King Digital Entertainment's (KING) CEO Riccardo Zacconi on Q2 2014 Results - Earnings Call Transcript

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King Digital Entertainment PLC (BATS:KING) Q2 2014 Earnings Conference Call August 12, 2014 4:15 PM ET

Executives

Alice Ryder – Investor Relations

Riccardo Zacconi – Chief Executive Officer

Stephane Kurgan – Chief Operating Officer

Hope Cochran – Chief Financial Officer

Analysts

Lloyd Walmsley – Deutsche Bank

Douglas Craig – Cowen & Company

Douglas Anmuth – JPMorgan

Justin Post – Merrill Lynch

Williams – BMO Capital Markets

Chris Merwin – Barclays Capital

Operator

Hello, everyone, and welcome to King's Second Quarter 2014 Earnings Conference Call. My name is Jay, and I will be your conference operator today. At this time all participants are in listen-only mode and will be opened up for the question-and-answer session. At this time, I would like to introduce Alice Ryder, Vice President of Investor Relations. You may begin.

Alice Ryder

Thank you, Jay. Hello, and welcome to King’s second quarter 2014 earnings conference call. Joining me today to talk about our results are Riccardo Zacconi, our Chief Executive Officer, Stephane Kurgan, our Chief Operating Officer and Hope Cochran, our Chief Financial Officer. The format for today’s call will be as follows. Riccardo, will lead off with an overview of our Q2 results and recent developments. Stephane will review our operations and Hope will discuss our financial results and outlook. We will then move to a question-and-answer session.

Before we get started I would like to remind you that our remarks today will include forward-looking statements and actual results may differ materially. Factors that could cause these results to differ materially from those contemplated by our forward-looking statements are set forth in today's press release, and our Form 6-K filed with the SEC on May, 08 2014 and the 6-K we expect to file on August 13, 2014. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

During this call, we will also present both IFRS and non-GAAP financial measures. A reconciliation of IFRS to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.king.com, were a webcast replay of this call will also be available. And now I would like to turn the call over to Riccardo.

Riccardo Zacconi

Thank you, Alice. And thank you all for joining us to discuss our second quarter 2015 results. Q2 was a second consecutive quarter, where we maintained three games in the top 10 grossing charts on all major platforms in the US for mobile and worldwide for Facebook. In addition we maintained a massive reach with 345 million monthly unique users in Q2 and our non-Candy Crush bookings grew 19% sequentially to approximately $250 million, which if you were to analyze that amount would represent a run rate of $1 billion from our non-Candy Crush games.

However, gross bookings were sequentially lower during the period unless than we expected as we experienced the stepdown in monetization across our network during the latter part of the quarter. This monetization stepdown impacted our overall game portfolio. The suggests is maybe due to external factors as opposed to a simultaneous change in the performance across our games.

As a result second quarter 2014, gross bookings where $611 million representing a 5% decline compared to the prior quarter based on this results we are lowering our guidance for full year 2015, to reflect this lower gross bookings run rate in our expectations for the second half of the year. Looking at the bottom line however cash flows for the period where very healthy and adjusted EBITDA remains flat compared to the first quarter at $248 million.

Q2 was our fourth consecutive quarter in EBITDA margin of more than 40%, and we generated net cash of $154 million or $227 million before equity related payments to end the quarter with $832 million of cash and cash equivalents, the strong cash generation of our business gives us the confidence to announce a $150 million special dividend, which Hope will describe in further detail. I would like to spend a few minutes now on the Q2 bookings trends and the actions we are taking to drive more growth in the business. First Candy Crush declined more than we had expected as we have mentioned previously Candy Crush had its peak gross bookings in Q3 of 2013 and accordingly we expect a continual decline in gross bookings from this franchise in Q2.

However, during the latter part of the quarter the rate of decline increased primarily due to monetization. The second factor impacting gross bookings performance in Q2 both that our non-Candy Crush games did not grow as much as we had expected as a result did not offset the decline in Candy Crush. Farm Heroes is a highly successful franchise it became a top five grossing game on all major platforms but fell short of our Q2 gross booking expectations due in part to a lower number of daily active users then we had expected.

Farm Heroes also experienced a similar monetization trends as Candy Crush during the latter part of the quarter. The third dynamic impacting our gross bookings in Q2 was a geographic mix shift in our player network. Well our overall network reach remained relatively stable in Q2 we saw decline in our U.S. players which was largely offset by growth in the rest of the world.

