Activision Blizzard, Inc.
Q3 2018 Earnings Call Transcript

Published: 9 Nov 2018

[Operator:]

Good day, everyone, and welcome to the Activision Blizzard Q3 2018 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Christopher Hickey, Senior Vice President of Investor Relations. Please go ahead, sir.

[Christopher Hickey:]

Thank you. Good afternoon and thank you for joining us today for Activision Blizzard's third quarter 2018 conference call. With us are

[Robert A. Kotick:]

Thank you all for joining us today. Our results for the third quarter exceeded our prior outlook, as we continue to entertain large audiences, drive deep engagement, and attract significant audience investment across our franchises. Last quarter, on average, 345 million people played our games each month, and our players spent a record 52 minutes per day playing Activision, Blizzard, and King games. Our unique advantage is the ability to create the most compelling interactive and spectator entertainment based on our own franchises combined with our direct digital connection to hundreds of millions of customers in over 190 countries. With these competitive advantages, we continue to connect and engage the world through epic entertainment. Very few companies are able to consistently deliver compelling content to hundreds of millions of customers. Fewer still can provide their audiences with flexible methods of payment for that content. For our hundreds of millions of customers, we now offer content on phones, computers, and video game consoles, and subscription billing, direct digital download billing, virtual item sales, digital advertising, and of course, we still sell our products through tens of thousands of stores around the world. As an example of the breadth of our capabilities, we launched Call of Duty

[Collister Johnson:]

Thanks, Bobby. Activision Blizzard exceeded its outlook in Q3, and we remain on track to deliver our previous upwardly revised outlook for the year and double-digit earnings per share growth year over year. We were able to achieve these results because of our incredibly talented teams comprised of the best creative and commercial leaders in the industry and their focus on the four key growth drivers of our business. First, our team produced new content releases that invigorated distant communities and bring in new audiences. Second, our growing stream of live operations, which includes content, services, features and events that engage our franchise communities and encourage new players to join. Third, the expansion of our existing franchises onto mobile, the world's largest platform, and the creation of new franchises. And fourth, new and growing franchise engagement revenue models such as esports leagues and digital advertising. On the first driver, our teams continued to deliver exceptional innovation and execution with major new content releases for Call of Duty, World of Warcraft, and Candy Crush. These content releases reinforce a strong foundation for our second growth driver, live operations. We generate over $4 billion a year in net bookings from in-game content, which represents the growing majority of our net bookings, yet still offer some of the best value per hour in all of entertainment. We see the continued improvement of our live operations model as one of our largest growth opportunities with the potential to generate billions of dollars of high-margin incremental revenue as we deliver year-round in-game content for our community. We have robust engagement in content roadmaps in place for our key franchises, including Call of Duty, World of Warcraft, and Candy Crush. Now, not all our franchises are experiencing the momentum we see in Call of Duty and Candy Crush. And we have to improve the pace of innovation and the cadence of in-game content, and our franchise and business unit leaders are all now committed to achieving that goal. On our third growth driver, the expansion of our franchises onto mobile, we know that many of the most successful mobile games today are based on intellectual property originally created for consoles and PCs. As an example, we've seen this ourselves with Hearthstone, where the fan base grew significantly when we added the mobile platform to a game that isn't even yet fully optimized for mobile success. Mobile remains the largest and fastest growing platform for gaming in the world. And while King is a clear leader in mobile, we're still investing in Activision and Blizzard franchises for mobile releases. For example, Activision is collaborating with Tencent on Call of Duty Mobile, taking the biggest action franchise of the last two decades to the largest gaming market in the world, and of course also to western audiences where, as Bobby pointed out, Call of Duty is already one of the most successful entertainment franchises in history. And last week, Blizzard announced Diablo Immortal, which will bring this tenfold franchise to a mobile audience in both the east and the west. While fan reaction was muted to the announcement, players' hands-on experience [indiscernible] this content confirmed what we believe, which is that Diablo mobile will be a very well received game when it releases, and players around the world will love it. These are just two of the many mobile initiatives underway across Activision and Blizzard. And King mobile expertise is now being shared throughout the company so our beloved PC and console franchises can expand their reach. Lastly, on our fourth driver, in new and growing franchise engagement models, Overwatch League is already well into planning its second season, and we are actively advancing how the league model and infrastructure will be applied to Call of Duty and other franchises. And our advertising business continues to grow profitably, exceeding our plan. While net bookings are still relatively small, they grew almost 50% quarter on quarter. And while investment in these new initiatives is growing, we are confident in the value they will create for our fans and for our shareholders. So with that framing for our growth drivers, let me share our Q3 results against our three key metrics, reach, engagement, and player investment. Starting with reach, which was 345 million monthly active users in Q3, King monthly active users were 262 million, relatively stable through Q3, which is a positive outcome following the Q2 partner network challenges we described on the last call. Importantly, monthly active users for King's largest game, Candy Crush Saga, grew year over year. And in October, King launched the all-new Candy Crush Friends Saga, which builds on five years of learnings in Candy with new modes, collection mechanics, and 3D visuals that make the Candy Crush characters and our owned IP more prominent and the game really fun to play. Candy Friends targets the over 0.5 billion people who have played Candy Crush over the last five years, for whom the innovation and accessibility of Friends should be particularly appealing. We're now focused on Candy Crush Friends to win back former players and entice new players. The game is off to a strong start, reaching the top of the iPhone game download charts in 93 countries. And while still early, retention and monetization trends are very positive, and the game is on pace to drive meaningful growth for the Candy franchise in 2019. At Blizzard, monthly active users were 37 million, consistent with the prior quarter. Overwatch monthly active users were broadly stable quarter over quarter. Hearthstone monthly active users declined, although PvP modes again attracted strong engagement. The game continues to add new players, with the franchise reaching 100 million players to date since its launch in March 2014. World of Warcraft

