before the intellectual property case was finally settled out of court. RockYous growth swung into higher gear once Facebook opened up its platform for application developers in May 2007. The number of registered users of RockYou applications grew nearly 4x in a matter of six months. RockYou launched RockYou Live or Super Wall application and Likeness on Facebook in September 2007 and for a brief period was the largest application developer on Facebook with over 3 million daily active users in December 2007. Super Wall was the top RockYou application on Facebook in December 2007. The companys primary source of revenues came from ads that were served directly or as product placement along with its various widgets. We believe that RockYou Ads has become the largest independent ad network in social media with more than 213 million monthly total unique visitors worldwide and more than 15 billion monthly impressions. In 2010, we expect RockYou to achieve revenues of $48M, nearly 4x that of its 2008 run rate. RockYou has received five rounds of funding totaling $128 million from Softbank, SK Telecom Ventures, Lightspeed Venture Partners, Partech International and Sequoia Capital.

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Slide (Private) SanFrancisco, CA http://www.slide.com/

Slide is the one of the largest publishers of social entertainment applications. Slide has over 27 million unique users in more than 200 countries. PayPal co-founder, Max Levchin, founded Slide in 2005 with an investment of $1M. The company started as a project in 2004 to develop and run a service that enables users to organize photos on their computers and post them to personal blogs. Slide was acquired by Google for $182 million in August 2010. We estimate that Slides 2010 revenue should be about $37M. Slide currently has 14.7 million monthly active users and a million daily active users. Slides numbers used to be much higher in mid-March when it briefly hit 48 million MAU. Slide had well over 20 million MAU for most of 2009. In 2005, the company started off making software widgets for MySpace and other smaller social networks. The companys quantum jump came in May 2007, when Facebook opened its platform to thirdparty applications, and with fewer restrictions than MySpace. Several of Slide's plug-in applications such as "Slide FunSpace" (formerly known as FunWall), "Fortune Cookie", "My Questions", "Top Friends", and "SuperPoke!" soon became some of the most popular applications on Facebook. These applications allow the user to engage with others with various gestures. Users can pinch, wink, give flowers or drinks, throw sheep, and perform many other such activities. Slide gained tens of millions of users through widgets such as Slideshows, SkinFlix, FunPix and Guestbooks on social networking sites and was focused on advertising. Slide surpassed 117 M monthly active users in June 2007 reaching more than 65% of the total widget viewing audience. In July 2008, Slide opened a New York Sales office with the intention of increasing revenue from advertisements. It attempted to position itself as an advertisement network built on top of a portfolio of widgets on different social networking sites. However, the company was unable to sufficiently grow this business. It closed its New York office in July 2009. The company then announced its exit from the business of selling standard advertisement units. Instead Slide, focused its efforts on selling integrated sponsorships. However, we believe that the strategy had only limited success. Since last year, Slide has shifted its focus more towards social games inspired by the success of others such as Zynga. We note that Slide had made an earlier attempt in the social gaming segment with the launch of SuperPoke in 2008, which was moderately successful. The company expanded into this segment in April 2009 through the launch of SuperPoke Pets. Later that year, it launched other games such as Super Pocus (October 2009), Top Fish (November 2009) and SPP Ranch (December 2009). Slide received Series D funding of $50 M in 2008 at a $500 M post money valuation. Slide had received Series C funding of $20.52 M in October 2006 and Series B funding of $8 M in July 2005. Slide is backed by Mayfield Fund, Blue Run Ventures, Khosla Ventures and Founders Fund and has received a total funding of $79.72 M. Slide, headquartered in San Francisco, the company employs 125.

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Electronic Arts (Public) Redwood City, California http://www.ea.com/

Playfish was founded in 2007 by Kristian Segerstrale, Sebastien de Halleux, Sami Lababidi, and Shukri Shammas and was acquired by Electronic Arts in 2009. Playfish is headquartered in London but has offices in Beijing and Tromso (Norway). The company is a developer of free social games that can be played on platforms such as Facebook, MySpace, Google, Bebo, iPhone and Android. Over 150 million Playfish games have been installed and played by millions of users. The companys Pet Society is its flagship game and one of the fastest growing third party applications on Facebook with a user base of more than a million.

Exhibit 8: Top Playfish games

Game Name

Details The user can play different games and carry out activities such as playing ball, jumping rope or going on a treasure hunt Lets the user create his/her own restaurant and run it Allows the user to enjoy the tranquil pleaures of his/her own country home Series of Mini games which tests a person's abilities in four areas concentration, memory, logic and visual and then result in an overall brain rating

Pet Sociey

Restaurant city

Country Story

Who has the Biggest Brain

Source: Company Reports and NeXt Up Research Most of Playfishs revenues come from its games and sale of virtual goods. The payment is made through micro-payment services such as PayPal. It also gets some revenues from in-game advertisements. In October 2008, Playfish secured $17M in venture capital funding from Accel Partners and Index Ventures. Playfish was acquired by Electronic Arts Inc (EA) on November 9, 2009 and now operates as a division of EA focused on the web and wireless. We estimate that Playfishs 2009 revenue was about $40M million and that EA apparently paid $400 million for the acquisition. We expect EA to realize synergies between console and social gaming.

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iLike (Private) Seattle,WA http://www.ilike.com In 2002 Ali Partovi led the effort to save GarageBand.com from being shut down. In 2006, Ali with the help of his twin brother Hadi, started iLike. With more than 60 million users, iLike helps users share music recommendations, playlists and personalized concert alerts. iLike is a social music discovery service and the leading music application on many platforms such as Facebook, Orkut, hi5, Bebo and Google. The companys Music is one of the most popular applications on Facebook. iLike also builds iPhone applications for artists that integrate with Twitter, YouTube, MySpace and more. iLike aims to promote music democracy by giving exposure to artists that users may have never heard of but would like to hear as part of their listening habits. iLike received $2.5 million in Series A funding and $700k in angel funding. In December 2006, iLike secured $13.3M from Ticketmaster, in exchange for a 25% stake. However, the company ran into the red. In September 2009, iLike was acquired by MySpace. It now operates as a fully owned subsidiary of MySpace. Exhibit 9: Products

Category

Products

Details Enables fans to discover and share playlists, find new music that matches their personal tastes and concerts of their favorite artists Scans one's music library, recommends new music, and helps in connecting musically with friends Dominant music application on many SNSs Manage their presence on many SNS, syndicate their music and content across the web Short video montage which features major acts of artists who have posted exclusive video content on iLike for syndication across the web Helps in creating multimedia ads that target users by location and music taste

iLike.com

Fans

iLike Slidebar iLike music application on leading SNS Universal Artist Dashboard

Artists

Multimedia blogging tools Artist Video "Greatest Hits"

Promoters

Music Promotion Platform

Source: Company Reports and NeXt Up Research

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Playdom Mountain View, CA http://www.playdom.com Founded in 2008 by Rick Thompson and Dan Yue, the company was formerly known as YouPlus. The companys early launches with Facebook flopped. But it was very successful with MySpace. By mid-2009, Playdom became one of the largest game developers on MySpace, with nine games among Top 25 on that platform. Its game Mobster is among the top games on MySpace. In May 2009, Playdom re-entered the Facebook platform with more success. It now gets 40% of its traffic from Facebook. The company offerings for Facebook include Mob Wars, a game similar to Mobsters. The companys Farm Life competes with Zyngas Farmville. Playdom has 14 applications on Facebook including popular games such as Tiki Farm, Sorority Life and Wild Ones. We estimate that the company has an annual revenue run rate of over $60M. The companys revenue stream consists of direct payments (70%), advertising (20%) and offers (10%). Playdom games have a spend rate of about 5%, higher than those achieved by others such as Zynga. The company has had only one round of funding. In November 2009, it secured $43 M (a post money valuation of $260M) from Rick Thompson, New Enterprise Associates, Lightspeed Venture Partners and Norwest Venture Partners. In Q4 2009, Playdom acquired Green Patch, a Facebook widget developer best known for its garden simulation game and iPhone application developer Trippert Labs. Trippert Labs is a developer of several iPhone applications such as MobAir and Blowfish. Playdom was acquired by Disney in August 2010. The purchase price was for $563.2 million + earn out of $200 million (7.5x times our estimated Playdoms 2011 revenues - $98 M). Playdom is currently the fourth-largest developer on Facebook in terms of Monthly active users. The companys senior management includes: Dan Yue (Chief Product Officer), Rick Thompson (Chairman), Chris Wang (CTO) and Ling Xiao (VP, Engineering), John Pleasants (CEO) and Steve Meretzky (VP Game Design). Headquartered at Mountain View, California, the company has 110 employees.

CrowdStar Dublin, Ireland http://www.crowdstar.com/ CrowdStar was founded in 2008 by web entrepreneur Suren Markosian and Jeffery Tseng (a former creative director at Sega). Headquartered in Burlingame, CA, CrowdStar aims to make games that have no scammy offers or advertisements. The company started by offering games such as Know-It-All-Trivia (a trivia game), Save The Reef and WWII for Facebook platform. However, most of these games achieved only limited success.

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In September 2009, the company launched Happy Aquarium, a game similar to FishVille. Within two months, the game shot past other established popular games such as Pet Society. We estimate that the companys games attract over 50M monthly active users. In November 2009, CrowdStar launched Happy Pets, which now has over 11M monthly active users. Unlike the games developed by its competitors, the games developed by CrowdStar focus on caring and loving pets/fish rather than growing them for sale at a later stage. Other popular CrowdStar applications on Facebook are Happy Island and Restaurant Life. The company derives revenues only from virtual goods sales based on direct payments. Unlike Zynga and Playfish, the company does not have revenues from in-game ads or offers (which can sometimes reduce user experience). CrowdStar received angel funding from Peter Relan who is now Executive Chairman of CrowdStar. The company has 20 employees.

