Activision Blizzard, Inc.
Q3 2019 Earnings Call Transcript

Published: 7 Nov 2019

[Operator:]

Good day and welcome to the Activision Blizzard Q3 2019 Earnings Conference Call. At this time, I would like to turn the conference over to Chris Hickey, Senior Vice President of Investor Relations. Please go ahead.

[Chris Hickey:]

Good afternoon, and thank you for joining us today for Activision Blizzard’s third quarter 2019 conference call. With us are Bobby Kotick, CEO; Coddy Johnson, COO and President; and Dennis Durkin, company CFO and President of Emerging Businesses. And for Q&A, Rob Kostich, President of Activision; J. Allen Brack, President of Blizzard Entertainment; and Humam Sakhnini, President of King, will also join us.

[Bobby Kotick:]

Thank you, Chris, and thank you all for joining us today. Our third quarter results exceeded our prior outlook for both revenue and earnings per share as we made continued progress on our growth initiatives for 2020 and beyond. For the fourth quarter, we've decided to increase investment in consumer marketing and user acquisition as we aspire to reach more players in more countries on more platforms than ever before.

[Coddy Johnson:]

Thank you, Bobby. Activision Blizzard exceeded our third quarter outlook driven by better-than-expected performance from Call of Duty in-game and World of Warcraft as well as favorable cost timing. And we started Q4 with successful launches for Call of Duty Mobile and Call of Duty Modern Warfare and achieved important milestones in several other franchises. We plan to build on this momentum and we'll invest this quarter to maximize the potential of our franchises in 2020 and beyond. So far this year, we've increased investment and development resources in our key franchises to drive innovation and improve performance across our four strategic growth pillars. We've made clear progress against each. And our first pillar, delivering a strong consistent cadence of major new content releases the World of Warcraft Classic launch in August drove a record quarterly increase in subscription plans with the player base remaining elevated into Q4. Again last week in Blizzcon, within that the next World of Warcraft expansion and sequels to both Overwatch and Diablo giving fans hands-on gameplay for the next major installment, some of our biggest franchises. And two weeks ago Activision launched Modern Warfare with exceptional early sales. And our second pillar which is driving live operations with ongoing in-game content, services, features and events. We saw encouraging results from our increased focus as we continue to invest in growing our capabilities in this area. The expanded development team on World of Warcraft has sustained strong engagement within Wild Classic into Q4 as it delivered the first in a wave of substantial content updates. Black Ops 4 reach and in-game performance continued to benefit from our focus on delivering more compelling in-game experiences and we saw a positive community response to our plans for Modern Warfares in-game system.

[Dennis Durkin:]

Thanks, Coddy. Today, I will review our Q3, 2019 results and our outlook for Q4. Q3 GAAP and non-GAAP EPS were ahead of our prior outlook. Key factors included business over performance, favorable cost timing and a lower tax rate. To review the quarter I'll start with our segment results. Activision revenue was $209 million, down year-over-year against the comparable that included the release of Destiny Forsaken. Key quarterly contributors were Call of Duty

[Operator:]

Our first question today will come from Michael Ng with Goldman Sachs.

[Michael Ng:]

Hi, thank you very much for the question. Just on Modern Warfare. With the absence of a season pass and with the implementation of the new in-game system, could you talk about what that means for in-game spending growth next year versus Black Ops 4? Thank you very much.

[Bobby Kotick:]

