Bad news for Candy Crush maker

King Digital's second-quarter revenue came in below expectations, but things appear even worse for the game company beyond the headline number.

By TheStreet.com Staff Aug 13, 2014 12:25PM

King Digital Media's initial public offering at the New York Stock Exchange, March 26, 2014 © Justin Lane/EPABy Antoine Gara, TheStreet


King Digital Entertainment’s (KING) revenue and bookings dropped in the second quarter and the company sharply cut its full-year guidance amid falling activity for its popular Candy Crush Saga game. Behind King Digital’s earnings miss, which caused shares to tumble to post-IPO lows in premarket trading on Wednesday, things appear even worse for the company.


King Digital's monetization of its suite of free mobile and online games appears to have plateaued, with only a limited number of users willing to pay for its games. Since the company generates the bulk of its revenue from a small number of paying users -- called monthly unique paying users, or MUPs -- monetization trends are crucial to the company’s earnings.


Here is the most worrying figure from King Digital’s second quarter results: MUPs fell 12 percent sequentially to 10.4 million total users. That sequential drop was faster than the low-single-digit sequential drop in King Digital’s overall revenue and bookings.


Meanwhile, strong year-over-year growth in users, revenue and bookings doesn't appear to be increasing the company’s ability to generate revenue from users.


TheStreet.com logoKing Digital’s monthly paying users only rose 1 percent year-over-year. In contrast, the company reported that monthly active users (MAUs) rose 83 percent year-over-year to 485 million, and daily active user (DAUs) rose a similar percentage to 138 million. Gross bookings at King Digital rose 27 percent year-over-year, revenue rose 30 percent and adjusted EBITDA rose over 34 percent.


What to make of those figures?


Put simply, King Digital is now even more reliant on a small base of users for its earnings than it was last year, or during its IPO process. The company now generates revenue from just 2 percent of its overall MAUs, an about 50 percent drop from this time last year.


Monetization per paying user actually increased sharply in the second quarter. Monthly gross average bookings per paying user (MGABPPU) increased to $19.54 in second quarter, up 26 percent year-over-year and 8% sequentially.


"We believe the increase in MGABPPU reflects our retention of our more engaged customers as we have seen that payers who play in more than one game tend to spend more. Additionally, we believe our launch of additional games that offer virtual currency, which creates the opportunity to transact at higher amounts, had a positive impact on our MGABPPU during the period," King said in an earnings press release.


But remember, paying users fell significantly in the second quarter and were flat year-over-year. What if the users, who increasingly are carrying the company, leave?


That’s the question that King Digital will have to begin answering in coming quarters. The good thing is that the company has time to come up with a solution.


Cash at King Digital rose more than four-fold to $832 million, allowing the company to pay a special dividend of $150 million. Some bargain-hunting investors on Wall Street think King Digital will be able to move beyond Candy Crush and turn itself around. However, trends are presently worsening.


Analysts, who have pumped King Digital since its IPO, are also just beginning to cut their estimates. TheStreet was decidedly skeptical of the sell-side’s bullishness on King Digital when analysts began initiating coverage in May.


Bottom Line: At a market capitalization of about $4.5 billion, King Digital remains a risky bet in spite of its significant profits, cash generation and dividend payments.


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2Comments
Aug 13, 2014 12:52PM
avatar
This wasn't a viable stock for public trading to begin with. All those involved in it's underwriting, IPO and authorization to be viable- should lose their jobs immediately and return to being fry cooks.
Aug 13, 2014 2:34PM
avatar

We're in madness when a game like tetras can raise billion dollars from a bunch of idiots we proudly call investors. Too bad it shows up in 401K funds.  Making us all a little moronic.

Madness.

I have nothing against games, but well built designed games with good graphics and maybe a story line.  Not some tetras or ping pong atari nonsense that is freeware you can download off the internet or something a kid can now program on an app publisher.

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