6 Waves Causeway Bay, Hong Kong http://www.6waves.com/

Founded in early 2008 by Rex Ng and other former Yahoo employees, 6 Waves is a leading Honk Kong based developer of gaming applications for Chinese and other non-English users. The company also supports games in Spanish, German, French, Turkish and Italian. The company also offers its games on other social network platforms such as Mixi, Cyworld, Netlog and Vkontakte. 6 Waves is now one of the largest Facebook developers on Facebook, operating nearly 141 applications with 44M monthly active users and 9M daily active users. Some of the popular games of 6 Waves include World Poker, Animal Paradise, Happy Harvest, My Fishbowl, Crazy Office and Medical Mayhem. Initially 6 Waves depended heavily on in-game advertising. Now the company offers other services such as a translation service, cross promotion of third party applications, sale of virtual goods and consulting provided to developers on making their games profitable. In addition to cross promotion, 6 Waves also helps developers by providing distribution, localization, monetization and infrastructure solution to increase the user base of their games on social networks. 6 Waves has received a $17.5 M round of funding from Insight Venture Partners. Headquartered at Hong Kong, the company has 18 employees. The company has plans to build function specific teams in Singapore, Taiwan and US.

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Lolapps (Private) San Francisco, CA http://www.lolapps.com Lolapps was founded in 2008 by a team comprising Kavin Stewart, Annie Chang, Brian Rue and Kamo Asatryan. Lolapps exited the stealth mode in April 2009, at which time it had 44 M monthly active users. Lolapps is the fifth largest application developer on Facebook with a user base of 50.6 M monthly active users. Lolapps makes games and applications that allow users to create virtual quizzes and gifts. Its early products on Facebook included a white label gift maker (Gift Creator) and a survey tool. Some of the popular games of Lolapps include Dantes Inferno, Champions Online, Yakuza Lords, Diva Life and Band of Heroes. Lolappss white label virtual gifting software has made countless Facebook users into licensed Facebook developers. Lolapps launched its full social game based on mafia called Yakuza Lords in September 2009. Lolapps acquired ROFLplay in November 2009. ROFLplay is involved in the creation of theme based Massive Multiplayer Online game which could be played in time periods of 5-10 minutes.

Lolapps secured Series A funding of $4.5 M in September 2008 from Polaris Venture Partners, Ron Conway and Ariel Poler. Lolapps earns revenue from the virtual gifting application through a combination of ad sales and paid sales of premium virtual gifts. Lolapps users were asked to accept offers from firms like OfferPal and Super Rewards and were not allowed to pay directly. Lolappss technology has allowed users to send 2 billion virtual gifts to each other. Headquartered at San Francisco, Lolapps has 45 employees.

Exhibit 10: Popularity Parameters on Facebook


Monthly Active Users (M) Zynga Phrases CrowdStar Electronic Arts Playdom 6 waves RockYou 203.3 52.2 50.0 43.2 35.6 33.7 27.6 Daily Active Users (M) 44.5 6.6 5.8 7.2 4.2 2.6 1.8

Source: Inside Facebook

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M&A and Partnership Activities


Zynga acquired YoVille in July 2008, shortly after raising $29 M Series B funding. YoVille offered simulation games such as YoVille. At the time of acquisition, YoVille had 150k daily active users. We believe the technology from YoVille was instrumental in helping Zynga move from interactive games to simulation games such as Farmville and Mafia Wars. Zynga entered into a partnership with San Francisco SPCA in May 2009 to raise awareness in helping homeless animals. The agency has collected $20k through the partnership. Users of YoVille can adopt special SF/SPCA shelter cats and dogs from the in-game shelter through virtual money transactions which are in fact paid by users using real money. Zynga acquired MyMiniLife in August 2009. MyMiniLife is a social networking site that enables users to build and decorate environments. Using the companys products, users can create their own spaces and homes. The economic activity on this game includes building properties, selling and buying objects using MyMiniLife virtual currency. We expect Zynga to enhance its Farmville products with the competence from MyMiniLife team. Zynga acquired GoPets in October, 2009. GoPets was an online gaming site that allowed users to create and raise a customized 3D pet which could be downloaded to the users desktop. GoPets included a evolved set of virtual goods monetization features such as mini-game section, multi currency virtual economy and a premium subscription service. Zynga used competences from this acquisition in the launch of PetVille in December 2009. Zynga shut down the GoPets site on November 8, 2009. GoPets employed around 55 people. In Feb 2010, Zynga announced the acquisition of Serious Business, a small private company founded by Alex Le and Siqi Chen (both engineers from Powerset) in early 2008. The firm raised $4M in funding backed by Lightspeed Ventures. Popular games from Serious Business include Friends For Sale and Rock Legends. We estimate that the San Francisco based firm had about 20 employees. Zynga entered in to a partnership with Softbank in April 2010, to tap the fast growing Japanese market, which has seen growth even as the US market was seeing signs of slowdown. The company has also extended its co-operation with its main host Facebook. Zynga was an early adopter of Facebook Credits for its game Pirates: Rule the Caribbean!. From February 2010, Farmvilles 75 million monthly active users had the option of buying virtual tractors and seeds by paying with Facebook currency In May 2010, Zynga expanded the use of Facebook credits for all its games. Zynga inked a distribution deal with Yahoo in May 2010 that will allow game players to play games and update statuses from Yahoos homepage, Yahoo Games, Yahoo Messenger, and Americas most popular email service, Yahoo Mail. In May 2010, Zynga entered in to a partnership with engagement advertisement network SocialVibe and started offering On Game Ads. Zynga will run simple in-game placements offering rewards, such as Farm Cash to help pay for a virtual tractor in FarmVille.

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Zynga entered in to a partnership with 7-Eleven in May 2010 which tested whether an appetite for virtual objects will help in selling real goods. The promotion included special products at 7-Eleven stores in the US and Canada. Customers were able to redeem codes for prizes in the games FarmVille, Mafia Wars and YoVille. Zynga acquired Chinese social gaming company XPD Media in May 2010. XPD Media was launched in early 2008, backed by True Ventures and Pilot Group. The Beijing-based XPD Media has 40 employees and has developed social games such as Medical Mayhem. The acquisition marks Zyngas first move into China and the larger Asian market. Zynga said the move will give it a presence in a fast-growing market and bolster its talent in game development. In June 2010, Zynga acquired Texas based Challenge Games. Zynga turned the Challenge Games office into Zynga Austin. The Austin location is in addition to locations such as its San Francisco headquarters, Baltimore, Los Angeles, Bangalore, and Beijing. Challenge Games was backed by Sequoia Capital and Globespan Capital Partners. Challenge Games was launched in 2007, to focus on immersive web game development built on a virtual goods business model. Popular games launched by Challenge Games include Warstorm, a collectible card game set in a fantasy universe, and Ponzi, a tycoon game. In July 2010, Zynga entered in to a partnership with Cascadian Farm. Players in Zyngas FarmVille game will be able to plant organic Blueberries with the Cascadian Farm brand name and benefit from coupon offers, organic and green living tips, and a chance to build a farm at high speed. We believe that Google may have made an investment of $100 - $200 M in Zynga in July 2010. Google has been planning its own entry into games and its investment in Zynga could be part of that strategy. Zynga acquired Tokyo based startup Unoh in August 2010. Unoh should help in localizing Zyngas games to better fit the taste of Asian customers and also help in creating titles for the local Japanese and international markets. Zynga acquired Boston based social games company Conduit labs in August 2010. The Conduit Labs office will become Zynga Boston, a new game studio focused on new product development. Conduit Labs was founded in 2007 with funding from Charles River Ventures and Prism VentureWorks. Zynga acquired Dextrose, a game engine developer based in Germany in October 2010. Dextrose developed the Aves Engine, which enabled high-end game play within a web browser. Zyngas games such as FarmVille have often been criticized for their bad graphics. Using Aves Engine, Zynga will be taking a step up in graphics quality. Zynga acquired Bonfire Studios in October 2010 and the new studio will be known as Zynga Dallas. Bonfire Studios was started by David Rippy, Bill Jackson and Scott Winsett in November 2008, after Microsoft shut down Ensemble Studios (the legendary maker of the Age of Empire games). In November 2010, Zynga entered in to a partnership with DreamWorks Animation. Megamind will become a neighbor to 17 M game players on FarmVille. Megamind will launch Mega-Farm, a new themed landmark within FarmVille.

