King Digital Entertainment plc
) reported second quarter fiscal 2014 earnings of 52 cents per
share, which managed to beat the Zacks Consensus Estimate of 50
cents. Earnings surged 29.6% from 40 cents per share reported in
the year-ago quarter.
Shares of King Digital declined 20.8% ($3.79) in after-hours
trading following the release due to weak revenue growth and
lackluster guidance for fiscal 2014.
Revenue (after adjusting for deferred revenue) for the quarter
increased 28.7% year over year to $593.5 million but missed the
Zacks Consensus Estimate of $618 million.
Monthly unique users (MUUs) surged 77.8% on a year over year basis
to 345 million while monthly active users (MAUs) jumped 83% from
the year ago quarter to 485 million in the reported quarter.
Daily active users (DAUs) were up 81.6% on a year-over-year basis
to 138 million in the second quarter. Monthly gross average
bookings per paying user (MGABPPU) were $19.54 in the reported
quarter versus $15.51 reported in the year-ago quarter.
Gross bookings were $611.1 million in the reported quarter, up
27.1% from the year-ago quarter. However, gross bookings declined
5% on a sequential basis.
During the quarter, King Digital launched eight new games on
royalgames.com. The second quarter also witnessed the launch of
Pyramid Solitaire Saga, its first card game for mobile. In the
quarter, King Digital completed the initial rollout of a localized
version of Candy Crush Saga for the Chinese market in collaboration
with Tencent's mobile communications and social network platforms
Mobile QQ and Weixin.
Adjusted earnings before interest, taxes, depreciation and
amortization (EBITDA) surged 34.7% to $248.2 million in the
reported quarter from $184.2 million in the prior-year period.
Adjusted EBITDA margins improved 20 basis points to 42% due to
Total cost and expenses were up 25.8% from the year-ago quarter to
$377.8 million in the reported quarter. This rise in expenses was
primarily attributable to a year-over-year increase in research
& development expense (up 60 bps) and general &
administrative expense (up 270 bps).
Adjusted net profit was $165.4 million compared with $130.6 million
reported in the prior- year quarter. Net margin of 27.9% declined
40 basis points (bps) on a year-over-year basis from 28.3% reported
in the year-ago period.
During the quarter, King Digital acquired Singapore-based game
developer, Nonstop Games for $6 million in cash upfront and $74
million scattered over a period of four years, provided it
succeeded in reaching certain revenue targets.
Balance Sheet and Cash Flow
Cash and cash equivalents at quarter end were $832.2 million. The
company generated operating cash flow of $161.7 million during the
During the quarter, the company announced a special dividend
amounting to $150 million payable to shareholders of record as of
Sep 30, 2014.
Management expects gross bookings to range between $500 and $525
million in the third quarter of 2014. The company expects bookings
to register a sequential decline in the third quarter followed by
an increase in the fourth quarter.
For the fiscal year ending Dec 31, 2014, the company expects gross
bookings to be between $2.25 billion and $2.35 billion (down from
the prior guidance of $2.55 billion to $2.65 billion).
With the rapid adoption of smartphones and tablets, we expect the
demand for King Digital's mobile-based games to increase
considerably. The company derives approximately 74% of its revenues
from mobile platforms. The company's innovative product pipeline is
In April, King Digital launched Diamond Digger Saga on Facebook (
). Most recently, the company launched Bubble Witch Saga 2, which
will further boost its top line in 2014. Moreover, gamers' growing
preference for free-to-play games bodes well for King Digital's
However, strong sales of new consoles from Microsoft (
) and Sony are expected to intensify competition for King Digital
in 2014. Moreover, competition from Zynga (
), Glu Mobile and other established players with a more visible
business model like Electronic Arts, Activision Blizzard and
Take-Two Interactive cannot be ignored.
Moreover, overdependence on Candy Crush Saga for its revenues may
cost King Digital heavily going forward. In the second quarter,
Candy Crush Saga accounted for about 60% of the gross bookings. The
fact that Candy Crush Saga is losing players on a regular basis
poses a major concern for the company.
Under such circumstances, we believe that the company needs to
develop other franchises capable of delivering strong growth
consistently. However, so far, it has failed to find any
replacement, which remains a headwind for the rest of 2014.
Currently, King Digital has a Zacks Rank # 3 (Hold).
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