“Candy Crush” maker King Digital did it again.
For the second quarter in a row, the company returned basically all of its quarterly profit to shareholders.
On Thursday, the company reported adjusted profit of $US177.4 million, or $US0.56 per share, which beat expectations for earnings of $US0.47.
And the company is rewarding shareholders with a $US150 million buyback program, which it hopes to execute in the first quarter of next year.
In immediate reaction, investors seem happy with the move: shares of King Digital were up more than 3% in after hours trade following the news.
Buying back stock is fairly standard corporate behaviour, a way to reward shareholders for investing in the business, but it is a somewhat more curious move from a company that just made its public debut in March.
As we wrote back in August, investors can see this decision to return cash to shareholders as a reward for sticking with the company in the fragile post-IPO period. Or, this move can be seen as King Digital waving the white flag on innovation.
And while many companies like Apple and IBM have taken some heat for buying back tons of stock, or not buying back enough, these are both mature companies that make billions of dollars a year. King Digital, by contrast, has only been public for a few months, and on Thursday reported quarterly gross bookings that declined by more than $US100 million, or more than 16%, year-over-year.
Back in August, I had an in-office debate with former Business Insider editor Joe Weisenthal, who thinks this is a great idea and wrote as much on Thursday. Joe thinks that King investing money in R&D would be like a “lottery winner spending the winnings on more tickets.”
Not a bad analogy.
But if this is the corporate strategy, then why go public at all?
Certainly management is going to want to instill confidence in investors that it is — and still can — grow the business.
In its earnings release on Thursday, King Digital’s CEO Riccardo Zacconi said, “We have a consistent track record of developing successive hit games.” And there is no doubt that “Candy Crush” has been a massive hit.
But there are two metrics in the company’s earnings report that are worth taking a closer look at.
In the third quarter, monthly gross average bookings per paying user increased 26% over the prior year. So people who were paying for stuff in King Digital’s games spent more in the quarter. This is good.
But monthly unique payers in the third quarter fell 33% from last year and 17% from the prior quarter. So fewer people were paying for stuff. This is bad.
King said, “We believe the sequential decline in [Monthly Unique Payers] was primarily a result of reduced payment activity among the less engaged payers on the network.”
Whether or not this is the case will be seen in future quarters, but in a high-growth sector like mobile gaming, does a company want to be trading revenue for users over the long term?
Now, a quick look at the company’s balance sheet, and the $US150 million buyback doesn’t appear to be all that big a deal. As of now, the company hasn’t said it will need to raise debt to execute the buyback, and even if it uses most all of its net profit to buyback shares, the company still had $US976 million in cash and equivalents at the end of the quarter.
So theoretically, the company could use that cash to invest in new games, new technology, or to buy another company (or maybe to buyback more stock!).
And pull up a quick stock chart, and investors who bought shares near the IPO have had a tough couple months, so if you are making money, why not reward shareholders?
Perhaps King Digital is setting a new standard for how companies reward shareholders, even before they become what investors might consider “mature” companies.
Or perhaps King is finding a way to make sure their shareholders stay, well, their shareholders.
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