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COMPANY BACKGROUND
Zynga was founded in June 2007 by Mark Pincus, a former management consultant and venture capitalist. Mark Pincus was one of the early investors in Facebook. In early 2007, Pincus learnt that Facebook would soon open its site to third party software developers. He and his small team comprising Michael Luxton, Eric Schiermeyer, Justin Waldron, Andrew Trader and Steve Schoettler launched their first game on Facebook which later became popular as Texas HoldEm Poker. Zynga was named after Zinga, Pincuss 13 year old American bull dog which died in late 2008.The company, based in San Francisco, has 350 employees. Zynga currently has 228 M monthly active users and 66 M daily active users on Facebook. Launches Several Games that Rank Among the Most Popular: The companys initial games were turn based social games. In these games, users play head-to-head with each other. Users can even login in to the game at different times in the day for an asynchronous session and wait for other users to make their moves. Zynga launched several games with these attributes. Popular games that it launched include Scramble, PathWords, Word Twist and Sudoku. The company also started offering its popular products on other social networks such as Facebook, MySpace, Bebo, Friendster and Hi5. In June 2008, Zynga launched an asynchronous game, Mafia Wars which grew to more than four million daily active users within three months. In July 2008, Zynga acquired YoVille, a large virtual world social network game. At the time of acquisition, YoVille had 150k daily active users. We believe the technology from YoVille was instrumental in helping Zynga move from interactive games to simulation games such as Farmville, FishVille, Caf World and PetVille. Zynga had 18 M monthly active users on Facebook. Zynga launched a mobile version of Texas HoldEm Poker game known as Live Poker for iPhone users in November 2008. Live Poker was one of the first applications to make use of Facebook Connect. Within a week of its launch, Live Poker became the leading free game and eight most downloaded application in the iTunes Application Store. Zynga had a monthly user base of 32 M on Facebook in November 2008. In March 2009, Zynga launched the mobile version of its word game Scramble on iPhone. Zynga released a version of the Mafia Wars game as a downloadable iPhone application in April 2009. Zyngas monthly active user on Facebook had increased to 45 M by then. Zyngas popular game launches on MySpace are Mafia Wars, Texas HoldEm Poker, Vampires, Street Racing, YoVille, Dragon Wars, Gang Wars, Fashion Wars, and Special Forces. Mafia Wars is the second most popular Zynga game on MySpace with 13 M total users. In June 2009, the company launched its blockbuster Farmville, which became an inflection point in the companys growth trajectory. Within a few weeks, FarmVille became one of top applications on Facebook. The company used the success of FarmVille to cross promote their new simulation games. Within two months of FarmVilles launch, Zynga increased its user base from 50 M monthly active users in June 2009 to 97.5 M monthly active users in August 2009. FarmVille is the second most popular application on Facebook and currently has 53.4 M monthly active users.

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In August 2009, Zynga acquired MyMiniLife, a social networking site that allows the user to build and decorate environments. The technology of virtual goods monetization used in MyMiniLife is now used in FarmVille. In August 2009, Zynga launched Roller Coaster Kingdom on Facebook, a game that allows users to build and manage virtual theme parks. Zynga launched Caf World on Facebook in October 2009. Caf World, built around the theme of a restaurant business, reached a user base of 8.6 M users within a week of its launch. In November 2009, Zynga launched a dedicated web portal for FarmVille. Users connect to this site using Facebook connect integration. This move allows Zynga to provide its users with a more engaging experience as this site will be free of the normal Facebook interface running around the borders and allows them a lot of flexibility in design. Zynga plans to port its other games to a separate portal based on the success of FarmVille.com. FarmVille.com web portal currently has 15 million users. We believe that the launch of Zyngas games on separate portals will not be very successful because these games on social networks make use of user notifications to attract new users. Zynga launched FishVille on Facebook in November 2009. FishVille is based on the same concept of Happy Aquarium from Crowdstar. The scam offers, which had been part of the ScamVille scandal, got back in to the game. Zynga and Facebook took the game down and re-launched it without the scam offers. In December 2009, Zynga launched PetVille on Facebook. PetVille marks the entry of Zynga in to the crowded virtual pet genre of social games. The launch of PetVille, FishVille and growing user subscription of all Zynga games catapulted Zyngas monthly active user base from 142 M in October 2009 to 230 M in December, 2009. Zynga has launched FarmVille on Windows Live Messenger and MSN Games on February 4th, 2010. Users can login using Facebook Connect and play FarmVille with more than 75 million players no matter which site they log onto. Zynga is also planning to launch its other games on MSN Games and Windows Line Messenger. If gamers are able to play Facebook games seamlessly from MSN Games, this could be the start of Facebook applications spreading to other popular game destinations such as Yahoo. However Zynga removed FarmVille from Microsofts MSN portal in August 2010. We believe the reason for this action was the very low adoption rate. Zynga launched Treasure Isle on Facebook in April 2010. Treasure Isle is a virtual world game where users dig for treasure on islands with their friends. Within a months time, Treasure Isle has become the seventh most popular Facebook application and has 26.8 million monthly users. In May 2010, Zynga entered in to a five year deal with Facebook for using Facebook Credits for virtual goods transactions that are executed in Zyngas games. Facebook will charge Zynga a flat rate of 30% of the value of each transaction. Zynga launched FrontierVille in June 2010. Zyngas new game does not fit in to any particular category. It is a mixture of features such as city building, farming, exploration and discovery. FrontierVille soared to more than 20 M monthly active users within 36 days of its launch and is currently the fourth most popular application on Facebook with more than 30 M monthly active users.

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Zynga launched its first localized game - Chinese version of Zynga Poker in August 2010. Zyngas choice as the first localized game seems to be based on the high engagement number Zynga Poker has seen since its launch in 2007.

Controversy aka ScamVille Scandal We estimate that the company receives 10 - 20% of its revenues from in-game offers such as those OfferPal Media and SuperRewards. OfferPal Media allows end customers to earn virtual currency if they answer surveys, get a subscription or partake in advertising offers. Many of these offers were little more than lead generation for OfferPal and similar lead generators. There are instances when a user may not be aware of the full extent of the monetary commitment or cancellation procedure at the time of signing up for an offer. For instance, users can get tricked into a mobile phone subscription merely because they entered their phone number as part of getting results for a quiz. It is not just the users who were affected. Firms that pay for lead generation also found that the quality of leads was worsening (as some users subscribed to the same offer multiple times). When the controversial aspects of the in-game promotions were brought to light by TechCrunch in October 2009, Zynga took actions to remove some of the more egregious offers. But when Zynga launched FishVille in November 2009, many of these scam offers resurfaced. Facebook made Zynga take FishVille offline until the scam offers were removed. Zynga re-launched FishVille in December. FishVille is now one of the most popular games on Facebook.

Financing Rounds Zynga has obtained four rounds of funding amounting to a total of $225M. In July 2008, Zynga secured $29M of Series B funding from KPCB, IVP, Union Square Ventures, Foundry Group, Avalon Ventures. In December 2009, Zynga obtained Series B2 funding of $25 M from Digital Sky Technologies (a large investor in Facebook), Andreessen Horowitz, Institutional Venture Partners and Tiger Global (Only $25 M was used for funding where as the rest of $180 M raised in this round was used for buying back Zynga shares from employees). In June 2010, Zynga obtained another round of Series B2 funding amounting to a total of $150 M from SoftBank.

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Exhibit 11: List of Zynga games on Company Website

Game Texas holdEm Poker Scramble Word Twist Dragon Wars Street Racing Vampires Special Forces Mafia Wars YoVille PathWords Pirates FarmVille Roller Coaster Kingdom Fashion Wars Caf World FishVille PetVille Treasure Isle FrontierVille

Launch Jun-07 Jun-07 Jul-07 Jul-07 Jul-07 Jul-07 Jul-07 Jun-08 Jul-08 Sep-08 Mar-09 Jun-09 Jul-09 Aug-09 Oct-09 Nov-09 Dec-09 Apr-10 Jun-10

Remarks First Game launched by Zynga Adaptation of Scrabble Word Combinations Popular on MySpace Popular on MySpace Time based pyramid game Commando game Popular on Facebook and MySpace Acquisition which led to creation of Sim Games Adaptation of Scramble puzzle Pirates plunder the seas First blockbuster game on Facebook Theme park simulation game Popular on MySpace Restaurant building game Virtual Aquarium Raising of Pets Digging of Treasure on Islands Mix of City building and farming

Source: Company Reports and Next Up Research

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Exhibit 12: List of Zynga games on Company Website

Source: Company Reports

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PRODUCT
Zynga offers a variety of games that can be played on multiple social network websites such as Facebook, MySpace, Bebo, Friendster, Tagged, My Yahoo and smart phones such as the iPhone. Once a user logs onto a game application, he can start inviting friends to play with him. Users can also chat with their friends while playing Zynga games. Zyngas games are known for their high stickiness quotient i.e. users get entrenched in the games they play. With the progression of time, users move on to higher levels of the game but need to keep playing the game at periodic intervals in order to maintain their position. Users help advertise for Zynga games by placing advertisements in their real estate and by notifying friends about their advances in the game. Exhibit 13: Zynga games on different networks

Games FrontierVille MafiaWars Cafeworld FishVille PetVille Roller Coaster Zynga Poker YoVille! Vampires Street Racing Pirates Dragon Wars FarmVille Special Forces Fashion Wars Blackjack Scramble Word Twist PathWords Sudoku Treasure Isle Scramble 2

Category Virtual World Game Role-playing Game Virtual World Game Virtual World Game Virtual World Game Virtual World Game Card Game Virtual World Game Role-playing Game Role-playing Game Role-playing Game Role-playing Game Virtual World Game Role-playing Game Role-playing Game Role-playing Game Puzzle Game Puzzle Game Puzzle Game Puzzle Game Virtual World Game Puzzle Game

Facebook X X X X X X X X X X X X X X X X X X X X X -

MySpace X X X X X X X X X -

Bebo X X -

Friendster Tagged MyYahoo X X X X X X -

iPhone X X X X X

Source: Company Reports and NeXt Up Research

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FarmVille FarmVille is the second most popular application on Facebook with nearly 53.8 M monthly active users. The game, launched in June 2009, allows users to build farms and create customized avatars to work on the farms. The various activities which can be performed by the users include plowing land, planting crops and harvesting them. Users can purchase various items such as trees, seeds, animals, buildings, vehicles and land using FarmVille coins. Plants on the farm can have various harvest times. The plants need to be harvested before that time so that they do not die. Users earn coins when they perform various activities such as harvesting crops. Using these points the players can graduate to the next level in the game. FarmVille coins can either be earned by performing various activities on the game or exchanged for real world currency. FarmVilles features are similar to that of Slashkeys Farm Town, which saw its user growth reduced from 19 M monthly active users to 15 M within six weeks of the launch of FarmVille. Farm Town currently has 4.9 M monthly active users. FarmVille users contributed $487500 towards the welfare of children in Haiti in October 2009. Exhibit 14: FarmVille Standalone Portal

Source: Company Reports and NeXt Up Research

Cafe World Cafe World, launched on Facebook in October 2009, is a restaurant empire building game. Users can actively participate in cooking dishes for the restaurant in a social way. Users can select a dish, buy the ingredients required for making it and then cook it over a period of time. Users can return to the game when the cooking is done and serve it to customers.