This mix shift away from the higher monetizing U.S. audience had a meaningful impact on the sequential gross bookings decrease. We believe the five month gap between the mobile launches of Farm Heroes and Bubble Witch 2 which is the longest period between our mobile launches was a contributing factor to the dip in our U.S. network. After the launch of Bubble Witch 2 we have seen a stabilization of the U.S network while the rest of the world reach has continued to grow on all platforms and geographies.

As we look forward the reminder of the year and into 2015 we’re focused on initiatives already underway that the targeted at increasing monetization and renewing engagement from our audience in key markets which Stephane will discuss in further detail.

Taking now a view of our long-term strategy, we continue to make progress in building a broader portfolio of games for our network of players. 2014 is a year of transition moving towards a more diverse revenue as we introduced new games to our audience. In June we released our first franchise sequel Bubble Witch 2 which was also our first game launched simultaneously on the web and mobile. The sequel not only has a new look and feel that has been optimized for play on mobile devices but also incorporates updated characters and the new game mechanic.

As a result Bubble Witch 2 has been a top 10 downloaded game in June and July both in the U.S. and worldwide across iOS and Google Play and today the Bubble Witch franchise is the third largest franchise in our portfolio after Candy Crush and Farm Heroes in terms of bookings.

Further on, we have made a strategic decision to broaden our portfolio beyond casual games. For these we have setup several internal initiatives and we are pleased to announce the acquisition of non-stop games, a game developer based in Singapore. We are currently working on expanding beyond our general games with new titles that I expected to launch in 2015.

We also have progress to report on extending geographic reach and expanding to new platforms. Last week we completed the initial launch of the localized version of Candy Crush in China in partnership with Tencent and we look forward to fully launching the localized game on Tencent mobile game platform which consist of Weixin, Mobile QQ and myapp.com later this month.

While it is too early to report on the games performance just a few days into the initial launch we are excited to offer Candy Crush the hundreds of millions of users on Tencent’s network and we look forward to updating you on our progress in the next quarter. To support and increase phase of development for our diversification strategy we’ve continued to expand our employee base. At the end of the second quarter we had 971 full time employees up from 808 at the end of the first quarter 2014.

I will now turn the call over to Stephane to discuss initiatives we put in place to address further growth in our business.

Stephane Kurgan

Thank you Riccardo. In Q2 we had strong start to the quarter and set a new high for daily gross bookings in April. In the latter part of the quarter however we experienced a decline in gross bookings for the three reasons Riccardo mentioned earlier. The first reason is Candy Crush gross bookings declined more than expected due to a step change in monetization across the portfolio. The second reason is the run rate of other titles specifically Farm Heroes didn’t grow enough to make a product short fall due to the monetization drop and lower than expected reach. And a third reason is the reduction in our U.S. network.

So to address these three challenges we are following on the – refocusing on the following initiatives. First let me talk about Candy Crush as you maybe aware Candy Crush Soda, which is the sister title to Candy Crush is in soft launch more than four countries. And we are pleased with the results to date. We are on track to launch Candy Crush Soda in Q4. Second, as Riccardo has mentioned we’re also extending the Candy franchise to new geographies as we have completed the initial rollout of Candy Crush in China in partnership with Tencent.

In addition to boost monetization performance we expect to migrate Candy Crush mobile to virtual currency and to introduce new monetization features, which we have been testing for months.

Finally, we have begun work on the next big feature extension for the original Candy Crush Saga as part of the Saga 1.5 initiatives that I’ll discuss shortly. The second initiative is to drive the longevity and monetization of our franchisees. A key success factor of Candy Crush has been to rock grade game play into Saga envelope. Let me explain what we mean by an envelope, if you split that game play for example, the match three mechanic of a Candy Crush from everything around it, like the map, the social features of the monetization is everything else is what we call an envelope. This is what makes our business repeatable and scalable because we can drop another mechanic like Bubble Witch in certain envelope.

