"Candy Crush Saga" maker King.com can thank advertising for propelling the company to go public — but not advertisers.
The online and mobile gaming company filed for a $500 million initial public offering on Tuesday and revealed that advertising only accounted for 1% of its $1.9 billion in revenue last year. That's down from 10% of total revenue in 2012 and underscores the company's diminishing interest in advertising revenue. King.com stopped running ads from third-party ad networks in its games in the second quarter of 2013.
"We do not expect to derive any significant portion of our revenue from the sale of advertising space in the foreseeable future," the company said in a regulatory filing.
The company may not derive much revenue from advertising, but it certainly directs much of that revenue toward advertising. Last year the company spent $376.9 million on sales and marketing, up from $55.2 in 2012. In the fourth quarter of 2013 alone, King.com put $106.3 million toward sales and marketing.
Ironically King.com's success on Wall Street will depend on advertising. King.com's cash cow remains the sale of virtual items within its games. However only 4% of its 408 million monthly active users pay to play games like the uber-popular "Candy Crush Saga." King.com's future revenue growth depends on persuading new and existing players to to buy in-game products.
That means advertising.
"If the cost to acquire players is greater than the revenue we generate over time from those players and if we cannot successfully migrate our current players to new games and new platforms as we have historically done so, our business and operating results will be harmed," the company said.
King.com's IPO will also test Wall Street investors' appetities for another online gaming company. The public market may still be fouled by Zynga. That company went public in December 2011 but has seen its stock price drop by 49% as it has failed to roll out popular new games to spike user and revenue growth. Like King.com, Zynga generates the overwhelming majority of its revenue from in-game sales.