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King Digital Entertainment in Worse Shape Than Earnings Suggest

NEW YORK (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 Wednesday trading, 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% 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.

King Digital’s monthly paying users only rose 1% year-over-year. In contrast, the company reported that monthly active users (MAUs) rose 83% 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% year-over-year, revenue rose 30% and adjusted EBITDA rose over 34%.

Must Read: King Digital Candy Crushed: What Wall Street's Saying

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% of its overall MAUs, an about 50% 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% 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.

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