Last December we launched an envelope extension to Candy Crush called Dreamworld where we added hundreds of new levels on a game play. Overall it had a positive impact in driving activity and bookings and on the back half of that success and other proven game events we’ve been running since all our franchisees our now working on the next evolution of Saga envelope which we call Saga 1.5. Here we’ll introduce new game mechanics drivers of social engagements and monetization opportunities which go beyond to the current products set. Meanwhile, we have also scaled our efforts towards the next generation of envelopes which reflect the accumulated learning’s of the past three years. We’re building these from the ground up on a new technology infrastructure which will offer a game play experience that’s not available in the industry right now.

We expect to launch our first game in these new envelopes in 2015. Our first set of initiatives address the reduction in our U.S. network. We believe the five months gap between the mobile launches of Farm Heroes and Bubble Witch 2 was a contributing factor to this reduction. Therefore, we’re taking the following steps to feed our network at more regular intervals.

First, to ensure we no longer have long gaps between two mobile games we are adjusting the phase of game launches. There will thus be two new games in 2014 over the course subject to meeting our quality standards. Second, all our franchisees have added to their roadmaps major content and all future extensions which will now be released on the regular basis in a similar way to Dreamworld.

Finally, as Riccardo mentioned we plan to add to a portfolio games that go beyond our casual draw and have higher monetization characteristics. There are several projects of different phases of developments both within our studios and labs as well as with our newest studio acquisition of Nonstop Games. In short, we believe we can retain our leading market position with our massive network, our leading franchises and brands, our heritage of creating great games and a robust balance sheet.

We believe these assets combined with the initiatives I just described provide us with the strongest platform to continue to be leading developer in the industry over the long-term.

I’ll now turn the call over to Hope to discuss our financial results in more detail.

Hope Cochran

Thank you, Stephane. I will now take you through our financial performance and outlook. Q2 2014 gross bookings were a $611 million a year-over-year increase of a $130 million or 27% compared to Q2 2013 and a sequential decrease of $30 million or 5% compared to Q1 2014.

Revenue was $594 million for Q2 2014, a year-over-year increase of $138 million compared to Q2 2013, and a sequential decrease of $13 million compared to Q1 2014. Adjusted revenue, which adjust for changes in deferred revenue was $595 million for Q2 2014, representing an increase of $132 million compared to Q2 2013 and a decrease of $14 million compared to Q1 2014.

The sequential decreases in gross bookings, revenue and adjusted revenue in the second quarter were partially driven by lower gross bookings from Candy Crush partially offset by higher gross bookings from Farm Heroes and Bubble Witch 2 following at Facebook and mobile launch in June.

In Q2, 2014 75% of gross bookings came our mobile audience consistent with Q1 2014 and up from 68% in Q2 2013. In terms of diversification, we saw 19% increase in non-Candy Crush gross bookings, which grew from approximately $212 million with 33% of total gross bookings in Q1 2014 to approximately $216 million or 41% of total gross bookings in Q2 2014.

If you were to annualize the gross bookings from our non-Candy Crush games, it would represent a run rate of $1 billion. With respect to revenue one important distinction is that we currently report revenue on a growth basis, which includes the platform partner fee. As we work through the reporting abilities with $0.10 for accounting purposes we may determine that we made to report Tencent revenues on a net basis. We will keep you updated as we come to a determination on this topic.

Now let’s turn to our network metrics. In Q2, we maintained a massive network reach.

Monthly unique users, which represents the number of unique individuals who played any of our games on a particular platform in that month, were $345 million, which is more than the population of the United States.

Daily active users, which represents the number of individual who played one of our games during a particular day, were $138 million in Q2 2014. Monthly active users which are the number of individuals who played a particular game in the month increased to $485 million in Q2 2014. The sequential increase in monthly active users and the increase in the ratio of monthly active users to monthly unique users reflect the growing number of games being installed and played by our player base as we expand our portfolio of available games.

Looking at our monetization metrics, monthly unique payers, which are the number of unique individuals who made a transaction at least one on a particular platform in that month, were $10.4 million in Q2 2014. This is up 1% compared to $10.3 million in Q2, 2013, but down 12% compared to the $11.9 in Q1 2014. The sequential decline in payers is primarily driven by a decrease in the payers to play an only one of our games. While the payers to play in two or more of our games remained relatively stable during Q2 2014.

In addition, we continue to see an increasing proportion of our gross bookings coming from purchases of our virtual currency in some of our games. Including Farm Heroes and Bubble Witch 2, which changes the spending patterns of payers resulting unless frequent payment but in higher denominations. The increased use of virtual currency will result in further decreases in the number of monthly unique payers, but offset by an expected increase in monthly gross average bookings per paying user.