Thanks for the question Mike. It's Rob. I think it's really important to first talk about our overarching principles and what we're trying to do. We're focused on bringing the community together, building one big community and keeping them playing together through great content and features. The changes that we've been making are certainly in service of those principles and we believe they're not only great for our players but also for growing and sustaining long-term engagement, which of course is critical to our long-term success. Now I do want to talk about some of the things you mentioned and some of those changes. We did eliminate the season pass and instead we'll be focused on dropping free content to the community, so everyone can enjoy it together. Tomorrow is actually going to be the first free content drop for Modern Warfare and we're excited about that. And the much bigger things that are yet to come for the community. And we also implemented cross play for the first time in the franchise to keep friends playing together no matter what platform they're on. And I think this was actually really important. And I'm seeing it in how friend groups are connecting already. Players who haven't played Call of Duty together in years are doing so, and we think that's really great for the community overall. Now we're also implementing a new battle pass system, which you mentioned and it's going to launch later this quarter. We feel it's the right thing to do for the game and how it's designed. And more importantly, we think it's the right thing to do for our players. That launch is still ahead of us but we've been really encouraged by the early response from the community to the change that we're making there. So in terms of growth we do feel good both about our long-term engagement potential as well as the new system that we're implementing. Now I'll let Dennis speak to how we think about in-game revenue kind of this quarter and beyond. But on the content side, we have plans for seasons and events that we believe will keep the community playing together for the long haul. Modern Warfare is really a great game. It's a deep experience and we believe it's just scratching the surface of what it can do. We keep saying in many places that the launch of Modern Warfare is just the beginning and it truly is. There's a ton more to look forward to here. Dennis is there anything else you'd add?

[Dennis Durkin:]

Yes a couple of points just to build on what you mentioned Rob. I mean, the first thing is we do feel great about the in-game plans and a lot of the changes that you and the team have made. We're always though very careful when we're modeling these new initiatives, particularly in launch quarters like this one and with the timing of it. Overall, with the changes in sort of keeping the community together and the cross-platform and the new economic system that we have inside the game, we think that most importantly that's going to drive long-term engagement inside the franchise. And usually when you've got great long-term engagement great business results follow. So we're pretty excited about what we have in-store and what's coming. And we think that's going to be a nice tailwind heading into 2020 for Modern Warfare.

[Bobby Kotick:]

Thanks, Mike. Operator, can we have the next question please.

[Operator:]

Certainly. Our next question comes from Mike Olson with Piper Jaffray.

[Mike Olson:]

Hey, good afternoon. Thanks for taking question. After 2019, that was maybe less robust from a pipeline perspective and you touched on this a bit, but how would you say that investors should think about the pipeline for the company over the next 12 to 24 months? Thanks.

[A – Coddy Johnson:]

Sure. Thanks, Mike. This is Coddy. Well, first, as Dennis highlighted on the call, we're sort of particularly excited to be this side of BlizzCon and to being able to how Blizzard walks through just what's coming in the upcoming content pipeline there. And when you couple that with the initiatives underway at Activision and King, we do feel that we're looking at the strongest content pipeline that this company has had in its history. And one of the reasons for that are the important steps that we've taken over the last year to make that possible. The investments we've made in our development resources, the focus on our core franchises that push to make sure that the content cadence across upfront live operations in mobile sits across all of our key franchises where appropriate. And we took some steps as well to make sure we could fund that by de-prioritizing other areas, all in service of getting to this moment where we could show the content cadence where players coming up and deliver to expectations and above. I think the early results are a really important sign post to look at on this growth road that we are on. When you think about WoW Classic, it is a major expansion coming into that universe. In an off year, typically it's every other year extension, a major expansion that comes in and has a significant step change impact on the reach of that franchise. Similarly, CoD Mobile. While partners outside development to pull that off, we had to make significant investment inside our production and publishing capabilities. And, again, a step change in that franchise's reach engagement. And then Modern Warfare, which we think stand-alone in terms of an experience and, as Rob highlighted, will continue to do so. So those aren't just sort of green shoots, those are real sign post and milestones of the growth that we think is possible. And it points to what we think is coming, some of which you know concretely. WoW

[Bobby Kotick:]

Thanks, Mike. Operator, can we have the next question, please?

[Operator:]

Our next question will come from Mario Lu with Barclays.

[Mario Lu:]

Hey, guys. Thanks for taking the question. So just one on, Overwatch. I think the share multiplayer environment you announced between Overwatch and new Overwatch 2 owners is very intriguing and unique. Anything you can share in terms of what kind of business model you can expect for Overwatch 2? Thanks.

