King Digital (KING) is set to report first quarter earnings Thursday after the closing bell. The latest installment in King’s flagship franchise, Candy Crush, has performed well resulting in 2 large earnings beats.
Even though the new game has been a success in the sense that it’s helped the company top analyst expectations, fundamental growth at King is non-existent and the company is often criticized for its dependency on Candy Crush. Earnings and revenue are both projected to fall compared to same quarter results of last year.
Revenue fell by 7% last quarter too. Even though King Digital’s monthly active user (MAU) count is increasing and the average spend per paying customer is growing, total revenue is still falling. This implies that the number of paying customers is actually shrinking. From FQ4 2013 to last quarter King’s quarterly average monthly unique payers dropped from 12.2 million to 8.3 million.
Fewer users are purchasing micro transactions within King and that’s a strike against the company. On the other side of the fence King has done fairly to diversify its revenue sources. In one year Candy Crush went from making up 78% of the company’s revenue to 45%. That also means that the earnings power of Candy Crush is shrinking faster the rate of decline in total revenue suggests.
After IPO’ing to fanfare with a lot of hype around the Candy Crush franchise, King Digital is now trying to cement itself as a mature player in the mobile games category with a diverse portfolio of offerings. In the past two quarters expectations were set too low and King hurdled them with ease sending its share price higher. The bear caricature of King Digital as a one hit wonder company entirely dependent on Candy Crush is overblown.
Beating low expectations in the third and fourth quarter of 2014 has been enough to stabilize and even increase King’s stock price. Still, King will need to prove that it can get its earnings growing again to please investors.