[Spencer Adam Neumann:]

Thanks, Coddy. Today I'll review our Q3 2018 results and our outlook for Q4 and the full year. To review the quarter, I'll start with our segment results. At Activision, Q3 segment revenue was $397 million. Key contributors were Call of Duty digital in-game revenue and Destiny 2

[Operator:]

Thank you. And we'll take the first question from Tim O'Shea of Jefferies.

[Timothy O'Shea:]

Yes, thank you for taking my question. Just wondering if you could update us on the Call of Duty

[Collister Johnson:]

Sure. Hey, Tim. This is Coddy. Well, we're confident and we're energized by the performance of Black Ops 4. The launch, as I said, is off to a strong start on both console and PC. As Bobby said, there's a lot more time left now given the decision we made to launch it earlier in the holiday window and in the gift-giving window, which we think is a good opportunity for players to come in and join this highly engaging game. And the Call of Duty team is doing what it knows how to do well, which is build a deeply engaging experience. And it's just worth highlighting again what we know so far in some of the stats coming through, which is that versus prior title and versus Black Ops 3, total active users are up significantly. And overall engagement, again, versus both the prior title and Black Ops 3, is up over 20%. So that first period of building that deep engagement block of players that really want to come in and play is off to a good start. But we built it, as we said on multiple occasions, for long-lasting engagement. We doubled down on multiplayer in Zombies, which are already strong engagement drivers, and we added to that the kind of content and progression and system designs that you see in there to give deep playability and content for months and years to come. And we added Blackout, which is a deeply appealing mode, particularly for those who are looking for that AAA Battle Royale experience. So the next step is just to continue to build out on the live system operations, the design. And really what is happening now is the live engagement or responding to players and seeing where they go and building the services and features that engage them even more deeply. So looking at it, we see a great run coming for Black Ops 4 and really for the franchise as a whole.

[Christopher Hickey:]

Thank you. Operator, can we have the next question, please?

[Operator:]

Yes, and our next question will come from Colin Sebastian of Robert W. Baird.

[Colin Alan Sebastian:]

Great, thank you. I guess I'd like to focus a little bit on the leadership transition of Blizzard, and if you could put a finer point on what we should expect to see change and what should stay the same. And also related to that, if you could provide a little more color on the pipeline from Blizzard. Thank you.