[J. Allen Brack:]

Hi. This is Jay. Thanks for the question. Last week at BlizzCon was a really big reveal for Overwatch 2 for us and the teams. And we're -- the reception has been great and we've been really humbled by that. One of the things that you alluded to and I think is worth really kind of articulating is this idea that the team has around redefining a sequel. And really what does that mean? And so, if you think about for PvP, we've communicated that all the players of Overwatch will play on the same maps as players of Overwatch 2. And in other words there'll be one map pool. Then we've also announced that all players will have access to the same set of heroes. And the principle for this is that no one is left behind and that we really are not splitting up the community. We've also communicated that we want to honor the collection from the existing game. And so everything that you've earned will carry forward into Overwatch 2. And the thought behind this is we've worked hard to build a strong community and we want to move forward as one. For PvE as Coddy talked about we're introducing lots of content for Overwatch 2. Players really asked for a back story and a narrative in the Overwatch universe for -- since the very beginning and we're really excited to create a huge amount of replayable content that really does that. And we also think this PvE content will bring entirely new players into the Overwatch universe. So the overall goal is to continue to build the largest community possible in the game with excellent content and a commitment to really continuing to release different live content than you've seen historically at a higher cadence. So stepping back to your question on business models, we're always looking for the appropriate business model for each franchise and Blizzard were lucky to have several different experiences or several versions of different business models. I think that players, it's proven that players demand premium and differentiated content and many of the Blizzard launches are premium experiences. We don't see any reason to walk away from that given what we can offer to players.

[Bobby Kotick:]

Thanks. Operator, can we have the next question please.

[Operator:]

Our next question will come from Jason Bazinet with Citi.

[Unidentified Analyst:]

Hey guys, it's Ted Cronin on for Jason. Thanks for the time. Just curious at the King segment, if you're able to provide any color on sort of where you plan to devote most of the focus going forward, just given that the KPIs for Candy Crush appear to be perhaps a bit better than for King as a whole. Just wondering if there's any sort of trade-off between maintaining the durability of Candy Crush and promoting of the titles?

[Humam Sakhnini:]

Thanks for the question. This is Humam. So I think it's a theme that you've seen across Activision Blizzard. And I think it plays itself out quite nicely as well at King, which is we're often finding that our biggest opportunities are in our biggest franchises. Releasing Candy Crush franchise is a great case in point on that. So we've increased the resources in the Candy team. And you, as you mentioned, the results are pretty evident. I think in Q3, we had the fourth consecutive quarter where we had year-on-year mobile MAUs and net booking growth for the Candy franchise, so really strong results from that focus on the candy opportunity. And I firmly believe that the opportunities in the Candy franchise continue to be ahead of us. We're continuing to introduce quite a bit of features and content and innovations in our live ops environment that drives player engagement, and we are expanding the network, as you see in our MAU trend. So as we continue to focus on that, I continue to see a lot more opportunity in our Candy franchise. I do want to highlight, though, that we are also selectively investing in new IP. And there, we're taking an approach of fewer, bigger bets, a very focused look at our pipeline. As you well know, launching new mobile IP is tough in the industry. But the combination of the creative talent at King and the sizable network that we have gives us a good advantage. And you've heard probably on previous calls, and we talked about our advertising efforts, we continue to push hard into that. And we continue to move that momentum forward. So all in all, that's the areas of the focus at the King’s level.

[Bobby Kotick:]

Thanks, Ed. Operator, can we have the next question, please?

[Operator:]

And moving on to Brian Nowak with Morgan Stanley.

[Unidentified Analyst:]

Hi, guys. It's Matt on for Brian. Thanks for taking the question. Can you give an update on how Call of Duty Mobile is doing in terms of attracting and retaining players now that we're a month out from launch? And are you seeing any cannibalization there with Modern Warfare? Thanks.

