King Digital filed to go public this morning. For people who enjoy this sort of thing (raise my hand) this F-1 has been eagerly anticipated for a while. King Digital (ticker to be KING) is the publisher of Candy Crush, one of the most downloaded mobile games last year, and several other popular titles. They are one of the most successful of this generation of social games, alongside Clash of Clans maker Supercell. These games were built almost entirely on mobile platforms, making even Zygna look old (having grown first on the PC). Both KING and Supercell generate their revenue largely through the sale of virtual goods. These games are free to download, but their designers have spent a lot of time thinking of ways to get users to buy things inside the game, consisting mostly of customizations to the appearance of your game or ways to speed up game progress.

It looks like Super Cell is not going public any time soon, having just sold a controlling stake to Softbank of Japan. So we will have to keep guessing at their financials. There was a recent blog post claiming that Supercell was generating $5 million a day in revenue, but the source was weak enough that I do not want to link to it. Nonetheless, we have known for a while that Supercell has grown very quickly and generates a lot of revenue.

However, we now have KING’s SEC filings to pour over gleefully. They make for some very fun reading.

First, their growth is astounding. The company has been around since 2002 under a different name, but things have changed a lot recently. In 2011, they generated $64 million in revenue, in 2012 they generated in $164 million, and in 2013 they generated $1.8 billion dollars. Their profits have grown even faster. All from selling virtual goods. There are a few other curious items. Their corporate history and shareholding structure make for some dense reading. Perhaps more intriguing is the fact that all their metrics – users, revenues, profits – declined from the third quarter to the fourth quarter. I have not found an explanation for that decline, but it does stand out a bit. Like Zynga, KING also measures profitability in terms of “Adjusted EBITDA”, but I could not find the footnotes explaining the exact accounting treatment for these adjustments. Zynga had to go a few rounds with the SEC in defining these adjustments for their IPO. So, I suspect KING uses a similar treatment.

Just for fun. I compared some of their metrics to those of other major Internet companies who have gone public recently. Zynga is the closest direct comparison, but they are (hopefully) recovering from a dark period, suppressing their numbers. I also looked at Facebook, Twitter and LinkedIn. Those three are not as appropriate a comparison, they are in different businesses and measure things differently, but chances are investors will use them as benchmarks when determining a valuation for KING.

Here is the chart comparing them:

KING now has far more regular users than Zynga, second only to Facebook on a monthly basis.  They are also much more profitable, both on an absolute basis and on a per user basis. There is one oddity, Zynga actually generates slightly more revenue per user (looking at both gross bookings and revenue), but KING ends up being much more profitable on a per user basis. This strikes me as a bit odd. It would seem to imply that Zynga still runs a very expensive operation, even after several rounds of serious restructuring. One explanation is that Zynga is still in transition and will work down its cost structure. Another possibility is that there is something very different in their accounting. When confronted with this kind of problem, the cynical investor always looks at cashflow. You can mask a lot of trouble with “profits”, but cash is cash. On this metric, KING really stands out, generating $1.66 in cash per user in the quarter to Zynga’s $0.25. Not a perfect comparison as it only reflects one quarter of data, but there is pretty clearly something out of sort with Zynga’s cost structure. Another possibility is that there is some big difference in the technology the two companies employ. This turns out to be an interesting story in its own right, which I will explore tomorrow.

For now, I think we can conclude that KING has stumbled on a very interesting model. It will be interesting to see how long they can maintain this, and what kinds of factors will stress the model. Can Candy Clash remain truly sticky or will users tire of it soon? Putting KING on the treadmill of trying to find another profitable franchise, much as Zynga stumbled. Also worth watching is how will the cost of acquiring users affect them as the mobile app install market shifts.already For instance, KING runs its own TV commercials. In 2013, KING spent $563 million on payments to “social and mobile platform providers”, much of this is likely Apple’s and Google’s 30%, but also likely includes ad payments for driving installs. In addition, the company spent $366 million on marketing and agency costs. Combined, that is a healthy chunk of their $1.8 billion in revenue for the year. Regardless, it is clear that the market for mobile, social games remains healthy, with lots of room for innovative business models.