We expect to see virtual currency continue to further impact our payer metrics as we launch our new games with virtual currencies migrate Candy Crush mobile to gold bars and with the recent rollout of Tencent version of Candy Crush, which also uses virtual currency. While the total number of payers has sequentially declined, we continue to see that the payers we have retained are the ones who tend to play in more than one game and spend more.

The impact of both the payer mix and the virtual currency on our payer behavior can be observed in our monthly gross average bookings per paying user, which we saw increase to $19 and $0.54 in Q2 2014 up $4.3 or 26% from Q2 2013, and up $1.52 or 8% from Q1 2014.

Now turning to profitability. Profitability remains strong in Q2 2014 with adjusted EBITDA relatively flat to Q1 2014 and the adjusted EBITDA margin at 42% for the quarter, demonstrating our highly variable and efficient cost structure.

Profit was $165 million for Q2 2014 an increase of $39 million or 31% compared to Q2 2013 and an increase of $38 million or 30% compared to Q1 2014. The sequential increase and profit was primarily a result of lower share base and other equity related compensation expense partially offset by higher tax expense.

Adjusted profit was $188 million for Q2 2014 an increase of $40 million or 27% compared to Q2 2013. Diluted earnings per share was $0.52 for Q2 2014 compared to $0.39 for Q2 2013. Adjusted earnings per share was $0.59 for Q2 2014 compared to $0.45 for Q2 2013.

In terms of liquidity, our business continues to generate strong and consistent cash flow. Net cash generated from operating activities during Q2 2014 was $162 million compared to $114 million for Q2 2013.

In addition, our capital expenditures remain low at $8 million in Q2 2014. We generated net cash of $154 million in the quarter. One thing to note is during the second quarter, we made a $73 million and equity related payments. Had we not had those payments, our cash generation would have been $227 million.

As of June 30, 2014 cash and cash equivalents were $832 million compared to $409 million as of December 31, 2013.

Finally, we are pleased to announce $150 million special dividends to be payable to shareholders of record on September 30, 2014. This dividend as a result of our strong balance sheet and demonstrates our confidence in our cash generation. Over the longer term we will continue to balance strategic flexibility with creating long-term value for our shareholders.

In addition, the company’s executive officers, directors, founders and affiliated funds including APAC together representing approximately 80% of our outstanding shares have agreed to new loss of restrictions with the company through the date following the company’s announcement of fourth quarter and full year 2014 earnings report.

Now, turning to our outlook for the reminder of this fiscal year. As we look forward to the second half of 2014, we are continuing to build a portfolio games for a network of players through the production of new games, revolving our existing games and extending into new genres and geographies. We’re continuing to invest in new studios, employees in technology.

However, based on the recent trends that we have discussed and the lower than expected bookings run rate of our games we are cautious about our outlook for the second half of the year. Therefore we are tempering our expectations of full year 2014. For Q3 2014, we expect gross bookings to be between $500 million and $525 million.

Looking at fiscal year 2014, we expect gross bookings to be between $2 billion, $250 million and $2 billion, $350 million.

We will continue to follow and ROI driven approach to our marketing activity and therefore expect sales and marketing expense to fluctuate with game launches and seasonal activity. As a result, we expect adjusted EBITDA margin to fluctuate slightly quarter-by-quarter.

In terms of our capital expenditures, we expected to increase in the second half of the year, as we continue to build and complete the infrastructure to support our growing workforce. With respect to taxes, we expect our effective tax rate to range from 19% to 23% in 2014.

I’ll now turn the call back over to Riccardo for some closing comments.

Riccardo Zacconi

Thank you, Hope. In summary, we’re not happy with the lower than expected gross booking run rate we have been experiencing since the latter part of Q2. But we’re executing on these strategic steps to leverage the massive audience we have built. We have a strong and expanding portfolio games and the three games in our major top 10 grossing lists in the US for mobile and worldwide on Facebook for two consecutive quarters, we have demonstrated our ability to consistently produced high-quality games that capture the interest of both existing and new players.

In addition, our profitable games and efficient cost structure deliver healthy cash flows as seen in our 42% adjusted EBITDA margins and $154 million of cash generated during second quarter 2014.