[J. Allen Brack:]

Hi, this is J. I'd like to just start off by saying that Blizzard is a hugely storied studio, and I couldn't be more honored to take on the role. I have been at Blizzard for more than a decade, but have really been a fan of their games my entire life. Today, I have a strong view on many of our franchises, and I'm actively working to get a broader outlook on certain teams, certain commercial groups, esports operations that I already have a good view of from my previous job. Coming out of that process, I feel like I'll have a larger perspective on what the next chapter for Blizzard's growth is going to look like. We're going to need to continue to invest in content in our existing franchises, and there's work to do to improve in some areas to better serve our communities and to create more content for all of our fans. That's our number one focus. And we'll continue to invest in the reach of the different franchises that we have to acquire more players globally across all platforms, including PC, console, and mobile. Right now, we have the strongest multiyear pipeline we've ever had, which is a huge opportunity, and delivering against that pipeline is our number one priority. I think Blizzard's focus is always going to be on delivering quality game play first. And we have a strong culture of values, and we want to create more content and deliver more games. And we think that's going to lead to more players, more engagement, and it's going to lead to great business results.

[Christopher Hickey:]

Operator, can we have the next question, please?

[Operator:]

Certainly, your next question will come from Raymond Stochel of Consumer Edge Research.

[Raymond L. Stochel:]

Great, thanks for taking my question. How should we think about King's pipeline and your efforts in mid-core mobile titles versus your historical success in more casual titles? Thanks.

[Riccardo Zacconi:]

Hi, Ray. It's Riccardo here. So when I think about our development efforts, our focus is first to fall on cash flow and our franchises, and in particular on Candy Crush, since it's our largest franchise. We have a large network of users playing our casual games, and this is the key reason why our first priority is to retain and engage them. And for doing this, we invest in a steady stream of new content and the new features for our live franchise games, and we also develop new titles for our established franchises. Last month we released Candy Crush Friends. It's our newest title in the Candy franchise. And it's a key part of our strategy to retain and engage existing players, but also to win back our large lapsed audience. You heard Coddy earlier. Candy Crush Friends is off to a great start. It exceeds our expectations on some key metrics, and I think it's the most polished Candy Crush game we have ever released. The characters are brought to life like we have never done before. And Candy Crush Friends strengthens the Candy franchise as a whole as we are going into 2019, and I'm very excited about this game in the future – and its future. This is for casual. We invested actively also in other genres and other games where we see opportunities, and we do this both internally and through partnerships. Earlier this year, we released Royal Charm Slots in a partnership with PLAYSTUDIOS. The game has not yet met our expectations around retention and monetization, and so the team is still working on it. In regards to mid-core, we released Legend of Solgard in August. It's our first mid-core launch. And mid-core is a space we want to develop a strong position over the long term, and this game will allow us to learn more about the genre and how to build out the space.

[Christopher Hickey:]

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

[Operator:]

And our next question will come from Drew Crum of Stifel.

[Drew Crum:]

Okay, thanks. Good afternoon, guys. You touched on this a little bit, but maybe spend a little more time on the health of the Destiny franchise and just what you've seen in terms of engagement post the Forsaken launch. Thanks.

[Collister Johnson:]

Sure, thank you. This is Coddy. I guess I'd start by reiterating that Forsaken is a high-quality expansion of content into the universe. Honestly, it's the highest-quality content we've seen in the franchise to date. It really came out of Activision and Bungie working together to address community concerns post-Destiny 2 holistically. Talking to players, we knew it came from users really doing a fundamental review of how to offer a deeper end-game, greater powers and greater rewards, and engage players who seemed to be really enjoying the content. In particular, it was very well received both by reviewers and by the community, and has ongoing deepening engagement by those that are playing it. At BlizzCon, we announced that Destiny, the base game is free for two weeks, meaning download it by November 18, and you get to keep the base game forever. We did that because we want the whole community loaded up and able to play it, but also because it's a live game. And once you're in it, with the ongoing features and services and content, there's really deep engagement that takes place. And part of it was also because we have not yet seen the full core reengage in Destiny, which has led to the underperformance against our expectations to date. Some players we think are still in wait-and-see mode. So when you're in, you're deeply engaged. If you're not, we're hoping now is the time to work and to bring players back in and to win them back.

