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Candy Crush IPO Part I: Proposed IPO Analysis of King Digital Entertainment plc

March 15, 2014
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You have around 15 minutes of leisure time with you before your typical day starts unfolding. You decide to play a game on your smartphone. You go to the games folder and come across arcade games, shooters, puzzles, simulators and so on. You choose a game and start playing. After couple of rounds, you look at your watch only to realize that half an hour has passed by. You could have left the game and started your daily chores. You say ok, let me play for another 15 minutes and then I start with a productive work. You go back to the game and next time you raise your head up, you realize an hour has passed by while you still feel like continuing with the game.

An addiction that sounds familiar….yes…at least to me.

Friends, leisure games have slowly and steadily started translating into business games. The saga started way back in Dec 2011 when Mark Pincus led Zynga, with 227 mn monthly active users (MAUs) across 175 countries filed for an IPO and subsequently went public with $ 7 bn valuation at $ 10 / share. Zynga was the company behind the once highly popular Farmville, a game that has now faded from public memory. The stock won investors’ confidence and attained its peak in the vicinity of $ 15 / share in February 2012. It remained on a downward spiral since then and currently trades around $ 5.40 a share with over 40% decline from its stock market debut.

However, the saga of monetizing the leisure games still continues as King Digital Entertainment, the Irish parent company of the mobile game Candy Crush filed for an IPO in March 2014. Ironically, it was King’s Candy Crush that replaced Farmville as the most-played app on Facebook. To me, it seems the story of converting the billions of games played in virtual world into billions of dollars in the real world is here to stay.
Any story survives the investment tests if it has strong business model. I started reading through the SEC filings of King Digital with this point in mind. Let’s try to peek into the business model of King Digital and figure out if this IPO will grab the attention of the investors. We look into the revenue model of this company and try to make some broad projections to see what size this company can grow into.

We all would have played the free games from Appstore of our smartphones and Ipads number of times but probably never bothered to explore why makers of these games should command a valuation in the magnitude of billions of dollars. Have you ever wondered how such game makers generate revenue and how much?

King Digital generates its revenue primarily through the sale of virtual items to game players that enhance and expand their game experience. It offers a range of virtual items to its customers. These currently include:

  • Entertainment time, where players can extend the duration of their game session;
  • Skill enhancements, where players can buy a wide variety of boosters that help them to progress;
  • Access to content, where players can pay to unlock new episodes.Our users can purchase virtual items

Its sales model includes multiple opportunities throughout gameplay for the users to buy virtual items:

  • A typical “consumable” virtual item is priced at approximately $1 and used immediately by the user
  • In some of the games, it offers “durable” virtual items in some of our games that can be used by the player over extended periods of gameplay. They typically have a higher purchase price of $5 to $30. Revenue from these durable virtual items is recognized over the estimated life of a paying player for that specific game.

The majority of the sales of virtual items are consumable in nature, with durable goods making up a relatively small percentage of the total mix. Durable virtual items accounted for only 4%, 13% and 1% of the revenue of King Digital in the last three years respectively.

With such a small ticket size, it should not take us long to estimate the quantum of sales King Digital must be making to achieve a revenue in proximity of $ 2 bn in the last financial year ending 31st Dec 2013. It will be therefore difficult to use the sales price and the quantity of the virtual items sold as the revenue drivers for this company.

Let’s take an alternative route to model its revenue. We start with active users base, a typical revenue driver for technology based entertainment company. Going through the management discussion section, I could locate following key revenue drivers for the company:

Exhibit 1: Possible Revenue Drivers of King Digital

Between MGABPPU and GABPU, later provides useful information to investors and others in understanding and evaluating the results given that it quantifies the daily monetization levels of our users. I have used this to model the revenue of King Digital.

Simply put, I have started with:

  • Monthly active users (MAUs) and growth in the same
  • And then proceeded to figure out what %age of MAUs are Daily active users (DAUs)
  • Then proceeded to GABPU and its growth
  • Then calculated Gross Booking = GABPU x DAUs
  • Then tracked what %age of gross booking translates into revenue

My projected revenue drivers are shown below:

Please refer to the attached excel file for detailed calculation.

Please change the assumptions in the excel sheet to come up with your own calculations of revenue drivers and revenue build up.

If you have any queries or if you wish to share your thoughts about the blog, feel free to start a discussion thread below!


About the Author

Shashi is a B.Tech from Indian Institute of Technology, Delhi and an MBA from Indian Institute of Management (IIM), Ahmedabad. With over 11 years of experience, he has dabbled in Project Management, Management Consulting, Investment Banking, Mergers & Acquisitions, Corporate Finance, Strategy Formulation and Fund Raising.


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