As we look forward, we are continuing to make investments both organically and through acquisitions. To build on our current position and create shareholder value over the long-term. We are focused on key initiatives to address the monetization weakness, we have seen in Q2, including diversifying our game portfolio to new genres to further leverage our massive player network.

Now, let’s open it up to questions. Thank you.

Question-and-Answer Session

Operator

At this time we’ll be opening the lines for our Q&A session. (Operator Instructions) And our first question comes from Lloyd Walmsley with Deutsche Bank. Your line is open.

Lloyd Walmsley – Deutsche Bank

Thanks. Just wondering when you originally provided guidance you knew Candy was post peak and going to decline. So, it seems to embed a lot of uptick in non-Candy games. And when you look at the performance of Pet, Farm Heroes, Bubble Witch, it looks like almost four games in the top 10 consistently, it would be pretty hard to assume the new titles would be much better than that right. So, just wondering what the disappointment was there, is it struggling to transition users in these new games to paying users and then what are you expecting from these non-Candy games at least once in a market now or those still going to be growing or have those games peaked as well?

Stephane Kurgan

Very, good question. Thank you this is Stephane, here, let me try to answer it. I think focus first on Farm Heroes Saga. So Farm Heroes is a very successful game it’s our seventh-largest franchise it made it to the number four on iOS and its hovering between number five and number six and it maybe to the number three on Google Play since we started the year. Now what took place in the latter part of the quarter is twofold. As Riccardo mentioned earlier, we have a seen a drop in monetization across the portfolio, which means the share of players who spend money in our games across the portfolio has come down and that’s impacted pretty much all the games number one.

And number two, the number of DAUs or the reach of Farm Heroes which is very high is lower than our expectations. And the reason for that is we expected the retention of Farm Heroes to improve over time because that’s what we’ve experienced in the past with Candy Crush and Pet Rescue, as we develop the games and added features we were able to positive impact here the retention of the game.

And Farm Heroes Saga after an extremely strong start were essentially the tens of millions of Canvas players who were accumulated and highly engaged installed the game generating they delivered a very high retention, but then we didn’t see that retention improve as improve as new ways of players joined the game. And we realized that as we added features the game was already very optimize. So, we had essentially applied or lessons of Candy Crush and Pet Rescue mobile to Farm and we also – it also the game that had the longest period between the Canvas launch and the mobile launch. So, when we got to the mobile version which was pretty much on par with the canvas, it was a very furnished game. And so we’ve enterprise that by the effect that the retention did not improve, and as a result of that the DAU, the daily active users are lower than expected and the monetization in aggregate is lower than expected.

Hope Cochran

Yes, I’ll just add to that Lloyd. We’ve talked about this happening in the latter part of the quarter and that’s what we saw across all of our titles is step down change and monetization in the latter part. I think a lot of that is probably due to some external factors, it’s hard to quantify and hard to prove, but the things that we see externally are that January and February very strong month, as people are coming off of Christmas and very excited about the devices. And potentially there is an impact from going into the spring and summer time that we’re seeing as well as just the world cup another activity that occur.

So it was since specific things an each game but also just an overall step down in the latter part of the quarter. And so, then as we look forward, I think part of question is whether we expect we’re trying to take all that learning of where the run rate is in the back half of the quarter and make sure we’re pulling that into our guidance for the reminder of the next six months. So, with that we will move to the next question.

Operator

Our next question comes from Doug Craig with Cowen and Company. Your line is open.

Douglas Craig – Cowen & Company

Yes, thanks. I know this is a hard question to answer and it kind of that sales roughly what you just said, but do you think the revenue sort of gap between what you’re going to do in your expectations do you think that revenue exited the market, or do you think it went to other games that aren’t King games.

Stephane Kurgan

I think hi, Doug this is Stephane that’s a very good question I mean I think Hope referred to the fact that because we haven’t seen a drop in product performance somehow that would suggest that the drop in monetization is due to external factors that – a number of possible external factors one of which is obviously competition and indeed we’ve seen a number of game emerging the top 10 where there is clearly a demographic overlap with our business. Now you have two categories right you have a very successful game from Glu which is Kardashian Game which has risen very fast which clearly has a strong overlap with our graphic. But you also have game like 2048 which is another great success which we haven’t seen in the top grossing but which obviously has impact on the time and the minutes being played by our player base. And that game in particular has what we understand as an outstanding download performance and its great game.