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Cafe World was launched six months after the launch of Restaurant City by Playfish. There are many similarities between the two virtual restaurant games such as the layout of the restaurants, view of the street on the side, design and animation of characters. In the first seven days, Caf World got more than eight million users. We estimate that there are 8.0 M monthly active users of Restaurant City on Facebook. We estimate that Cafe World has nearly 17.6 M monthly active users on Facebook. Exhibit 15: Caf World on Facebook

Source: Company Reports and NeXt Up Research

FrontierVille FrontierVille was launched on Facebook in June 2010. The game is a new mix of the farming and city building genres set in pioneer days. FrontierVille does not fit in to any particular game category as it includes an array of features such as city building, farming, exploration and discovery. Players can assume the identity of an ancient farmer who tries to make a living out of wild plot of land and raise a family in the process. FrontierVille was launched at a time when Zyngas monthly active users had dipped to around 200M from 240M. FrontierVille usage soared to more than 20M monthly active users within 36 days of its launch. It is currently the fourth most popular application on Facebook with 28.6 M monthly active users.

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Exhibit 16: FrontierVille on Facebook

Source: Company Reports and NeXt Up Research

FishVille FishVille launched in November 2009, belongs to the genre of Facebook applications which are built around the idea of virtual aquarium. Users are given a virtual aquarium with a few fish to start with. Users can harvest the fish, sell them and use the earnings to buy fish eggs and then feed the fish. As with other Zyngas games, users need to wait for a certain amount of time for the fish to grow and need to feed the fish to prevent them from dying. Users are rewarded with coins for performing activities such as inviting their Facebook friends to play FishVille, helping other players, selling fish, cleaning tanks etc. Users graduate to higher levels as they earn experience points. FishVille is similar to Fish World a game with 1.65 M active users (launched by Tall Tree Games) and Happy Aquarium (launched by CrowdStar, with 10 M monthly active users). Within two months of its th launch, FishVille became the 6 most popular application on Facebook with 24.6 M monthly active users. FishVille currently has 5.5 M monthly active users.

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Exhibit 17: FishVille

Source: Company Reports and NeXt Up Research

Mafia Wars Mafia Wars is available on Facebook, MySpace, Tagged, Yahoo and iPhone. A group of friends or connections can start a Mafia family. The family can manage a criminal empire and fight to establish their family as a more powerful group. The game play revolves around creating a mafia by recruiting players, doing and mastering jobs to earn cash and experience required for advancing ones criminal empire. Mafia Wars is set in New York City and Little Italy with the option for players to travel to Cuba, Moscow and Bangkok based on completion of certain levels in the game. We estimate that there are 22.4 M monthly active users of Mafia Wars on Facebook. Mafia Wars has 14.9 M monthly active users on MySpace.

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Exhibit 18: Mafia Wars

Source: Company Reports and NeXt Up Research

Texas HoldEm Poker Texas HoldEm Poker now known as Zynga Poker was the first gaming application that was launched by Zynga. It transformed the once fledging social game company Zynga to an online gaming powerhouse. Texas HoldEm Poker has always been one of the most popular Zynga games on Facebook and MySpace and is also available on Bebo, hi5, Tagged, Yahoo! and iPhone. Texas HoldEm Poker is a variation of the card game of Poker in which individuals compete for money contributed by the players themselves. Each player attempts to control the amount of money in the pot based on the card he holds as the cards are dealt randomly, outside the control of players. Players need to buy Zynga poker chips to play the Texas HoldEm Poker. Playfish has rolled out Poker Rivals to compete with Zynga Poker. Texas HoldEm Poker is the third most popular application on Facebook and we estimate that there are 35.4 M monthly active users of Texas HoldEm Poker on Facebook. Texas HoldEm Poker is the seventh most popular game on MySpace and has 7.2 M monthly active users on MySpace.

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Exhibit 19: Texas HoldEm Poker

Source: Company Reports and NeXt Up Research

Treasure Isle Treasure Island launched in April 2010, is an island based social game where players need to hunt for treasure buried in island within a particular timeframe. The game play in Treasure Isle revolves around digging out land patches on deserted islands with an objective of finding treasure chests and money. Treasure Isle has resemblances to Treasure Madness (developed by zSlide) which has currently 2.1 M monthly active users. Treasure Isle was launched at a time when Zyngas gaming traffic had started to stagnate. Treasure Isle like FarmVille grew to nearly 3.2 M monthly active users within a span of 5 days. Treasure Isle currently is th the 11 most popular application on Facebook and has 13.2 M monthly active users.

PetVille PetVille launched in December, 2009 is a game built on the same idea as Playfishs Pet Society. Users can create a customized pet, raise it and care for a pet that they have created. Players get coins in return for doing activities such as washing the pet, cleaning the pet and visiting friends houses as well as carrying out activities such as dancing with pets.

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When the player runs out of energy, he can replenish himself only by taking rest, not by purchasing virtual food or beverage as with other games. Users graduate to the next level by earning points for the activities they perform. Higher levels provide more profitable food for the pets and exclusive items that can be bought for the users homes. We estimate that there are 8.9 M monthly active users of PetVille on Facebook.

YoVille In YoVille (similar to the other popular game Habbo Hotel), users can create a character for themselves and customize the hairstyle and clothing. Once the character has been set up, players can start taking part in various activities in YoVille such as decorating ones virtual apartment, gambling in the virtual casino, playing games with other users, going to work at YoVille Widget Factory or shop. YoVille was acquired by Zynga in July 2008 when it had around 150k daily active users on Facebook. We estimate that there are 5.8 M monthly active users of YoVille on Facebook. Exhibit 20: YoVille

Source: Company Reports and NeXt Up Research

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FINANCIALS AND VALUATION


Zyngas games are free to play and Zynga derives its revenue through virtual goods, in-game advertising, lead generation and application installs. Virtual Goods Although the company has over 250M users, only a tiny fraction, less than 1% in our estimate, consistently make purchases of virtual goods. Zynga derives nearly 80% of its revenue from the sale of virtual goods. These goods are accessories for the games that can enhance a players capabilities. For instance, a tractor or high yield seeds could be a useful accessory for a farmer in FarmVille. In Mafia wars, the accessory could be higher performance guns. All these accessories can be purchased through Zyngas virtual currency. Each game has its own virtual currency that can be used only for that game. For instance, Coaster Cash that is used in Roller Coaster cannot be used for purchasing a gun in Mafia Wars. Users purchase virtual currency or in-game cash using real world currency or through virtual currency. Users can get virtual currency by paying real dollars, inviting their friends or by performing services in some games. For instance, a FishVille player can earn virtual currency by performing maintenance work on fish tanks of some other users. We expect virtual goods sales to dominate the companys revenue mix for the foreseeable future. Lead Generation (or Offers Marketing) Players can also earn virtual currency by signing up for offers (that are made by lead generation firms). We estimate that Zynga derives nearly 10% of its revenues through lead generation. We expect Zynga to benefit from business generated from more reputable businesses even as it grapples with keeping scams off. In Game Ads Over 95% of the users of Zynga never make a purchase. The company monetizes them through in game advertisements that appear during a game session. Such ad dollars contribute, in our estimate, to 20 30% of the companys 2009 revenues. We estimate Zynga currently gets CPM rates of 15 - 20 cents. We estimate that Zynga will derive only 5% of its revenues through In Game Ads in the future. Application Installs We believe Zynga offers a customized demographic profile for third party game developers. Zynga advertises third party games to its users. For these advertisements, Zynga charges 50 cents to $1 per application installation. We note that here the company charges on an installation basis rather than on a CPM basis, as it does with others in game ads. We estimate that Zynga will derive only 5% of its revenues through Application in the future.

