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Morningstar | Activision Posts in Line Quarter; Call of Duty: Black Ops 4 Off to Strong Start

Activision Blizzard slightly beat its guidance again as third-quarter GAAP results came in above the prior outlook for the seventh straight quarter but only met Street projections. Despite the beat, the firm maintained its revenue guidance for both GAAP and non-GAAP revenue and slightly lowered its implied projection for non-GAAP net income, leading to a 10% decline in the share price in the aftermarket. However, the firm’s October release, Call of Duty: Black Ops 4, is outselling the previous Black Ops installment with active users up over 16%. We are maintaining our narrow economic moat rating and our fair value estimate of $69. With the stock sliding into the 4-star range in aftermarket trading, we believe current prices offer an attractive entry point for investors.

GAAP revenue for the quarter fell 7% year over year to $1,512 million (versus guidance of $1,490 million). Console GAAP revenue fell 11% year over year to $347 million due to a tough comp as the third quarter of last year benefited from the full game launch of Destiny 2. The quarter also suffered from weaker than expected sales of the Destiny 2 expansion, Forsaken. PC GAAP revenue grew 5% to $482 million as the latest World of Warcraft expansion, Battle for Azeroth, launched in the quarter. Mobile revenue, down 2% in the quarter, contracted for the first time since the King acquisition in the first quarter of 2016. While King had two games in the top 10 of U.S. app stores for the 20th quarter in row, the firm continues to suffer from the partner network that began last quarter. GAAP operating margin for the quarter improved to 17.5% from 15.9% last year as increased revenue from higher margin digital sales and microtransactions more than offset increased marketing expenses and game launch costs.

Blizzard recently held its fan event, Blizzcon, on Nov. 2 to 3 in Anaheim where the division introduces new game and sequels. Despite Blizzard’s attempts to tamper down speculation about a possible reveal of a new installment in the Diablo franchise, fan expectations were still high leading into the weekend. These expectations were dashed when the firm unveiled a mobile version of the longtime PC franchise called Diablo Immortal which is being codeveloped with Chinese mobile gaming giant, Netease. The reaction was immediately negative, both at the convention itself and online, with gamers viewing the mobile version of the tentpole game as a betrayal of the implied contract between Blizzard and its largely PC gamer fanbase.

While we understand that Blizzard is creating mobile versions of its games to appeal to Asian markets, we think the timing and the setting of the announcement were mis-steps by the company. The mobile version of Diablo is not aimed at the audience that attends Blizzcon annually and those attendees would have been more satisfied with a simple teaser video implying that Diablo 4 development was underway. The announcement of the mobile title could have been done at an investor day or a game show aimed at the Asian markets or mobile gaming. However, we do not expect any long-term negative financial consequences from the announcement and also believe that the mobile version of Diablo will be positively received by its intended audience.