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CAPSTONE PROJECT: Zynga 2

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Background: With 18% of its staff laid off on June 3rd 2013, Zynga is clearly in trouble. The Director of Strategy at Zynga has hired your team to explain to investors & internal stakeholder various aspects of their business. To help you with the messaging, the CEO has asked you to arrange the report based on the framework below. Additionally, he has asked, unless otherwise directed to/specified, you to only use information for the 2012 Annual Report and recent earnings report provided with this document in creating the report. Further, the Director of Strategy has asked you to cite the source of data using footnotes.;-Value Chain Analysis - Global Revenue Operations: 1 page;Background;Pete Campbell is a Director of Sales at Zynga ? Small and Medium Size businesses. Given the untimely & unfortunate death of the CFO, he has been asked to step in temporarily. Pete is reluctant to take on the scope of the entire position as he is occupied supporting the Business Development department. So Pete limits the scope of his duties as acting CFO to the Order-to-Cash process in Africa. Order-to-Cash value chain in Africa is a simple three step process from a finance operations standpoint;1. A sale of service is made to a customer (e.g. Pete convinces new startups-like Kabam to sign on);2. A billing analyst sends the customer an invoice by mail;3. A collections analyst mails/calls the customer to obtain any outstanding cash;Key assumptions;1. Zynga as a startup does not use computers/electronics/ERP systems etc. for this process in Africa. So billing only occurs via mail (i.e. a billing analyst must print the invoice and mail it to the customer). Further, collection activities occur by having collection agents actually calling/mailing customers.;2. Billing? collection are sequential steps. That is, the SMB segment cannot ask a customer for money unless and until they have actually invoiced them.;3. Given that the SMG segment?s customers are less than responsible, they rarely pay on time. The only thing that seems to get customers to pay their bills on a timely basis is from constant prompting/reminders by collection agents.;4. It requires more effort to collect from international customers than domestic customers.;5. Assume that customer have the ability to pay well within 30 days post invoicing.;6. Cash is important for the firm. Given the growth and increasing cost of capital, the SMB segment would like to have as much cash on hand.;Pete?s Admin gather?s key financial data (see below).;Pete first meets with the Billing Manager to review the data;Pete: ?Wow, your costs have increased 9x this year from $100K in May to $900K in Dec. What?s going on??;Billing Manager: ?Pete, let me first say congratulations on your new role... I?ve heard its only because of you we?re getting so many customers and much business. Speaking of business, don?t be alarmed by the increase in costs. We?re a key part of the Order-to-Cash value chain. You guys are constantly putting pressure on us to get our bills out on time, and fact is we do. If you look at our ?Billing backlog?, which represents that number of customers that we didn?t invoice due to capacity constraints, the number is sharply down from 279 invoices to 127 invoices. Fact is we?re getting bills out much faster. So we?re super efficient. I wouldn?t see those are ?costs?, rather an investment and a service so our customers know exactly what they owe us.?;Pete leaves the meeting feeling good. After a drink, he decides to meet with the Collection Manager.;Pete: ?How do you think you are fairing here in collections. At least your costs are much better. You have been able to manage costs only increasing 5x from $120K to $623K?.;Collections Manager: ?Pete, let me explain. As you can see I have to pay my department more. You see, collections, like advertising is an art. It requires building a good relationship with the customer. After all, it?s only then that a customer will actually agree to pay us. As you can see we are very good. We?ve been managed to increase collections on a monthly basis by $7.3M.?;Pete feels great about his new role. At the Director meeting he says things are humming along well and there?s nothing to worry about. He also presents the financial data gathered by his secretary to the other Directors.;One of the VP of Sales, Don Draper, however, interjects.;Don: ?This doesn?t look right Pete. You need to look at the entire value chain here. You are missing the big picture?.;Problem;Discuss what Don meant by ?look at the value-chain? and the ?big picture?. Support your discussion with financial data.;RIMM AFRICA Order-to-Cash Data;Revenue Data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec;Domestic Revenue 3,351 4,112 8,248 9,074 9,411 11,516 11,567 9,188 9,470 11,028 12,700 9,926;International Revenue 7,820 6,168 8,248 9,074 9,411 12,475 13,044 14,991 17,588 21,406 25,784 23,161;Total Revenue (in 000s) 11,171 10,280 16,496 18,147 18,822 23,991 24,611 24,179 27,058 32,434 38,484 