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Activision Blizzard - Comfortable second quarter

Nicholas Hyett | 9 August 2019 | A A A
Activision Blizzard - Comfortable second quarter

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Activision Blizzard Inc Com Stk USD0.0000

Sell: 58.57 | Buy: 58.58 | Change -1.71 (-2.84%)
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Activision's second quarter revenues fell 14.9% to $1.4bn, with underlying earnings per share down 14.5% to $0.53. However, both numbers were ahead of previous management expectations.

The shares fell 1.8% in aftermarket trading.

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Our View

It wasn't a great start to the year for Activision, what with losing its 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 0.8%.

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% last year.

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 account for around $800m of revenue a quarter, 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 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 20.8 times PE ratio.

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Half Year Results

Product sales fell 22.6% in the quarter to $359m, with subscription revenues of $1bn down 11.9%. Digital sales accounted for $1.1bn of total sales, with in-game sales of $800m.

Falling sales were concentrated in Console and PC, down 28% and 20% respectively, with mobile down 2%. Both Candy Crush and Call of Duty saw active users increase in the quarter, with growth in hours spent on all Activision's key games. Overwatch League viewership increases by double digits year-on-year.

Operating costs were also substantially lower, down 12.2% at $1.1bn, with sales & marketing and general & administrative costs both down year-on-year.

Free cash flow in the quarter of $127m contributed to an improved net cash performance, with the group finishing the half with net cash of $1.9bn.

Revenue is expected to be lower in the third quarter, at $1.1bn, with underlying earnings per share of $0.20.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.