Zynga Spends 10%, 20%, Or 30% On R&D?
Zynga (NASDAQ:ZNGA) spent 30% of its money on research & development (R&D) in 2018. It has been spending less money on R&D in the recent years. In fact, Zynga’s R&D, when looked at as a percentage of its revenue, has declined from 43% in 2016 to 30% in 2018. This can primarily be attributed to lower stock based compensation. The figure is expected to be higher in the near term, as the company reported an increase in the fair value of the contingent consideration related to its recent acquisitions of Small Giant and Gram Games. Zynga’s R&D expenses, as a percentage of revenue, at 30% in 2018, is much higher than the 15% figure for Activision Blizzard, but in line with 29% for Electronic Arts in fiscal 2019. In this note we discuss the key drivers of Zynga’s expenses. Look at our interactive dashboard analysis ~ ZNGA Expenses: How Does Zynga Spend Money? ~ for more details.
Zynga’s Total Expenses Were $892 Million, With Operating Expenses of $900 Million, $11 Million In Tax Expenses, And $20 Million In Non-Operating Income In 2018.
Zynga’s Net Income Margin Has Fluctuated In The Recent Years. It Saw An Uptick In 2017, Due To Certain One-Time Charges. The Expected Jump In 2019 Can Also Be Attributed To One Time Gain From A Building Sale
1. Operating Expenses Have Seen Modest Growth In Recent Years
- Zynga’s operating expenses have increased from $835 million in 2016 to $900 million in 2018, primarily driven by:
- (A) $66 million increase in COGS,
- (B) $50 million decline in R&D,
- (C) $43 million increase in S&M, and
- (D) $6 million increase in G&A expenses.
(A) Cost of Goods Sold (COGS)
- COGS grew from $239 million in 2016 to $305 million in 2018, driven by higher payment processing fees.
- As a % revenues, COGS grew from 32% to 34% over the same period.
- It will likely be around 35% in 2020, led by higher payment processing fees, as the company sees better mobile bookings.
(B) Research & Development (R&D):
- R&D has declined from $320 million in 2016 to $270 million in 2018, driven by lower stock based compensation expense.
- As a % of revenue, R&D has declined from 43% to 30% over the same period.
- It will likely grow to 33% in the near term, led by contingent consideration related to certain acquisitions, as reported by the company.
(C) Sales & Marketing (S&M):
- S&M expenses increased from $184 million in 2016 to about $227 million in 2018, led by higher player acquisition costs.
- As a % of revenue, sales & marketing expense has hovered around the 25% mark. however, we expect it to grow to 28% in 2020, led by higher promotional expenses for new games.
(D) General & Administrative (G&A):
- G&A expenses grew slightly from $93 million in 2016 to $99 million in 2018, driven by higher legal costs.
- As a % of revenues, general & administrative expenses have declined from 13% in 2016 to 11% in 2018.
- Going forward, we expect the figure to be around 8%, partly reflecting a litigation benefit recorded in 2019.
2. Non-operating Expenses Have Declined
- Zynga’s non-operating expenses, which includes other income & expenses, declined from $11 million in 2016 to -$20 million in 2018, driven by certain lease rental.
- As a % of revenues, other income & expenses declined from 1.5% to -2.2% during the same period.
- It is estimated to be -27% in 2019, due to a $314 million one time gain recognized on a building sale. It should normalize to the 2% range in 2020.
3. Income Tax Expense Grew From $3.4 Million In 2016 To 11.0 Million In 2018.
- This growth was driven by a change in jurisdictional mix of earnings.
- However, it is estimated to decline to <$2 million in 2019, amid a benefit arising from the Small Giant acquisition.
- Effective tax rate also grew from -4% to 163% during the same period. it is estimated to be -5% in 2020.
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