King Digital Candy Crushed: What Wall Street's Saying

Updated from 9:01 a.m. to include thoughts from JPMorgan analyst.

NEW YORK (TheStreet) -- King Digital Entertainment (KING), better known as the maker of Candy Crush Saga, saw its shares crushed after the company lowered guidance for the rest of the year, citing concerns about seasonality and the impact of the World Cup.

For the second quarter ending in June, King earned an adjusted 59 cents a share on $593.5 million in revenue, up 30% year over year, but down 2% sequentially. Gross bookings for the quarter came in at $611 million, up 27% year over year, but down 5% sequentially.

Monthly active users rose 83% year over year to 485 million, while daily active users rose 82% year over year to 138 million.

Analysts surveyed by Thomson Reuters were expecting 59 cents a share on $609 million in revenue.

The company also announced a special $150 million dividend, which will be paid to shareholders on Sept. 30, to "enhance returns for our shareholders," according to a statement from King CEO Riccardo Zacconi.

Zacconi also announced that the company that it was partnering with Chinese Internet giant Tencent (TCEHY) to roll out a localized version of Candy Crush Saga, and is launching its first sequel, Bubble Witch 2 Saga, as well as taking advantage of the company's acquisition of Nonstop Games.

Games such as Farm Heroes Saga and Bubble Witch 2 Saga have not proven to be the huge hit Candy Crush Saga became, a game that accounted for 59% of its gross bookings in the second quarter. Candy Crush continues to be in decline, having approximately $361 million in gross bookings this quarter, compared to approximately $430 million in the first quarter, according to Bank of America Merrill Lynch analyst Justin Post.

Shares of King Digital plunged in early Wednesday trading, falling 23.1% to trade at $13.99.

The company lowered 2014 expectations for both the third quarter and the fiscal year. It now expects third quarter gross bookings to be between $500 million and $525 million, with full year gross bookings between $2.25 billion and $2.35 billion.

Following the report, analysts were largely negative on the stock. Here's what a few of them had to say:

Barclays Capital analyst Christopher Merwin (Equal Weight, $16 PT)

"Fears about title concentration risk for KING came to pass in the 2Q print when gross bookings missed our estimate by 5%. Management lowered its outlook for the 3Q and FY14, a bar we believe is now achievable, although we have some concerns about further decay in core franchises next year and are lowering our bookings estimates as a result. Also, about 80% of the company's outstanding shares pass lock up after 4Q results and could pressure the stock in the months that follow. We are downgrading shares of KING to Equal Weight and lowering our price target to $16 from $24."

Credit Suisse analyst Stephen Ju (Outperform, $17 PT)

"Citing monetization headwinds driven by seasonality, the World Cup, and below-expectations performance for Farm Heroes, KING management lowered expectations for gross bookings growth for the balance of 2014. Given that the miss was across the board and not specific to one game, we suspect the monetization headwinds are more transitory, but we have nevertheless taken what we believe are draconian cuts to our MAU assumptions for new games (3 out of 5 annual releases to be commercial failures) and project a more rapid decay trajectory for Candy Crush to model continued consolidated bookings decay in the medium-to-longer term. We believe near-term downside risk to KING shares at this point will be to around $12-$13 and upside potential to our updated $17 target -- we hence maintain our Outperform rating on this reset."

Deutsche Bank analyst Lloyd Wamsley (Hold, $12 PT)

"We downgrade rating on King shares given a crushing disappointment of new games to hit our estimates and deteriorating monetization across the portfolio. Candy Crush Saga (CCS) exceeded our estimate but new games, despite steady presence in the top grossing charts, missed. Given a much weaker new title outlook, we exile our 2015 estimates and cut our target to $12 from $27. We see meaningful upside potential on our lower base estimates, helped by new titles and geographies, but prefer to enter with more visibility into these call options."

Pacific Crest Securities analyst Evan Wilson (Sector Perform, No PT)

"King faces the same hit risk as other gaming companies, but with the near-term setup and valuation, investors have a cheap call option on a potential future hit. Also, the postponement of its IPO lock-up expiration delays a potential nearterm catalyst. However, given that King expects to return to growth and the weak performance of its game portfolio (and not a lot else that will come to market), we are not confident King will be able to hit consensus expectations, which makes it difficult to recommend the stock."

JPMorgan analyst Doug Anmuth (Neutral, $18 PT)

"King’s 2Q14 earnings were disappointing—not so much because of the light 2Q results, but more due to the stepdown in monetization in the back half of the quarter and the company’s outlook that trends will remain soft for the rest of the year. As a result, King’s outlook for 2H14 bookings comes down from $1.318B to $1.048B at the mid-point, a cut of 26%."

--Written by Chris Ciaccia in New York

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