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Zynga Adds Customers Through Cross Promotion and Heavy Advertisement on Facebook: Zynga is one of the largest advertisers on Facebook, with a budget of $5- $8M a month, in our estimate. The company spent $2M to advertise Farmville, which quickly grew to be one of the most popular applications on Facebook, overtaking Farm Town. In addition, Zynga also cross promotes its new games to its existing users. Zynga rewards users who refer their friends with virtual currency. Exhibit 21: Zyngas Revenues ($, million)

2,500 Virtual Goods In Game Ads Of f ers Marketing Application Installs

2,000

1,500

1,000

500

0 2008 2009 2010 2011 2012 2013 2014

Source: Company Reports and NeXt Up Research Estimates Exhibit 22: Revenue Moderates after 2014

2008 Revenue (million) %yoy

2009

2010E

2011E

2012E

2013E

2014E

$101

$278 175%

$740 166%

$1,160 57%

$1,480 28%

$1,800 22%

$2,120 18%

Source: Company Reports and NeXt Up Research Estimates

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We use the following methods a) Multiple of EV/Revenue, and b) Target EV based on steady state revenues, normalized net margins, and a growth multiple to arrive at an approximate valuation for Zynga. A. Steady State Revenue Method: As explained in Appendix A, valuing private companies while they are in a rapid growth trajectory is a difficult exercise. Minor shifts in time periods can cause significant shifts in valuation. We believe investors have to look at a year when growth moderates to around 15% and discount the valuation back to present. We calculate target EV based on the following formula (please see Appendix A for a detailed description of this method)

Target EV = Steady State Revenues * Normalized Margins* Growth Multiple

Target Market Cap = Target EV + Net Cash

Target Price = Target Market Cap/Diluted Shares Outstanding Assuming steady state revenues of $2120 million in 2014, normalized net margins of 20%, a growth multiple of 25, we arrive at a target 2010 enterprise value of $ 5.112 billion

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Exhibit 23: Valuations off Various Calendar Years Discounted to 2010 ($, million)
8,000

6,000

4,000

2,000

2008

2009

2010

2011

2012

2013

2014

Source: NeXt Up Research Estimates

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Exhibit 24: Estimated Stock Price Per Common Share as a Function of Exit Valuation for an IPO

$25
IPO Bear Case IPO Bull Case

$20

$10 Bull Case Valuation @ $5220 M $5 Bear Case Valuation @ $5112 M


$0

Share Price

$15

$0

$500

$1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500 Valuation ($, M)

Source: NeXt Up Research Estimates

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EV/Revenue Multiple: We believe that there are no publicly-listed companies involved in application building in the social networking space. To arrive at approximate estimates, we have used the following publicly-traded groups as a proxy for Zynga: a) home entertainment software, b) internet software and services. The 2010 median EBITDA margin values for the home entertainment software is 35%, and that for internet software and services is 41% (Exhibit 24 a and b). Between the two groups, we believe that internet software and services is similar to Zynga in terms of key financial ratios. Based on the table in Appendix A3, we are attributing a multiple of 4.5x to Zyngas EV/Revenues (assuming long term EBITDA margin of 26% and revenue growth rate of 40%). We believe that the EBITDA margin for home entertainment software should be considered as floor level valuation multiples for Zynga. EV = (EV/Revenue using Appendix A3)*(estimated revenue of Zynga in 2011) EV = 4.5 * 1160= $5.22 billion The list in Exhibit 24 has many companies which we believe have a slower growth rate than Zynga. But this universe should provide a conservative estimate for Zyngas valuation. Exhibit 25 a: Comparable Company Analysis - Home Entertainment Software Space
Secular Revenue ($, B) Company Name Ticker Total EV ($, B) CY10E Giant Interactive Konami Corp. Changyou.com Shanda Interactive Electronic Arts Activision Blizzard Nintendo GA 9766 CYOU SNDA ERTS ATVI 7974 0.76 2.28 1.50 2.20 3.47 11.13 25.07 0.21 3.00 0.32 0.90 4.14 4.50 16.44 CY11E 0.27 3.15 0.40 1.04 3.77 4.84 14.92 Mean Median CY10E 3.6 0.8 4.6 2.4 0.8 2.5 1.5 2.3 2.4 CY11E 2.8 0.7 3.7 2.1 0.9 2.3 1.7 2.0 2.1 27% NA 25% 16% NM 8% NA 19% 20% EV/Revenue Growth EBITDA Margin

50% 14% 45% 43% 8% 35% 25% 31% 35%

Source: Thomson One and Next Up Research Estimates

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Exhibit 25 b: Comparable Company Analysis - Internet Software and Services Space


Secular Revenue ($, B) Company Name Ticker Total EV ($, B) CY10E Google Yahoo NHN Corp Netease.com Tencent Baidu Alibaba GOOG YHOO A035420 NTES 700 BIDU 1688 180.28 19.32 7.64 4.87 34.62 37.48 11.02 27.42 4.89 1.29 0.83 2.72 0.96 0.77 CY11E 31.46 5.12 1.47 1.00 3.51 1.38 0.99 Mean Median CY10E 6.57 3.95 5.94 5.90 12.73 39.20 14.37 5.6 5.9 CY11E 5.73 3.78 5.21 4.86 9.86 27.15 11.17 4.9 5.0 15% 15% 14% 21% 15% 30% 15% 16% 15% EV/Revenue Growth EBITDA Margin

41% 35% 41% 44% 32% 32% 26% 40% 41%

Source: Thomson One and NeXt Up Research Estimates In the above table, we note that China based companies such as Tencent and Baidu tend to have higher EV/Revenue multiples (almost 3x of comparable US companies) despite comparable growth rates and EBITDA margins. Based on our table in Appendix A3, Tencent and Baidu should have an EV/Revenue mutiple of 3.2x and 4.6x respectively. However, the table in A3 assumes US corporate taxes. If Chinas below 10% corporate taxes are applied to our formulas, the EV/Revenue will be higher for a given growth rate and EBITDA margin. Excluding the impact of taxation, brings the companies in these two regions somewhat closer. But the Chinese companies still get a premium. We attribute the difference to perceived long term potential from China market and more limited supply of higher quality, high growth large market cap companies for indexes that track those regions. For valuation purposes, we believe that only EV/Revenue multiples of US companies such as Google and Yahoo should be used as a guidance for deciding on a multiple for RockYou, Slide or Zynga. B. M & A Transaction Analysis: In this section we look at the valuation metrics of acquisitions, mergers and IPOs for comparable companies, to provide a sense of what the market is willing to pay for these securities.

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Exhibit 26: M & A Activities in SNS and Social Application Development Space

Acquirer

Target

Date

Target's business and Reason for Purchase

Deal Size

Viacom

Xfire Favorite Peeps Flektor Photobucke t Pieces of Flair and Speed Racing Sumize

Apr 06

Xfire is a tracking tool for gamers, allowing friends to find friends. Favorite Peeps is similar to Slides Top Friends Flektor allows users to create widgets from photos, video and text. Photobucket allows uploading, sharing, linking and finding photos, videos and graphics Speed Racing is a popular game on Facebook. Pieces of Flair is similar to Fun Wall, Super Wall, and Bumper Stickers. Summize is a search engine commonly used to track Twitter conversations It is a large virtual world social network game Allows blog owners to add a univerisal add button to their blog so visitor can add your post to various social bookmarks. MyMiniLife lets the user to built and decorate virtual homes and other virtual environment iLike helps share music recommendations, playlists, and personalized concert alerts GoPets had advanced virtual goods monetization features One of the leaders in social games Facebook developer with games such as (lil) Green Patch, (lil) Blue Cove, (lil) Eco Racer and (lil) Farm Life An iPhone developer with games such as MobRacer, The Godfather II Crime Rings, Fighter Jets, Armada and Bug Olympics

$102 M

Slide

Jun 07

$60 K

MySpace

Jul 07

$20 M

MySpace

Jul 07

$250 M

RockYou

Jul 08

NA

Twitter

Jul 08

NA

Zynga

YoVille

Jul 08

NA

Clearspring

AddThis

Oct 08

NA

Zynga

MyMiniLife

Aug 09

NA

MySpace

iLike

Aug 09

$20 M

Zynga

GoPets

Oct-09

NA

Electronic Arts

PlayFish Green Patch Trippert Labs

Nov-09

$400 M

Playdom

Nov-09

NA

Playdom

Nov-09

NA

Source: Company Reports and NeXt Up Research

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Exhibit 26: M&A Activities in SNS and Social Application Development Space (Continued)
Deal Size NA NA NA

Acquirer

Target

Date

Target's business

MOL Global Zynga Playdom

Friendster Serious Business Offbeat Creations Three Melons

Dec-09 Feb-10 Mar-10

A social networking site past its prime Facebook developer with games such as Friends For Sale and Rock Legends Facebook developer with games such as Super Farkle, Be a tycoon, Give a Heart, Chug It! Argentine based Facebook developer with games such as soccer application Bola Developer of widgets, games such as Flood-It , LineUp 2, Trio and Round-e Up for web environments Developer of social games for big brands such as Sea World, Purina, National Geographic and NBC Uinversal Social game publisher known for its Facebook guitar game RockFree and its reputation in the casual and MMORPG gaming space North American version of the free Asian MMORPG video game Dekaron published by GameHi. Chinese social game developer whose games are available on Facebook and chinese social networks like RenRen Facebook developer known for games such as Warstorm and Ponzi Facebook developer known for games such as Knighthood, Youtopia, Kick-Off and Sindicate Social Gaming startup Online Game studio that has launched games such as Island Life and My Vineyard One of the popular application developers on Facebook Popular social gaming company - the biggest developer on MySpace and fourth largest developer on Facebook A German based game engine developer known for developing the Aves Engine which enabled high-end game play within a web browser A game studio based in Dallas

Playdom

Apr-10

NA

Google

LabPixies

Apr-10

$25M

Playdom

Merscom

May-10

NA

Playdom

Acclaim

May-10

NA

Playdom

2Moons

May-10

NA

Zynga

XPD Media Challenge Games

May-10

NA

Zynga

Jun-10

NA

Playdom MTV Playdom Google

Hive7 Social Express Metaplace Slide

Jun-10 Jul-10 Jul-10 Aug-10

NA NA NA $182 M

Disney

Playdom

Aug-10

$573 M

Zynga

Dextrose Bonfire Studios

Oct-10

NA

Zynga

Oct-10

NA

Source: Company Reports and NeXt Up Research

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Valuation based on Recent Transactions: Google acquired Slide for $182 million in August 2010 valuing Slides EV at 4.2x 2011 our revenue estimate of $44M for Slide. Walt Disney acquired Playdom for $563.2 million in August 2011 valuing Playdoms EV at 5.5x Playdoms 2011 revenues of $98M (our estimate). Using these M&A transactions as a comparable and assuming a median multiple of 4.45, Zyngas Target EV = 4.45 x $1160 million = $ 5.166 billion.

