EUR 850.00 For Business Accounts Only

Morningstar | Activision Misses on 4Q; Weak Revenue Guidance for Transitional 2019. See Updated Analyst Note from 12 Feb 2019

Activision Blizzard ended 2018 on a weak note as top and bottom-line fourth quarter non-GAAP results came in below the Street projections. The firm issued very conservative guidance for 2019 which management is now labeling a transition year. The new guidance of non-GAAP 2019 revenue of $6.3 billion is well below the previous consensus estimate of $7.3 billion. Activision also announced an 8% workforce reduction across its divisions with most of the losses hitting the nondevelopment staff. Management plans to reallocate the savings to increase size of its core franchise development teams as the firm looks to speed up the timing and cadence of its major titles and post-release content. We are maintaining our narrow economic moat rating but are lowering our fair value estimate to $62 from $69 to account for the loss of Destiny 2 and the impact of transitional 2019.

GAAP revenue for the quarter improved 17% year over year to $2.4 billion (versus guidance of $2.2 billion). Console GAAP revenue improved by 19% year over year to $808 million as Call of Duty Black Ops 4 launched strongly in the front half of the quarter. Black Ops 4 outsold Black Ops 3 in their respective launch quarters and digital full-game downloads hit 40% versus last year’s WWII installment. After the weak launch of the Destiny 2 expansion, Forsaken, in the third quarter and underperformance in the fourth quarter, Activision sold its publishing rights for the title back to its development partner, Bungie. PC GAAP revenue grew 5% to $482 million as Black Ops 4 tripled the PC copies sold by Black Ops 3. Mobile revenue, up 3% in the quarter, bounced back from its contraction last quarter which was the first since the King acquisition. GAAP operating margin for the quarter improved to 29% from 10.8% last year as increased revenue from higher-margin digital sales and microtransactions more than offset increased game launch costs.

As part of the firm’s transitional 2019, management plans to expand the development teams for its core franchises by 20% in aggregate. These six franchises, Call of Duty, Candy, Overwatch, Warcraft, Hearthstone and Diablo, appear to be focus of the firm moving forward with previous key franchises either sold off (Destiny) or shunted aside for now (Skylanders and StarCraft). While the focus on these franchises makes sense given the potential opportunities, we note that the firm may be eschewing new opportunities by reallocating so many resources to these six core titles. Also, this emphasis on these titles leaves the firm with only one core console franchise, Call of Duty, which is also the only Activision game among the six. While Blizzard has ported over titles to consoles like Diablo III, we expect that the division will remain focused on PC gaming, the platform that made its development teams famous. This console dependence on Call of Duty may backfire as the shooter genre looks to be even more crowded with the February launches of EA’s Apex Legends and Anthem.

Despite the focus on the six franchises, we do expect that Activision Blizzard will develop new games set within the universes created by these franchises. While Apex Legends appears to be a new franchise for EA, the battle royale game is actually set within the universe that developer Respawn first introduced in Titanfall, its multiplayer first-person shooter released in 2014. Blizzard has a long history with creating new games within its universes. Warcraft, its fantasy real-time strategy franchise, gave birth to two of the firm’s core franchises, World of Warcraft, the firm’s uber successful multiplayer online RPG, and Hearthstone, an online digital collectible card game. While Call of Duty Black Ops 4 does have a successful battle royale mode called Blackout, Activision could spin out the mode as a standalone free-to-play game like Fortnite Battle Royale was spun out the full price Fortnite game. The firm does have a number of franchises outside of the six core ones like Crash Bandicoot or StarCraft that could provide the basis for a spin-out franchise.