[Bobby Kotick:]

Matt, it's Rob. Thanks for the question. Probably the first thing I want to do is just step back and say that overall, this is a pretty special time for Call of Duty across Mobile, our traditional console and PC business and across e-Sports. We're seeing significant success and traction on all fronts. With Call of Duty Mobile, on your question, we've obviously have a great game, a high-quality game. We've talked about the installs over $100 million in under a month, which has been fantastic. We're seeing strong growth in many geographies like India and Brazil, more so than we've ever had in our history and it's providing a real step change in reach for the franchise. And frankly, just growing the brand in all new ways, which is great to see. We also just had a really strong launch for Modern Warfare which suggest we're creating a really strong franchise ecosystem globally, where these products are actually complementing one another and not competing with one another. This is exciting news for us on a number of fronts, including how we think about cross promoting, our products across this ecosystem both now and I think well into the future. Now in terms of the mobile metrics specifically, we're obviously very pleased with the installs and we've referenced them a number of times on the call. But importantly, our retention has been really strong and that's due to the great game quality and great game experience we have, as well as the quality of our ongoing live operations. We also have a compelling content pipeline ahead, that we believe will continue to drive our business results. So right now, we feel great about where we're at and we feel good about -- and really good about our prospects for the future. But I do just want to come back and close before I started. With the success on Mobile, with the success of Modern Warfare and with the Call of Duty League launching in January, we do think the best days for the franchise are squarely in front of us. And that's a pretty cool thing to say, given all the success we've had in the past 15 years. Thanks for the question, though.

[Coddy Johnson:]

Rob, it's Coddy. I just want to jump in at a few points. One is, I just note that bringing Call of Duty to Mobile was one of the first and most important initiatives that Rob and his team signed up for, as they kind of stepped in new roles. And so, it's a real credit to the team that we've kind of reached this moment. I know that has been a road and to get to this place. It's awesome to see. But I think important to that is, it's really just the first step, there are a number of things happening across Call of Duty to continue to expand across platforms and geographies and have this as an ecosystem that sits across mobile and console and PC at e-Sports. And so I think I think there's some really important and good things still to come. And I think that's true -- for CoD, but across a number of our other key franchises as well, where Call of Duty success on level points the way for what's possible for some of our other AAA franchises.

[Bobby Kotick:]

Operator, can we have the next question, please?

[Operator:]

And next will be Mike Hickey with The Benchmark Company.

[Q – Mike Hickey:]

Hey, guys. Congrats on the quarter. Thanks for taking my questions. I guess just two on Hearthstone. Can you share with us sort of the impact you're seeing from competition there and how we should think about the opportunity to return the franchise to growth? Thank you.

[J. Allen Brack:]

Hi. This is J. I think when we think about different games and we think about Hearthstone I think it's natural to attract competitors. It's not something that we spend a lot of time thinking about. I think new games bring in, new players, new ideas and it grows the industry which is great for everybody. I also think that players will try lots of new games but are going to come back for differentiated experiences. So we focus on making the best experience we can and then increasing the cadence of great content and great game play. One of the things that -- one of the things that the industry has seen this year is the rise of the auto battler genre. And at Blizzcon, we announced our take on this within Hearthstone. We've already actually seen some positive response from the early audience feedback. And we're looking forward to the wider release next week. It is an engagement driver. That's the focus is on new and returning players with this mode. I think the Hearthstone team has really done a great job this year and I'm super proud of what they've accomplished in a very short amount of time. They saw this as an emerging genre really early in the year, something that we're really excited about. And then they pushed to add the mode to Hearthstone in a very Blizzard way in a way that I think is going to turn out to be very cool for players.

[Bobby Kotick:]

Thanks, Mike. Operator, do we have the next question please.

[Operator:]

And that question will come from Alex Giaimo with Jefferies.

[Alex Giaimo:]

Thank you, guys. Just hoping to get a bit more color around the long-term mobile strategy within the portfolio. With CoD Mobile up and running, we know Immortal is coming at some point. But would Mobile make sense for any of the other 10 pool franchises like a WoW or an Overwatch? Thank you.