Exhibit 27: Valuation Summary

Methodology Steady State Revenues EV/Revenue Recent M&A or Term Sheets

Enterprise Value ($,M) $5,112 $5,220 $5,166

Source: Company Reports and NeXt Up Research estimates

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Zyngas Capitalization Structure Exhibit 28: Post Money Valuation for Zynga

Event Date Authorised No of shares Diluted Shares Estimate (M) Preferred Shares Issued (M) Type of Preferred Liquidation Multiple Anti-Dilution Provisions Pay to Play Provisions Conversion Rate (Preferred to Common) Issue Price/Share in $ New Conversion Price (due to down-round) Dividend Rate (Non Cumulative) Amount of Funding (M) Pre- Money (M) Debt Post Money (M)

Series A Apr-08 200.00 75.3 49.5 Conventional Convertible 1x Weighted Average None 1 to 1 $0.11

Series A1 Jun-08 290.24 124.8 20.1 Convention al 1x Weighted Average None 1 to 1 $0.25

Series B Jul-08 290.24

Series B1 Nov-09 338.24 174.6 1.6 Convention al 1x Weighted Average None 1 to 1 $9.49

Series B2 Dec-09 336.66 220.9 1.95 Conventional Convertible 1x Weighted Average None 1 to 1 $12.87

Series B2 Jun-10 412.81 298.4 11.65 Convention al 1x Weighted Average None 1 to 1 $12.87

IPO

Merger

144.9
29.7 Convention al 1x Weighted Average None 1 to 1 $0.84

310.0

310.0

16.4816.83

16.4816.83

8.0% 5.6 8.5

8.0% 5.0 31.2

8.0% 25.0 122.0

8.0% 15.2 1657.5

8.0% 25.04 2843.9

8.0% 150.00 3840.8

14

36

147

1673

2869 Digital Sky Technologies, Andreessen Horowitz, Institutional Venture Partners, Tiger Global

3991

$5112$5220

$5112$5220

Investors

Avalon Ventures, Clarium Capital, Foundry Group, Pilot Group, union Square Ventures, Reid Hoffman, Peter Thiel, Brad Pittman, Andy Russell, Brad Feld

Kleiner Perkins Caufield and Byers, Union Square Ventures, Foundry group, Avalon Ventures

SoftBank

Source: Company Reports and NeXt Up Research Liquidation Scenarios: Zynga has raised funding through four rounds. There is preference or seniority among preferred share holders and in the case of liquidation, each preferred shareholder gets an amount in proportion to his contribution to the total funding.

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Exhibit 29: Liquidation preference

Funding Type

Shares (M)

Issue Price/Share ($)

Total Investment ($,M)

Liquidation Preference (X)

Dividend Rate

Liquidation Rate ($,M)

Series A Preferred Series A1 Preferred Series B Preferred Series B1 Preferred Series B2 Preferred

49.5 20.1 29.7 1.6 13.6

0.1129 0.25 0.8419 9.4922 12.87293

5.59 5.03 25.00 15.19 174.77

1 1 1 1 1

0.08 0.08 0.08 0.08 0.08

5.59 5.03 25.00 15.19 174.77

Source: Company Reports and NeXt Up Research; Scenario 1: Exit Valuation less than or equal to $241.69 M In this case, Series A, Series A1, Series B, Series B1, Series B2 preferred shareholders receive their proceeds of $5.59 M, $5.03 M, $25 M, $15.19 M, $174.77 M respectively because of their seniority over common shareholders and the remaining proceeds are shared among common shareholders. Scenario 2: Exit Valuation between $241.69 M and $281.51 M At an exit valuation of $241.69 M, Series A preferred shareholders convert all 49.5 M shares in to common stock as the stock price is greater than the conversion price of $ 0.11. Series A1, Series B, Series B1, and Series B2 preferred shareholders receive their proceeds of $5.03 M, $25 M, $15.19 M and $174.77 M and the remaining proceeds are shared among common shareholders. Scenario 3: Exit Valuation between $281.51 M and $440.82 M At an exit valuation of $281.51 million, Series A1 preferred shareholders convert all 20.1 million shares in to common stock as the issue price is more than the conversion price of $ 0.25. Series B, Series B1, and Series B2 preferred shareholders receive their proceeds of $25 M, $15.19 M and $174.77 M and the remaining proceeds are shared among common shareholders.

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Scenario 4: Exit Valuation between $440.81 M and $2991.02 M At an exit valuation of $440.81 million, Series B preferred shareholders convert all 29.7 million shares in to common stock as the issue price is more than the conversion price of $ 0.8418. Series B1, and Series B2 preferred shareholders receive their proceeds of $15.19 M and $174.77 M and the remaining proceeds are shared among common shareholders. Scenario 5: Exit Valuation between $2991.02 M and $3990.82 M At an exit valuation of $2991.02 million, Series B1 preferred shareholders convert all 1.6 million shares in to common stock as the issue price is more than the conversion price of $ 9.5. Series B2 preferred shareholders receive their proceeds of $174.77 M and the remaining proceeds are shared among common shareholders. Scenario 6: Exit Valuation greater than $3990.82 M At an exit valuation of $3990.82 million, Series B2 preferred shareholders convert all 13.59 million shares into common stock as the issue price is greater than the conversion price of 12.87923. Beyond this point, the entire proceeds are shared among common shareholders as all Series A, Series A1, Series B, Series B1 and Series B2 preferred shareholders have converted all shares to common stock.

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Exhibit 30: Payoff Graph for an M & A case


$24 Common Shareholders $22
$20 Series A

Series A1 Series B
Series B1 Series B2 converts @ $12.87

$18
$16

Series B2
Share Price

$14
$12

Series B1 converts @ $9.5

$10 $8
$6

Series A converts @ $0.11

Series B converts @ $.85

$4
$2

Bull Case Valuation @ $5220 M Series A1 converts @ $0.25


$0 $400

Bear Case Valuation @ $5112 M

$0
$800 $1,200 $1,600 $2,000 $2,400 $2,800 $3,210 $3,610 $4,010 $4,410 $4,810 $5,210 Valuation ($,M)

Source: Company Reports and NeXt Up Research

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Exhibit 31: Summary of Funding Rounds for Zynga


Amended and Restated Certificate of Incorporation Initial Oct-07 Shares Autorized (M) Common Series A Preferred Series A1 Preferred Series B Preferred Series B1 Preferred Series B2 Preferred Series Z Preferred Preferred Stock Pricing ($) Common Series A Preferred Series A1 Preferred Series B Preferred Series B1 Preferred Series B2 Preferred Series Z Preferred Dividends ($) Series A Preferred Series A1 Preferred Series B Preferred Series B1 Preferred Series B2 Preferred Series Z Preferred 0.0001 0.0001 0.9030 0.0001 0.9030 0.0001 0.9030 2.00 0.0001 0.9030 2.0000 6.7350 0.0001 0.9030 2.0000 6.7350 0.000025 0.2258 0.5000 1.6838 18.9843 0.000025 0.1129 0.2500 0.8419 9.4922 12.8729 0.0100 0.000013 0.1129 0.2500 0.8419 9.4922 12.8729 0.0100 0.000013 0.1129 0.2500 0.8419 9.4922 12.8729 0.0100 20 1st Nov-07 25.00 6.00 2nd Jan-08 25.00 6.22 3rd Feb-08 29.28 6.21 3.10 4th Jul-08 36.28 6.21 2.51 3.71 5th Jun-09 42.28 6.21 2.51 3.71 6th Nov-09 168.33 24.85 10.05 14.85 0.80 7th Dec-09 336.66 49.70 20.10 29.70 1.60 1.94 10.00 8th Apr-10 360.26 49.70 20.10 29.70 1.60 1.94 10.00 9th May-10 382.82 49.70 20.10 29.70 1.60 24.50 10.00

0.0722

0.0722

0.0722 0.16

0.0722 0.1600 0.5388

0.0722 0.1600 0.5388

0.0181 0.0400 0.1347 1.5187

0.0090 0.0200 0.0638 0.7594 1.0298 0.0008

0.0090 0.0200 0.0638 0.7594 1.0298 0.0008

0.0090 0.0200 0.0638 0.7594 1.0298 0.0008

Source: Company Reports and NeXt Up Research

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INVESTORS
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Reid Hoffman (Angel funding) Avalon Ventures Clarium Capital Foundry Group Pilot Group Union Square Ventures Kleiner Perkins Caufield & Byers Digital Sky Technologies Andreesen Horowitz Institutional Venture Partners Tiger Global Peter Thiel Bob Pittman Andy Russell Brad Feld SoftBank

Exhibit 32: Summary of Funding Rounds for Zynga


Investment Rounds Series A Series A1 Series B Series B1 Series B2 Series B2 Total Period Apr-08 Jun-08 Jul-08 Nov-09 Dec-09 Jun-10 Funds Raised $5.589 million $5.025 million $25 million $15.187 million $25 million $150 million $225.81 million

Source: Company Filings and NeXt Up Research; ** Only $25 million of $180 million raised in December 2009 will be used to power Zyngas growth. Rest of the money is being used to buy back shares from Zynga employees.

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MANAGEMENT
Mark Pincus, Founder & CEO Mark Pincus is the founder of Zynga. Prior to Zynga Mark founded firms such as Tribe Networks, SupportSoft and FreeLoader. After selling FreeLoader, Mark founded Support.com in August 1997 with Cadir Lee and Scott Dale to address the problems in Windows computing. Support.com later became SupportSoft. Mark also started Tribe.Net, one of the first social networks in 2003. Mark has also worked with several corporations such as TCI and Liberty Media (out of Denver). Mark holds a BS in Economics from Wharton and MBA from Harvard Business School.

