Analyst: King Digital Entertainment Beats Street Expectations

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Adjusted revenue and EPS above Street expectations as other games fill in for Candy Crush Saga declines. Adjusted revenue was $608 million, compared with our estimate of $602 million and consensus of $604 million. Bookings were $641 million, roughly in line with our expectations. Adjusted EBITDA was $249 million, compared with our estimate of $239 million. Non-GAAP EPS was 61 cents, compared with our estimate of 64 cents, consensus of 59 cents. The company provided initial FY:14 guidance for gross bookings of $2.55 billion-$2.65 billion, adjusted revenue of $2.4 billion-$2.5 billion, and adjusted EBITDA margin of approximately 40 percent of adjusted revenues.

Three King (NYSE:KING) games were among the top-10 grossing games on all major platforms during Q1:14. King saw sequential improvement on every key networking and monetization metric except for Monthly Unique Payers (MUPs); the company attributed the decline in MUPs to reduced payment activity among the occasional payers on the network and the introduction of virtual currency in some games.

Revenues from new and legacy games offset Candy Crush Saga’s decline, resulting in sequential bookings growth. Candy Crush Saga generated 67 percent of bookings ($430 million) in Q1:14 and generated 78 percent ($493 million) in Q4:13. We think that the primary driver of the offset came from Farm Heroes, which debuted on mobile in January 2014, and to a lesser extent, Pet Rescue.

We are increasing our FY:14 estimates for bookings slightly, to $2.64 billion from $2.63 billion, and for adjusted EBITDA to $1.04 billion from $1.01 billion, but lowering our non-GAAP EPS estimate to $2.47 from $2.55 to reflect Q1 results and guidance. We are maintaining FY:15 estimates for gross bookings of $3.13 billion, revenue of $2.97 billion, and adjusted EBITDA of $1.19 billion, but lower our non-GAAP EPS estimate to $2.80 from $2.87 to reflect a higher share count.

Maintaining our OUTPERFORM rating and a 12-month price target of $25. Our target is based upon assigning a roughly 9x multiple to our $2.80 estimate for King’s EPS in 2015. This reflects a discount to the market multiple to account for the risks associated with a hit-driven business, and to reflect King’s large concentration of revenues from its biggest game, Candy Crush Saga.

Michael Pachter is an analyst at Wedbush Securities. 

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