[Christopher Hickey:]

Operator, can we have the next question, please?

[Operator:]

Our next question comes from Brian Nowak of Morgan Stanley.

[Brian Nowak:]

Thank you for taking my question. Just on Diablo Immortal, can you give us a little more color on Diablo Immortal, and how we should think about the timing of that?

[J. Allen Brack:]

Hi, this is J. So we've seen some interesting reaction to the announcement. I think that it's clear that there are a lot of players who are eager for more Diablo PC and console content. I think that came through loud and clear from BlizzCon. And frankly, we feel fortunate to have a community that cares so much about that franchise. The commitment and the engagement of our community is, I think, one of the things that makes Blizzard very special. It's something that we really appreciate, and we like to hear the things that they articulate as to what they want to hear next and what we can do better, frankly. Diablo is an important tent-pole franchise for Blizzard Entertainment, and we have – one of the things we said is we have multiple teams working on multiple different projects for the Diablo community. We feel that Diablo Immortal is going to deliver a very authentic Diablo experience, and we're not going to compromise on that mission. Launching the game is only going to be the beginning. There's going to be ongoing support, and we're only going to release the game when we feel like it is meeting the community's very high standards. In the end, Diablo Immortal is going to fulfill that, and we think that people are going to experience it, and we think that they're going to love it. Regarding I think the opportunity for Diablo and specifically on mobile, I think it is a very significant opportunity. Mobile is the biggest platform in gaming today. And taking a game like mobile onto that platform in a way that is really reflecting our quality standards I think can really open a lot of – it can open that franchise and other franchises to a global audience, including people who don't have PCs, or especially in China where Blizzard is a very, very strong western brand. Regarding the timing, that's something that we'll talk about as we go forward. It is very important that we release the game and it is an excellent, excellent experience when it is released.

[Robert A. Kotick:]

One other thing to add, Brian, is when we got the feedback from people who actually had the chance on a hands-on basis to play the game, it was really positive.

[Christopher Hickey:]

Operator, can we have the next question, please?

[Operator:]

Certainly, we'll move on to Alexia Quadrani of JPMorgan.

[David Karnovsky:]

Hi, this is David Karnovsky on for Alexia. Just for King, can you provide an update on your advertising outlook and maybe what the contribution of ad revenue was in the quarter or year to date? Thanks

[Riccardo Zacconi:]

Hi, it's Riccardo here. So as you heard earlier from Bobby, the ads business is performing above plan in Q3. The team has great momentum as we head into the year end, and this is off the back of some strong progress in scaling our network and in building demand. Our ads team has worked closely with the game teams to integrate ads into the key titles. And in Q3, we made good progress in each of these areas. The number of video ad impressions on the platform nearly doubled in Q3 versus Q2, and we're seeing a strong growth in the number of advertisers committing to meaningful campaigns on our platform as well as growth in the average spend by these clients. We're now going to build on this progress. First of all, we're focused on scaling further the ads across our network, and we're doing this by enabling ads for even more players in the games where ads are already implemented and also introducing ads to more games. And then we're also building an even greater demand on the sales side. We believe that rewarded video is a great format for brand advertisers because it associates brands with a positive experience in the game and therefore a positive experience in the player's mind. And because with over 90% completion rate, this leads to a strong brand recall. So we think that the rewarded video is a great format, and it's a format that is unique to games. In the longer term, we want to roll out the ads business also to the other parts of the Activision Blizzard group. And so I think if I have to summarize, I feel very good about the progress this year in ads. And as the ads business continues to scale, I expect it to become an even more meaningful contributor in 2019.

[Christopher Hickey:]

Operator, can we take the next question, please?

[Operator:]

Up next we have Mike Olson of Piper Jaffray.

[Michael Olson:]

Hey, good afternoon. I was wondering if you could provide more color on the World of Warcraft launch to date as well as just any info you could share on plans for more content in between major releases. Thanks.