Hope Cochran

Yes and I’ll just add to that what’s interesting Doug is when you look at the App Annie. revenue, which we’ve talked about before its hard to take those numbers as absolute. So I think it’s trends or somewhat interesting and what we saw across the app stores between May and June was decline amongst all the major provider as they’re all the major companies in terms of their game performance between May and June according to App Annie. So it does lead you to believe that there is some seasonality going on or distraction with World Cup whatever might be that maybe hit the app store play overall from the May to June timeframe and with that we’ll move to the next question.

Operator

Our next question comes from Douglas Anmuth with JPMorgan. Your line is open.

Douglas Anmuth – JPMorgan

Great thanks for taking the question. Few things I want to hit on can you comment first is on what you’re marketing strategy was through Q2 as you’re seeing the declines here in the middle and back part of the quarter and how that shifted and perhaps just given the massive network that you’ve talked about why you are unable to stand some of those declines more so that’s part one. Secondly does this signal in your minds some kind of shift broader shift of playing away from casual games in some way for Teague perhaps we obviously see you making acquisition of Nonstop Games and getting into another genre. And then third can about the pipeline more in a back half, just to clarify you talked about two new games I just wanted to understand if that is referring to the Candy sister title in particular up there is something more there and terms of tiles that you haven’t yet talked about. Thanks.

Stephane Kurgan

Thank you, Doug. This is Stephane. I’ll answer the first part of your question and then Riccardo will take the second part. So, the marketing strategy in Q2 has remained the same within Q1. We are very return on investment based model to essentially organize, our marketing investment in our player acquisition. We’re using a variety of channels. We are marketing through Facebook to license our mobile channels and through TV. We are using the same return on investments parameters of the same framework that we were using in the first quarter of the year. I would say that we have, as I think we indicated earlier had very positive expense with TV.

So, we keep investing in TV and what we’ve done that is that we have improved the production quality of the creative’s. We might have seen that with Bubble Witch 2 and we've been very pleased with the impact of the new quality of TV creative. You might have seen now that we’ve just started as seventh TV campaign for Farm Heroes with the new creative of the same production quality. So, it hasn’t really shifted its slight through lower due to the fact that Bubble Witch 2 was launched late in the quarter. Now I’ll hand over to Riccardo for the second question.

Riccardo Zacconi

Thank you, Stephane. So, in terms of casual games, we continue to see a strong demand for casual games. I have to considered with our share of downloads, I believe is between 15% to 18% on Android and iOS. So, it’s relatively low, the key thing we’ve seen in top grossing and we’ve seen others genres of games, which are the reason into the top, but it is mainly because the other games in casual, I’m not monetizing at the same level as we do.

Now, this is a big opportunity in two areas, number one, because we think that casual is still under explode that in terms of revenue potential. And secondly, and we are the leaders in casuals. Secondly, because we think that there is an opportunity to leverage the reach, the massive reach we have built, the biggest reach in industry to actually extend our portfolio to other genres and so to gain market share in other categories. We haven’t said exactly in which categories we're growing but it's a strategic target for us.

Hope Cochran

Yes, and then I think you also asked about our pipeline for the reminder of the year. Stephane talked about the launch of two games coming up in the next between now and December that we’re focused on that Candy Crush is clearly one the other title we’re not discussing yet but we’re excited to bring to market. So with that we’ll turn to the next question.

Operator

Our next question comes from Justin Post with Merrill Lynch. Your line is open.

Justin Post – Merrill Lynch

Great thank you, Hope you did mentioned seasonality as a factor in your guidance or you hopeful that maybe as you move towards the fall and people are out of the summer mode and maybe you would see a pick up. And then secondly can you talk about Tencent in China how do you frame that opportunity internally and if that goes well what would that mean for the company? Thank you.

Hope Cochran

Yes, thanks Justin. In regards to seasonality it’s hard to quantify because you can’t really say if people X amount people went and watched the World Cup rather than play our games. But what you do see is strong correlation between a lot of activity in January and less activity in June. So I can’t exactly say its directly attributable to that but it coincides nicely as well as you look at those App Annie trend that show the App store is declining from the May to June window. It's a great question about whether we’re forecasting that uptick back in the fall right now I’m being cautious in that regard because I can’t prove that it was seasonality and I would say that its coming back in September. But right now we’re relying on the fall to be think that we initiate rather that things that happens to us so as we talk about the launching of Tencent’s the launch of Candy Crush Soda those are the types of activities that would drive our revenues in the fall rather than a hope for an external influence.

