Seeking Alpha
Long/short equity, deep value, growth at reasonable price, special situations
Profile| Send Message|
( followers)  

Summary

  • King Digital Entertainment PLC makes its first earnings announcement at 8 AM EDT on May 7.
  • Look for year-over-year [Y/Y] sales growth of at least 27% and continued high monthly spend.
  • Look for evidence that its virtuous cycle for game development is alive and well, allowing the company to continue to post the industry’s highest pre-tax margin.
  • Listen for news about its partnership with Tencent Holdings Ltd. and growth in international sales, especially in Western Europe.
  • Has Dreamworld increased Candy Crush sales? How’s Diamond Digger doing?

King Digital Entertainment PLC (NYSE:KING) makes its first public earnings report tomorrow morning before the open. While some will be solely focused on indications that King is not a "one-trick pony," I think investors should be less concerned with diversification than with evidence that King's business is strong and growing. Watch for the following 7 things.

1. Monthly Spend or Monthly Gross Average Bookings per Paying User (MGABPPU)

As I mentioned in my pre-IPO valuation of King, players of its games spent an average of $17.32/month in Q4 2013 vs. the worldwide industry average of just $2.78. While this figure has varied from quarter to quarter from a high of $23.65 to a low of $15.51, ideally, I would like to see it increase.

2. Percentage of Paying Users

In its F-1, King reported it had 4% paying users (about 12 million), which is at the high end of 1-5% range industrywide. Maintaining or increasing the percentage of paying users is key to its sales growth. I don't want to see this metric fall.

3. Year-over-Year Sales Growth

Annual sales growth was a key factor in my valuation of the company. I assumed a CAGR of 27.3%. So, I am looking for King to report Y/Y sales growth of at least 27.3%.

4. Maintaining the Virtuous Cycle in Product Development and Marketing

King's customers are very loyal and actively participate in the company's development and vetting of new games. They also spread the word. This keeps King's R&D and S&M costs as a percentage of sales low at just 5.9% and 5.1%, respectively vs. Zynga Inc.'s (NASDAQ:ZNGA) 11.2% and 30.4%, respectively.

Only Take-Two Interactive Software Inc. (NASDAQ:TTWO) spends less on R&D. Zynga's sales and marketing is the highest of its peers. Keeping these costs low is key to King's high pre-tax operating margin of 38% vs. Zynga's -8%.

5. Status of New Initiatives

Last December, King added a new feature to the Facebook (NASDAQ:FB) and mobile versions of Candy Crush, called Dreamworld. Dreamworld extends play for those who have reached the top level of the game and introduces new challenges. It will be interesting to hear how well it has been received and its impact on Candy Crush's sales. Since the Saga games share the same platform, incorporating a successful feature from one game to the others is trivial.

6. International Sales

As of December 31, 2013, King's share of Western Europe was just 14.5%. Since Western European players spend the most on mobile gaming, I would like to see King increase its share.

Three weeks ago, King announced a partnership with Tencent Holdings (OTCPK:TCEHY) to launch a Chinese language version of Candy Crush in China this summer. It will be very interesting to know how things are progressing. China is a huge and important market.

7. Diversification:

While diversification is at the top of many people's lists, it is at the bottom of mine. There are numerous examples of companies succeeding for years selling just one popular, discretionary product.

Nevertheless, I want to know the sales breakdown for Candy Crush, Farm Heroes, Papa Pear, Pet Rescue and Bubble Witch and how it compares with Q4 2013. In addition, I will be listening for news about the performance of its newest game, Diamond Digger.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: 7 Things To Look For In King Digital's First Earnings Report