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Activision Blizzard - Strong Q1, but guidance disappoints

George Salmon | 3 May 2019 | A A A
Activision Blizzard - Strong Q1, but guidance disappoints

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Activision Blizzard Inc Com Stk USD0.0000

Sell: 45.25 | Buy: 45.74 | Change -0.43 (-0.93%)
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Reported net revenues fell 7.1% in the first quarter to $1.8bn, although still came in ahead of Activision's previous guidance of $1.7bn. Underlying earnings per share also came in ahead of management expectations at $0.78, flat year-on-year.

The board announced a dividend of $0.37, up 9% year-on-year.

However, the shares fell 5.6% in in pre-market trading as guidance for the coming quarter disappointed, and full year guidance remained unchanged.

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Our View

It wasn't a great first quarter for Activision, what with losing it's CEO to Netflix and a publishing agreement with developer Bungie coming to a premature end. However, we still think the group's got long term potential.

Global gaming spend is expected to hit $148bn in 2019. And with 2.3bn gamers worldwide, it's a very attractive market. Activision's Call of Duty, World of Warcraft and Candy Crush, are among the most successful gaming franchises going and accounted for around $4.4bn of revenue in 2018.

We particularly like the mix of console, PC and mobile gaming. In a rapidly changing industry the group has fingers in every pie, and that's delivered average profit growth of 8.2% a year since 2008. Profits are being ploughed back into the business for now - with a negligible dividend yield of 0.7%.

Unlike some rivals, Activision Blizzard owns its most powerful brands outright, so it doesn't have to share success with licence holders.

The group's looking to make the most of that through the development of esports. esports see professional gamers compete live, with fans watching on TV, online or in stadiums. Audiences have been growing - up 13.8% in 2018.

Call of Duty's position as the world's most popular console game makes a successful league based on the game the Holy Grail, but it's still early days on that front. However, Activision's Overwatch League is now in its second season with viewership up 30% year-on-year. 2018's grand finals attracted millions of online viewers, 70% of whom fall in the 18-34 year old age bracket.

Millennials are a difficult group for marketing teams to reach, since they consume less traditional media than older generations. That makes esports attractive to advertisers, and advertising revenue can be high margin.

A possible concern is in-game purchases, which have attracted some very negative press. Some see 'loot-boxes', where players pay for a randomly generated in-game benefit, as a gateway to gambling for children, and regulators have started to take note.

In-game sales accounted for $800m of revenue in the first quarter alone, so negative-regulatory moves here would be far from welcome. Fortunately Activision is less exposed than some rivals, and its biggest titles target adults in any case.

The release schedule for 2019 is a bit lighter than we might have liked, but Activision has increased investment behind its lead franchises rather than spreading itself thin. We think that's the right decision, since ultimately it's the blockbuster names that justify a not insignificant 21.5 times PE ratio.

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First Quarter Results

Products sales fell 8.9% in the quarter to $656m, with subscriptions down 6.1% to $1.2bn. Total costs fell 8.4%, with product development costs falling just 3.9% as the company continues to invest in its core franchises.

The group reported monthly active users of 345m, down 3.1% over the quarter, with declines in Activision and Blizzard partially offset by growth in King. Average daily time spent per user increased across all three divisions.

Activision continues to develop its esports offer, with season two of the Overwatch League attracting 30% more viewers than season one. Demand for the group's Call of Duty franchises is said to be strong, with five already sold to holders of Overwatch franchises.

Activision expects to deliver revenues of $1.3bn in the second quarter, with underlying earnings per share of $0.35.

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