Owen Van Natta, Executive Vice President of Business Owen Van Natta is responsible for the companys revenue strategy, corporate development, international expansion and brand. Owen is also a member of Zynga's Board of Directors. Prior to joining Zynga, Owen served as Chief Executive Officer of MySpace. Prior to joining MySpace, Owen held positions as the CEO of Playlist and as COO of Facebook. Early in his career, Owen was VP of Worldwide Business and Corporate Development at Amazon, where he managed global marketing programs and strategic partnerships. Owen was also a part of founding team at A9.com, Amazon.com's search company. Owen holds a bachelors degree from University of California at Santa Cruz.

Dave Wehner, Chief Financial Officer Dave Wehner is the Chief Financial Officer at Zynga. Prior to joining Zynga, Dave was a managing director at Allen & Company, where he has worked since 2001. At Allen & Company, Dave led corporate finance teams in raising capital and M&A transactions with a focus on firms Silicon Valley clients. Prior to Allen & Company, Dave worked as a VP Corporate Development for an e-commerce start-up and was involved in numerous M&A and financing transactions while working at the technology-focused investment banking firm Hambrecht & Quist. Earlier, Dave worked as a strategy consultant for global consulting firm Monitor Company. Dave holds a BS in Chemistry from Georgetown University and a MS in Applied Physics from Stanford University.

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Steve Chiang, President of Studios Steve Chiang is the president of Studios at Zynga. Steve has 17 years of gaming experience working at Electronic Arts and Tiburon Entertainment. Prior to Zynga, Steve was a Senior Vice President and Group Manager for EA Sports. During his 15 year tenure at Electronic Arts, Steve oversaw Madden NFL (one of the all-time bestselling video game franchises in North America) and was in charge of the development of popular sports titles such as NCAA Football, FIFA Soccer, NBA LIVE and NHL. Steve also worked with web teams to reLaunch EASports.com and create Tiger Woods PGA Tour online. Prior to joining Electronic Arts, Steve was co-founder of Tiburon Entertainment which was acquired by Electronic Arts in 1998. Steve Chiang holds a degree in electrical engineering from Columbia University.

Reggie Davis, General Counsel Reggie Davis is the General Counsel at Zynga and looks after all aspects of Zyngas legal affairs. Prior to joining Zynga, Reggie served as associate general counsel for a period over nine years at Yahoo!. At Yahoo, Reggie worked closely on quality and security initiatives such as click fraud litigation and contributed to founding the first information security committee. Prior to Yahoo!, Reggie served as partner at Duane Morris LLP for a period of ten years. Reggie holds a bachelors degree in European history and sociology from Harvard and a JD from Tulane Law School.

Cadir Lee, Chief Technology Officer Cadir manages the analytics, network operations, security and India operations teams. Prior to joining Zynga, Cadir was the CTO of Support.com (an online technology support company that Cadir co-founded with Mark Pincus) for a period of 11 years. Prior to Support.com, Cadir was an engineering consultant at Hewlett Packard for two years. Cadir began his career as an entry level programmer at SpaceWorks, a technology company in Washington, DC. Cadir Lee holds a bachelors degree (with honors and distinction) in biology and music from Stanford University.

Vish Makhijani, SVP of Casual & Mobility Divisions Vish Makhijani is Senior Vice President of Zyngas Casual and Mobility Divisions. Prior to joining Zynga, Makhijani was CEO of Yandex, a Russian search company, where Vish is still a board member. Prior to Yandex, Vish had a long career with Yahoo!, most recently as VP of Yahoo! Search. Vish holds a BS in Accounting.

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Colleen McCreary, Chief People Officer Colleen McCreary is the Chief People Officer at Zynga. Prior to Zynga, Colleen served as global human resources director at Electronic Arts for a period of five years. Prior to EA, Colleen served as senior technical recruiter and technical support manager at Microsoft for a period of 7 years. Colleen holds a bachelors degree in mass communication and public relations from Boston University and an MA in higher education administration from Columbia University.

Eric Schiermeyer, Co-Founder and SVP of Product Eric is a co-founder and Senior Vice President of Product at Zynga. Prior to Zynga, he co-founded three successful start-ups including eUniverse (Intermix Media) and DVDwave. Intermix Media was the founder of MySpace.com. Eric studied philosophy and economics at University of California, Santa Cruz. He has interests in world religions, philosophy, martial arts and yoga.

Mike Verdu, Senior Vice President of Games Mike, a 19-year veteran of the gaming industry, heads the game studios for FarmVille, Mafia Wars, Caf World, Zynga Poker as well as Zyngas new Baltimore and Los Angeles studios. Mike has key credits on video games that have sold more than 20 million copies. Prior to joining Zynga, Mike was the General Manager of EA Los Angeles where he managed three major franchises Command & Conquer, Medal of Honor and The Lord of the Rings: The Battle for Middle-earth. Mike also served as a co-studio head at Atari and co-founder and CEO of Legend Entertainment Company. Mike studied Computer Science at Rensselaer Polytechnic Institute.

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BOARD OF DIRECTORS
Mark Pincus (Founder and CEO) and Owen Van Natta (Executive Vice President of Business) Please refer to the Management section

Bing Gordon (Kleiner Perkins Caufield and Byers) Bing Gordon has been a partner at Kleiner Perkins since June 2008. Prior to KPCB, Bing was the Chief Creative Officer of Electronic Arts from 1998 to 2008. Bing joined EA in 1982 and was instrumental in the creation of the founding business plan that attracted KPCB as initial investor. Bing has driven EAs branding strategy at WA sports, EAs pricing strategy for package goods and online games and contributed to design and marketing at many EA franchises. Bing has been a director at Amazon since 2003 and was a founding director at Audible. Bing is also a trustee of the Urban School of San Francisco and serves on the Yale Presidents Advisory Council. Bing Holds a BA in Drama and Literature from Yale and a MBA from Stanford University

Brad Feld (Foundry Group) Brad Feld has been an early stage investor and entrepreneur for more than 20 years. He co-founded Foundry Group, Mobius Venture Capital and prior to that Intensity Ventures. Previously, Brad was the CTO of AmeriData Technologies, which was acquired by GE Capital in 1995. Prior to that, he founded Field Technologies in 1987, which was later acquired by AmeriData Technologies. Brad currently serves on the board of directors of a number of private firms such as Rally Software, Gist, Gnip, NewsGator, Gold Systems, StillSecure and Judys Book. Brad holds a BS and MS in Management Science from Massachusetts Institute of Technology. He is avid art collector and marathon runner. He has completed eight marathons as a part of his mission to run marathon in each of the 50 states

Reid Hoffman (LinkedIn) Reid Hoffman is the founder and Chairman of LinkedIn, a professional networking site with 17 M members. Reid also serves as director on the boards of SixApart and Mozilla Corporation. Reid was the CEO of LinkedIn from 2003 to 2007 and from December 2008 to June 2009. Prior to LinkedIn, Reid was Executive Vice President of PayPal wherein he was in charge of all business relationships. During his tenure at PayPal, Reid played a key role in the acquisition of PayPal by eBay in 2002 and was responsible for partnerships with Intuit, Visa, MasterCard and Wells Fargo. Reid holds a BS in Symbolic Systems from Stanford University and MS in philosophy from Oxford University

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Appendix A: What Multiple?


It becomes very difficult to value companies while they are on a high growth trajectory. Not only do the revenues grow rapidly but the profitability starts to expand as well. Under such a rapid growth scenario, any valuation attempt could lead to significant errors due to timing of estimates. A better approach is to focus on a year when growth rate is slow enough, that small shifts in time period do not sufficiently alter the valuation and then discount the value to the present assuming a cost of capital and risk premium that is in line with a slower growth steady state mode. Due to law of large numbers, any growth company will moderate to a slower growth rate of 15% a year (or less) in a finite number of years. For the purposes of our report, we are assuming that subject companies will reach that steady state level in 2 5 years. Exhibit A1: Hypothetical Revenue Growth Pattern of a Firm Since Inception
450 400 350 300 250 200 150 100 50 0 0 2 4 6 8 10 12 14 16

Steady State Growth

Source: NeXt Up Research

At 15% or lower growth rate, the market multiple (Exhibit A2) is then determined primarily by the yield on ten year notes. Although yield at the time of writing could be higher due to loose monetary policy, we believe eventually ten year notes will tend to trade closer to their historical averages of about 5%. Accordingly, we are assigning a growth multiple of 25 for most of our subject companies based off steady state revenue numbers and normalized net margins. Most companies tend to focus on growth at the expense of profitability during early stages of growth. Normalized net margins are the maximum profitability that a company could potentially achieve at any revenue level. This could vary dramatically from actual net margins.