[Coddy Johnson:]

Sure. Thanks, Alex. This is Coddy. I guess I'd take first just on mobile strategy generally, remember a third of our business is on mobile already. And we have the largest mobile gaming presence in the west. And so we want to build on that leadership position and we think it's a -- we think it's a foundation of strength to do that. It is a massive opportunity and we think not just for Call of Duty and not just for Diablo Immortal. And it's worth still pausing and talking for about Call of Duty, Mobile for why it's such a large opportunity. I think first it shows that the AAA kinds of games we make are ready to work on mobile because of the improving compute and graphics capability. Honestly because of evolving player expectations. It's now the case that many of the most successful global games are RPG, first person action, strategy. Those all aligned as you might imagine very well with our portfolio. We have a growing ability to execute. And we're seeing that franchise, familiarity and awareness matter, matter fundamentally in like to the tune of 100 million of people that when you reach out in the right way of franchises that are willing to come in. And so that's the level of opportunity we see. In terms of what we'll make you might imagine we're looking at all of our franchises. We want to do it where it makes sense and we think about it strategically in three main buckets. The first is extending existing game play. This is what Call of Duty, Mobile -- taking the best of Call of Duty quite literally in apps weapons characters and it's brought that over for mobile experience. So that's one bucket where we are looking at a number of opportunities to go do that. The second is reimagining the IP on the mobile platform. You can think about this like Hearthstone, which was really a reimagination of the Warcraft IP and the card game and it – that works very well in mobile. So you might imagine, we're pursuing a number of ideas like that. And then developing true cross-platform titles that work from the start across mobile. Some of those take time, but we are anxious to move. And you mentioned one already in the pipeline and there are more to come. And so, we're excited about rolling that out over the next several quarters.

[Bobby Kotick:]

Thanks, Alex. Operator, can we have the next question please?

[Operator:]

And the next question comes from Ray Stochel with Consumer Edge Research.

[Ray Stochel:]

Great. Thanks for taking my question. How is retention trending for World of Warcraft Classic? And can you help us think about the long-term opportunities around running a multi track subscription model? Thanks.

[Coddy Johnson:]

So you asked about Classic specifically, but I think it's important to note that we think of World of Warcraft as a single community. Launching WoW Classic into the existing subscription was very intentional. We made a conscious choice to have one ecosystem and one engaged base of players. The goal of that system was frictionless movement between classic and modern. So now we have a large group of players and we have the challenge of keeping them engaged. And I think we have a number of different ways to do that. In Classic, you've already seen the first example with the Dire Maul update, which was released in mid-October. And we've seen player engagement into Q4, with subscriptions in some regions continuing to grow. We also have the added benefit for Classic with a known content road map for players. Switching to Modern WoW, at BlizzCon we announced the next expansion with World of Warcraft

[Bobby Kotick:]

Thanks, Ray. Operator, can we have the next question, please?

[Operator:]

And we have a question from Robert Berg with Berenberg.

[Robert Berg:]

Yes. Hi. Thanks for taking my questions. A couple for me please. The first on the next-generation of consoles. We've heard from EA and Ubisoft on how they're thinking about the potential tailwind for unit sales in 2020/2021. Interested to hear how you're currently thinking about the impact of the next-generation of consoles on your business. Second question is, given some of the developments on PC and mobile recently and with streaming coming, what are your latest views on the prospect for lower royalty rates across the industry over the medium term? Thanks.

[Coddy Johnson:]