[J. Allen Brack:]

Hi, Mike. This is J. Obviously, this is a question that is very near and dear to me. I worked on World of Warcraft for more than 12 years. Battle for Azeroth is another great World of Warcraft expansion and is performing in line with expectations. I'm really proud of the team, who over the last few years has done just an amazing job of really delivering great expansions at a regular cadence, but also adding more content and updates than ever before. The expansion launch that we have for Battle for Azeroth and the ongoing content is really how we are going to continue to engage players between expansions. The WoW team has a very strong content plan as a follow-on for Battle for Azeroth. The first content update is called Tides of Vengeance, and it's going to come out the week of December 10. It'll feature two new raids, a new war front, new island expeditions, new allied races. We have some classic battlegrounds from World of Warcraft that we're remastering, and we're going to add some seasonal content as well. Later planned updates are going to add new zones, dungeons, and raids for people to explore and additional PvP arena. As always, we have a really close relationship with the community and try to respond to all the player feedback and continue to listen and make improvements in the game. For 2019, something we've been working on for a while that I'm also very excited about is the return of World of Warcraft Classic to the community. We announced at BlizzCon that anyone with a World of Warcraft subscription will have access to both the modern World of Warcraft as well as WoW Classic.

[Christopher Hickey:]

Thanks. Operator, can we take the next question?

[Operator:]

And our next question will come from Brandon Ross of BTIG.

[Brandon Ross:]

Hi, thanks for taking the question. You mentioned earlier PC sales for Black Ops 4 were up three times over Black Ops 3. Any way you could give additional color on the Black Ops PC performance on Battle.net and maybe how you think about the game's future on PC? Thanks.

[Collister Johnson:]

Sure, thanks. This is Coddy. I think first, it's worth stepping back to remember why we decided to make the investment in PC around Black Ops 4 and development resources in the way it's archictected to the platform to go to market. And there will be five or six reasons in there. And so just to frame those so that we can pressure test how we're doing against them, the first is it opens up Call of Duty to a broader, more global audience as we take it to platforms that reach around the world like PC. Second, because of the nature of the game and the kinds of modes and engagement that we're seeing really lend themselves to PC, particularly for multiplayer for Battle Royale, of course. Third, because we're now able as a company to integrate Call of Duty with the Battle.net platform, which is a big thing and a very important development. And it's not only just a compelling best-in-class PC platform, we also have a much deeper and richer understanding of our players because they're now on our network and on our platform. We think the time is right for Call of Duty, as you know and as we've talked about, to be expanding across platforms and to be working across console and PC together. And then obviously, PC comes with better profitability, given that it's entirely digital. And because it's on our platform, the economics accrue to us. So those are the five or six things about why we would do this. And the investment really does seem to be paying off. As you said, the size of our PC business is growing multiples, which is good and a good start. And we've been able to launch it to scale on Battle.net to markets we have not had access to before in Asia, particularly in Korea, but also other markets still to come in Asia. And so there's an expansion for us there, particularly with the kinds of modes of play that we're seeing. We also see, I think importantly, the broader PC community rallying around this title. A lot of that has to do with streamers and influencers who are coming in and really having fun as they play inside the game. And Activision has always had good relationships with influencers and streamers. But in this case, we've really taken it to the next level to service the community, to bring in those influencers and streamers, and give broad viewership and access to what's happening in that game. So as we go forward, we think there's a lot of opportunity here. It's our own digital platform. There are many options for us in terms of how we market it and how we price it and promote it to new audiences around the world. And so we'll be leaning into that this quarter as we head into next year.

[Christopher Hickey:]

All right, we have time for one last question.

[Operator:]

Thank you. And we'll take our final question from Evan Wingren of KeyBanc Capital Markets.

[Evan Wingren:]

Thanks. I'm just wondering about the pace of digital downloads in Call of Duty, what you're seeing through the launch, and what you are expecting on a go-forward basis. Thanks.

[Spencer Adam Neumann:]

Sure, Evan. This is Spencer. I'll take this one. So as you may recall, we talked about Call of Duty

[Spencer Adam Neumann:]

I think that's the last question. I just want to thank everybody for joining us today. We look forward to sharing our holiday results next quarter, and we'll talk to you next year.

[Christopher Hickey:]

Thanks very much for joining us.

[Operator:]

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.