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Target EV = Steady State Revenues * Normalized Margins* Growth Multiple Target Market Cap = Target EV + Net Cash Target Price = Target Market Cap/Diluted Shares Outstanding

Exhibit A2: Growth Multiple as a Function of T-Bill Rate and Revenue Growth
T Bill Rate Revenue Growth 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2.0% 34x 41x 50x 60x 72x 86x 102x 120x 141x 165x 2.5% 27x 32x 39x 47x 56x 66x 78x 92x 108x 125x 3.0% 22x 19x 32x 38x 45x 54x 63x 74x 86x 99x 3.5% 19x 23x 27x 32x 38x 44x 52x 61x 70x 81x 4.0% 17x 19x 23x 27x 32x 38x 44x 51x 59x 67x 4.5% 15x 17x 20x 24x 28x 32x 38x 43x 50x 57x 5.0% 13x 16x 18x 21x 24x 28x 33x 37x 43x 49x 5.5% 12x 174x 16x 19x 22x 25x 29x 33x 37x 42x 6.0% 11x 13x 15x 17x 19x 22x 25x 29x 32x 36x 6.5% 10x 12x 13x 15x 17x 19x 21x 24x 28x 31x

Formula: P/E=(1-(g/ROEhg) x (1+g) x (1-((1+g)^n)/(1+khg)^n)/(khg-g)) + ((1-(gn/ROEst) x (1+ g)^n x (1+g)^n x (1+gn))/(kst-gn)x(1+khg)^n) Assumptions: Beta - 1 ROEhg return on equity in the high growth period, made assumption that its 30% ROEst in the stable period, made assumption that its 10% gn growth in the stable period, made assumption that its 4% Cost of equity khg=risk free rate (T-Bill)+ B (changed to 1.5 and 1) x (equity risk premium) (assumed 4%)

Source: Benjamin Graham, Security Analysis (1951), McGraw Hill We are providing our methodology as a framework. Investors can change any of our variables to arrive at their own metrics.

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In our valuation methodology, we also have tried to look at comparable group of companies and estimate their EV/Revenue multiple. We believe that adjusting for risk, the EV/Revenue multiple is a function of growth rate (over the subsequent 2 3 years from our reference year) and EBITDA margins. We may attribute a higher or lower multiple than peer group based on these two variables as outlined in Exhibit A3. Exhibit A3: EV/Revenue Multiple as a Function of EBITDA Margins and Revenue Growth
Revenue Growth EBITDA Margin 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2.5x 2.3x 2.0x 1.8x 1.5x 1.3x 1.0x 0.8x 0.5x 0.3x 5% 3.3x 2.9x 2.6x 2.3x 2.0x 1.6x 1.3x 1.0x 0.7x 0.3x 10% 4.0x 3.6x 3.2x 2.8x 2.4x 2.0x 1.6x 1.2x 0.8x 0.4x 15% 4.8x 4.3x 3.8x 3.4x 2.9x 2.4x 1.9x 1.4x 1.0x 0.5x 20% 5.6x 5.0x 4.5x 3.9x 3.3x 2.8x 2.2x 1.7x 1.1x 0.6x 25% 6.3x 5.7x 5.1x 4.4x 3.8x 3.2x 2.5x 1.9x 1.3x 0.6x 30% 7.1x 6.4x 5.7x 5.0x 4.3x 3.6x 2.8x 2.1x 1.4x 0.7x 35% 7.9x 7.1x 6.3x 5.5x 4.7x 3.9x 3.2x 2.4x 1.6x 0.8x 40% 8.7x 7.8x 6.9x 6.1x 5.2x 4.3x 3.5x 2.6x 1.7x 0.9x 45% 9.4x 8.5x 7.5x 6.6x 5.7x 4.7x 3.8x 2.8x 1.9x 0.9x 50% 10.2x 9.0x 8.2x 7.1x 6.1x 5.1x 3.1x 3.1x 2.0x 1.0x

Source: NeXt Up Research

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Appendix B: Top Applications of Facebook


S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Name Phrases FarmVille Texas HoldEm Poker FrontierVille Mafia Wars Causes Caf World Quiz Planet Are You Interested Give Hearts Treasure Isle Millionaire City Windows Live Messenger Hey I Like Pet Society Bejeweled Blitz BandPage by RootMusic MindJolt Games Birthday Cards Phrases (new) Average Users Monthly (million) 54.3 53.8 35.4 28.6 22.4 20.3 17.0 14.9 14.4 14.3 13.2 12.6 12.5 12.4 12.3 11.8 11.0 10.9 10.6 10.3 Developer Phrases Zynga Zynga Zynga Zynga Causes Zynga CrowdStar SNAP Interactive 6 waves Zynga Digital Chocolate Windows Live Digitware Electronic Arts Popcap Games RootMusic MindJolt RockYou Takeoff Monkey

Source: AppData

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Appendix C: Other Zynga Games


Vampire Wars Vampire Wars is a time based pyramid game where the goal of players is to become the most powerful vampire rather than achieving the highest level in the game. Users can become the most powerful vampire by recruiting the maximum number of players in to their clan and by acquiring a mix of abilities. We estimate that Vampire Wars has 1.8 M monthly active users on Facebook and 5.2 M monthly active users on MySpace.

Roller Coaster Roller Coaster Kingdom, launched in July 2009, is a theme park simulation game that gives users a chance to create and own a theme park. Users can build exciting rides, open food stands and design the theme park in such a way that it has repeat audience. New players of the game will get 10 Coaster cash. Unlike other Zynga games which run in the background, Roller Coaster only runs when it is kept open in a browser window. Roller Coaster Kingdom has seen a drop in user activity. We attribute the decline to slow loading times. We estimate that there are 330 k monthly active users of Roller Coaster on Facebook.

Street Racing Street Racing is one of the popular Zynga games on MySpace. Users can challenge other players in a one-on-one or a crew race. The main goal is to win races and earn money to acquire cars and property. Players can also use virtual currency to get car upgrades and reach higher levels in the game. The factors that affect the chances of victory in one- on-one challenges are attack statistics and possession of a car with superior specifications. We estimate that there are 151k monthly active users of Street Racing on Facebook. Street Racing has 4.6 M monthly active users on MySpace.

Pirates In Pirates launched by Zynga in March 2009 on Facebook and MySpace, Users can build a fleet of pirate ships with their friends, engage the enemies in battle and dominate the seas. Pirates can loot and plunder the seas in search of gold, power and wenches. All players begin with a common set of resources such as health, energy and gold. These resources get used based on the actions or quests performed by the players. Pirates need to Plunder to advance to

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higher levels of the game. The players can either purchase virtual goods or earn a reward in exchange for carrying out quests. We estimate that there are 117k monthly active users on Facebook alone.

Scramble Scramble is an adaptation of the Scrabble game, in which players have to generate words from a jumbled grid of letters. Players can match their wits against others in a live game or host a private game to which they can invite a maximum of 20 friends. We estimate that there are 398k monthly active of Scramble on Facebook.

PathWords PathWords was launched by Zynga in September 2008. It belongs to the genre of games related to scramble puzzle. Users are presented with a grid of letters that they can encircle to create words. Once a word is formed, the letters used to form the word, disappear from the grid and are replaced by new ones. Users can host a game with their friends and try to beat friends scores in the Ladder mode. We estimate that there are 189k monthly active users of Path Words on Facebook.

Fashion Wars Fashion Wars, launched in August 2009, allows users to select a diva and participate in fashion competitions. Style and attitude are the characteristics that determine the ranking as well as the ability of a diva to earn money or win a competition. These characteristics depend on the items which the diva has i.e. essentials, perks and vehicles. Players can increase the popularity of their diva by attending events or battling with other users. Users can earn money by recruiting friends to join their team. We estimate that Fashion wars has 69k monthly active users on Facebook.

Word Twist In Word Twist, the players have to come up with several different combinations of words using the set of letters given to them. The computer generates boxes and lets the user know the number of combinations of letters that are possible. Users can invite friends to play the game or play alone. We estimate that there are 160k monthly active users of Word Twist on Facebook.

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Special Forces Users logging in to Special Forces game begin as a recruit in a place called The Command. Players begin with standard amounts of energy, stamina, health and cash. They can purchase upgrades and recruit others to join their squad for carrying out mission and proceed to higher levels of the game. Each mission would involve an expenditure of energy. So users need to wait for their energy levels to be recharged. Players can also invest in contracts which provide hourly payoffs. We estimate that there are 59k monthly active users of Special Forces on Facebook.

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Appendix D: Social Networking Sites


Business Networking Family AdvisorGarage ArtBreak Blogtronix Commutal CompanyLoop ConnectBeam Decorati DoMyStuff Doostang Fast Pitch HooversConnect iKarma Inc. ImageKind Jambo Jigsaw Konnects Lawyrs Linkedin mediabistro.com Pairup.com Ryze.com Spoke.com Viadeo WebCrossing XING Amiglia CafeMom Cingo CommonGate Family 2.0 Famiva Famster Geni.com Genoom Kincafe Kinzin MayasMoM Minti MomJunction MothersClick myfamily.com OneGreatFamily OurStory.com Parentography The Family Post Friends 43 Things Amitize.com aSmallWorld Badoo.Com Bebo Eons Facebook.com Faceparty Flingr Friendster hi5 Lovento Multiply.com Mycool MySpace.com NetFriendships Netlog Orkut Passado Piczo Plazes Pownce.com ProfileHeaven reunion.com Vox.com Xanga XuQa Students AlumWire B4Class Campusbug CampusRank College.com CollegeMedium College Tonight DormItem.com Graduates.com Half.com iHipo LocalSchools Pazap.com Quizilla RateMyProfessor Student.com Studentbid.com StudentSN.com Uloop.com

Source: NeXt Up Research

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DISCLAIMER The research is prepared by NeXt Up Research. Next Up Research is not registered as an investment advisor in the United States. Nor is it a member of FINRA. The views expressed in this report correspond to our subjective views on the subject securities and issuers. This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Neither Next Up Research nor any of its employees own a direct or indirect long or short position in any of the companies mentioned in this report. The opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. This research report was intended to provide background information for accredited or institutional investors. Recipients who are not market professionals or institutional investors should seek the advice of their personal financial advisor before making any investment decisions based on this report.

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