Sure. Thanks. This is Coddy. I guess, maybe taking a step back first. We are increasingly seeing in the industry and we think it's certainly true for our franchises, that they exist above and beyond any single platform, that there are franchises that appeal broadly across multiple platforms. As mentioned, this -- we believe now is eminently true on Call of Duty across PC, console and mobile. And if you go back several years ago, that wouldn't have been true for Call of Duty. But now robust growth across all three of those. Overwatch, of course, across PC and console, meaningfully and Hearthstone across PC and mobile meaningfully. So I would, first, just start with the premise that we are well above any individual console change, and it is about the broader nature of our franchise across multiple platforms. Of course, all that said, we're excited when large partners want to come in and expand their platforms. And so that includes consoles. And that's next-gen looks to be getting ready. We think it's an opportunity to continue to showcase our premium experiences. We also think increasingly you see consoles being iterative and that gives us the opportunity we believe to keep our communities together. It's why we've made such strong investments to keep communities playing together and either put those in the market or announce that we're doing so. And we think that continues with this console generation has to come. I'd just remind you consoles are only about one-third of our business, maybe different from some of our competitors. And so we, kind of, see ourselves having robust growth pipelines across all the large platforms out there. You ask finally just about economics and that we always look to bring our IP to bear on appropriate large platforms as long as the economics are right. I would not get into specifics about royalties at this stage. But we have a long track record of making sure that our IP is fully understood and valued by our partners. And I just -- I think the broadest point to remember is right now you have a lot of well-funded platforms coming in, looking to build out gaming reach and they're looking for great content and they're short of it. And we find ourselves, we think very fortunate and well-positioned to have great content to bring to bear. And we think that sets us up very well for the next several years.

[Bobby Kotick:]

Thanks Rob. Operator, we have time for one last question.

[Operator:]

Certainly. That question comes from Colin Sebastian with Baird.

[Colin Sebastian:]

Thank you. One question please. Wondering what you took away from the Overwatch esports experience and ramp in terms of applying that knowledge to the Call of Duty League launch next year. Thank you.

[Bobby Kotick:]

Sure. Thanks Colin. It's Bobby. Well, as you can imagine we've learned a lot. Probably the most important thing is that we underestimated things like the demand for the broadcast rights, sponsorships even on the licensing front. I think we also underestimated enthusiasm that we would have from prospective owners, which is why the price of the teams went up so much over the two-year period. And then I think, operationally, we had the benefit of two years in a fixed location to really think about how to optimize production. But as we go out into the local markets next year, which is the big point of differentiation for us in our view, between us and anybody else that's thinking about esports, is really engaging these great local entrepreneurs and professional team owners or professional groups in actually generating revenues, marketing, new fans, new opportunities for our fans to connect to their favorite players. And so what we've learned over the last couple of years is serving us incredibly well as we launch the Call of Duty League. And in fact, most of the owners are existing owners, and most of them have jumped in at prices that are higher significantly than what they paid for their Overwatch teams. And I think we're going to get the benefits of scale of being the biggest operator of a professional esports league anywhere in the world. The other thing, I think, is we probably didn't appreciate how big the viewing audience was. And if you look at the demographic that we serve, principally 18 to 34 year olds, the audience that we're serving on a global basis is bigger than the MLS for that demographic or Major League Baseball for that demographic. So there's an untapped opportunity for sponsors, for advertisers, for our licensing partners to be able to reach an audience that has become increasingly difficult to reach. So I think from every perspective, not only have we learned a lot, but I think what we've done in terms of execution is the best that anybody has expected or seen in professional e-Sports. And so when you then think about what's happening in these franchises, whether it's the announcement we just made about Overwatch 2 or the new 100 million consumers that just came into the Call of Duty marketplace and community, we're seeing an incredible amount of growth in both the opportunity for spectators, but also in audience that we'll be able to reach for our sponsors, our broadcast partners, advertisers. And so when you look out over the course of the next 12 to 24 months, there will just be a lot bigger ecosystem for us to be able to take advantage of. And a lot more of an audience for our players -- our professional players to be celebrated by and recognized by. And so, we couldn't be more pleased with the progress that we've been making. And I think all these initiatives that are expanding the communities of our franchises, just serve us better as we move into the local markets.

[Chris Hickey:]

All right. Thanks Bobby and thanks everyone for joining us today. We look forward to hopefully seeing many of you in-game over the coming months and then back here in early February when we release our end of year results. So thanks.

[Operator:]

Well thank you. That does conclude today's conference. We do thank you for your participation. Have a wonderful day.