So King Digital, the company that makes “Candy Crush,” just announced a $US150 million share buyback. That’s the lion’s share of the $US177 million that the company made in the quarter.
You can read the earnings announcement here.
Anyway, this isn’t the first time that King (which hasn’t been public very long) has returned cash to shareholders.
Back in August, the company announced a one-time $US150 million dividend, catching investors by surprise.
King’s strategy makes a lot of sense.
Its premier game, “Candy Crush,” is an absolute cash-gusher. And the margins are enormous. Almost all the revenue is profit, because the game already exists and what they sell is virtual.
Unfortunately, “Candy Crush” isn’t an easily repeatable phenomenon. Yes, they have developed other games and impressively, “Candy Crush” is now only 41% of the company’s revenue, but it’s still a unique phenomenon.
It’d be foolhardy for the company to plow its cash back into R&D, as that would be like a lottery winner spending the winnings on more tickets.
My old colleague @jyarow asked on Twitter, why bother even being public then? The answer is that being public is a nice way to lock in (“monetise”) a massive (but uncertain) stream of future cash flows.
I think of King Digital as kind of like being a small oil sands company in Canada. If you’re sitting on a huge future stream of oil, it’s a smart move to sell off the future cash flows it spins off, rather than, A, wait for all the cash to come in and collect it or, B, hope to strike (black) gold again via speculative drilling.
So yeah, it’s weird to see a young mobile tech company paying massive dividends. But it’s absolutely the right move.