And you also ask about Tencent. And Tencent is something that we’re actively working on right now we’re just in the middle of that launch we talked about the initial launch phase having occurred and working on the official launch are coming up shortly its one of those things that we have high hope for Tencent but I think we’re cautious than what we put in our numbers as we’ll see how our product does in the Chinese markets. But overall we do recognize that there is a tremendous reach in that part of the world and we’re working closely with Tencent to how to make our product of success there. Next question?

Operator

The next question comes from Stephan Ju with Credit Suisse. Your line is open.

Hope Cochran

Hi, Stephen.

Operator

Pardon me we do not have Mr. Ju. The next question comes from Edward Williams with BMO Capital Markets. Your line is open.

Williams – BMO Capital Markets

Good evening. A couple of quick questions, can you comment little bit about how much your cost might be increasing as you increase the cadence of game that you are launching as a part of that narrowing of segment GAAP and as you increase the content drops. And can you also give us a little bit of color to how much cash you really feel that you need to keep in your balance sheet relative to how much is kind of extra cash at this point.

Hope Cochran

Thanks. I will take that. as I think about our cost structure I mean I think as one of the greatest assets if I could tell us that as the company, when I look at the variable cost structure. And what I mean by that is the costs that are inline with revenue versus the committed costs. The committed costs really being headcounts and facilities and things that really run the business are not more than 10% of the total revenue.

And maybe there is $16 million in total for the quarter. So we run a very efficient cost structure a very high, revenue per employee. And most of our costs go into performance marketing and cost of revenue which we can really adjust as we need to. So from a cost structure, yeah, I think your question was specifically about how will it increase. Yes, we do plan to hire employees. It is important that we’re able to hire great talent. So they can product great games. And that’s our focus, but will it really burden our cost structure not much.

I mean it might take it up a percentage in the R&D category and a little bit in G&A just as we support a public company, but you’re not going to see a dramatic increase in the cost structure of the company due to those hires. And then in regards to the cash needed on the balance sheet you did see that we declared a dividend on for this particular quarter, it is the special dividend as of one time event. But enduring that we’ve really did evaluate the strength of our balance sheet, we’ve got $832 million in cash and we are very mindful of the shareholder value and we want to make sure that we are able to return funds to our shareholder.

So as we looked at our cost structure which we feel like is very efficient. We felt like we have the ability to return that capital to our shareholders and still keep that fire power we need for growth as well as any strategic flexibility that might come our way. So, we are very careful to make sure we have the ability to act on anything opportunistically that would come our way and we’ll just continue to evaluate our cash needs with that in mind in as we go forward. Next question?

Operator

We have time for one more question. The final question is from Chris Merwin with Barclays. Please go ahead.

Chris Merwin – Barclays Capital

Hi, thanks. So you talked about the decline in MEPs and have the move to a virtual currency is the driver there? I certainly understand that the concentration in a pair base has been partially offset by the uptick in the gap move, but why not prioritize the growth in unique payers just to mitigate the risk if any of those payers going away. And do you think that the expansion that you’re doing into some of these new genres can actually reverse that trend in MEPs overtime?

Stephane Kurgan

Yes, thank you, this is Stephane here. I think what we have observed and we done this several times, when we switch to half currency is that the aggregate bookings go up. Because the increase in the value of the transactions made by the spenders more than offsets the decline in the number of spenders and we’ve observed that over the long-term with the Canvas games first and then the mobile games later. So, we are reasonably comfortable that this would drive an improvement in bookings.

The second part of the question is about I understand the Saga 1.5 and the game extensions and yes, I think the – but we are trying to do that is to at not only large amount of content, but also new features and new opportunities for our players to convert and spend and this is why and it reference the fact that we will be creating our offering that new set of products I mean today we have three categories of products, we have timing that gives you by large, your performance and you have content or if you have content, there will be new categories of products that will be offered as part of the Saga 1.5 extension.

Hope Cochran

And with that we will conclude our call. Thank you for joining us today. We appreciate your interest in King and we look forward to speaking with you again.

Operator

Thank you. This concludes today’s conference call. You may now disconnect. Have a good day.

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