33,087;Billing - Cost Data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec;Billing Analysts 20 25 30 45 50 60 70 75 90 100 110 130;$/month/analyst $ 5,000 $ 5,150 $ 5,305 $ 5,464 $ 5,628 $ 5,796 $ 5,970 $ 6,149 $ 6,334 $ 6,524 $ 6,720 $ 6,921;Billing Analyst Cost (in 000s) $ 100 $ 129 $ 159 $ 246 $ 281 $ 348 $ 418 $ 461 $ 570 $ 652 $ 739 $ 900;Billing Backlog 279 206 275 202 188 200 176 161 150 162 175 127;Revenue per customer $ 372 $ 286 $ 382 $ 350 $ 303 $ 321 $ 275 $ 225 $ 210 $ 210 $ 207 $ 148;Collection - Cost Data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec;Collection Analyst 20 25 30 35 40 45 50 55 60 65 70 75;$/month/collector $ 6,000 $ 6,180 $ 6,365 $ 6,556 $ 6,753 $ 6,956 $ 7,164 $ 7,379 $ 7,601 $ 7,829 $ 8,063 $ 8,305;Collector Cost (in 000s) $ 120 $ 155 $ 191 $ 229 $ 270 $ 313 $ 358 $ 406 $ 456 $ 509 $ 564 $ 623;$ Collected (in 000s) $ 10,612 $ 9,278 $ 14,143 $ 14,781 $ 14,564 $ 17,636 $ 17,187 $ 16,041 $ 17,053 $ 19,419 $ 21,890 $ 17,879;Cost of Capital Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec;Cost of Capital 8% 8.2% 9% 10% 10% 10% 10% 11% 12% 12% 14% 15%;-Cost Driver Analysis - Credit write-off risk: 1page;Question;The Director of Credit Sales is having trouble identifying the key drivers to receivable write-off. However, after speaking to Harry Markowitz, an economist, the Director of Credit Sales believes that his receivable write-offs in SMB segment are strongly correlated to credit yield spreads in the country. Some definitional items;1. Write-off: A receivable write-off occurs when a Company deems that the amount owed on a sales transaction cannot be collected from the end customer. This write-off usually occurs well after the revenue is recognized. Assume DSO in SMB segment for Zynga is 60 days [note: key assumption in your model].;2. Credit yield spread: The credit yield spread represents the difference between the interest offered on a risk-free bond (such as a government bond) and a non-risk-free bond (e.g. corporate bond). Typically, the higher the credit yield spread, the higher the credit risk. [Another way to think about it is, if a SMB company offers 10% interest rate and the government bond is 5%, that means if a company needs to raise money in a SMB segment they have to pay 2x in financial costs, since the market is demanding a 5 percentage-point ?spread? for taking on more credit risk).;The Director of Credit Sales asks you to specifically use a 6M write-off to revenue as the cost metric to ?smoothen? the data. [Specifically, you could have months where there are odd spikes, so the Director is suggesting to take 6Ms of write-off-to-revenue in building you equation].;Problem;Using a regression analysis, please evaluate if write-offs are in fact correlated to credit yield spreads. Please explain how/why a credit yield spread could be a lead indicator for RIMM?s receivable write-off. Please ensure you make specific references to the R^2 and other key statistical metrics. Additionally, please provide an equation to predict the write-off;F(6M write-off-to-Revenue) = b + m (Credit Yield Spreadt);Instructor note: There is a trick here. Specifically on the DSO of 60 days and when the write-off occurs. So when constructing the model, taking this ?trick? into consideration will enable you to earn extra credit.;Month Writeoffs SMB Revenue Write-off to Revenue 6M Rolling;(SMB) 3M Credit Yield Spreads between SMB and Risk-Free rate (in %);Jan '08 $21,037 $3,680,371 0.9082;Feb '08 $8,451 $3,409,598 1.0677;Mar '08 $8,929 $3,839,710 1.392;April '08 $2,818 $3,776,876 1.395;May '08 $12,793 $3,808,638 1.3992;June '08 $5,674 $4,025,860 0.26% 1.364;July '08 $39,402 $4,166,516 0.34% 1.133;Aug '08 $50,894 $3,881,583 0.51% 1.1458;Sept '08 $25,343 $3,857,867 0.58% 2.366;Oct '08 $17,762 $4,028,158 0.64% 3.601;Nov '08 $21,628 $3,742,716 0.68% 3.512;Dec '08 $34,811 $3,577,956 0.82% 3.259;Jan '09 $39,159 $4,050,910 0.82% 3.134;Feb '09 $19,613 $3,398,966 0.70% 3.19;Mar'09 $14,638 $3,734,520 0.66% 3.097;April '09 $27,904 $3,506,688 0.72% 2.757;May '09 $70,185 $3,702,047 0.94% 2.379;June '09 $50,441 $4,176,622 0.98% 2.335;July '09 $28,073 $4,325,971 0.92% 1.964;Aug '09 $102,019 $4,032,304 1.25% 1.835;Sept '09 $22,451 $4,298,877 1.25% 1.639;Oct '09 $39,636 $4,571,363 1.25% 1.441;Nov '09 $40,356 $4,960,674 1.07% 1.346;Dec '09 $43,830 $4,926,564 1.02% 1.456;Jan '10 $34,968 $5,216,584 1.01% 1.45;Feb '10 $19,470 $4,590,018 0.70% 1.352;Mar'10 $30,176 $5,140,343 0.71% 1.267;April '10 $11,778 $4,625,715 0.61% 1.3456;May '10 $4,577 $4,983,588 0.49% 1.627;June '10 $22,222 $4,749,637 0.42% 1.545;July '10 $24,943 $5,117,567 0.39% 1.387;Aug '10 $22,617 $5,226,519 0.39% 1.412;Sept '10 $21,232 $5,288,469 0.36% 1.374;Oct '10 $25,246 $5,819,327 0.39% 1.189;Nov '10 $16,960 $6,550,264 0.41% 1.31;Dec '10 $9,627 $6,393,108 0.35% 1.294;Jan '11 $12,062 $6,752,203 0.30% 1.279;Feb '11 $10,600 $6,255,959 0.26% 1.215;Mar'11 $9,818 $6,793,199 0.22% 1.229;April '11 $14,213 $6,294,991 0.19% 1.173;May '11 $13,253 $7,194,142 0.18% 1.178;June '11 $10,496 $6,990,344 0.17% 1.289

 

Paper#80258 | Written in 18-Jul-2015

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