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Activision Blizzard - quarantined gamers boosts sales

Nicholas Hyett, Equity Analyst | 6 May 2020 | A A A
Activision Blizzard - quarantined gamers boosts sales

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Activision Blizzard Inc Com Stk USD0.0000

Sell: 69.97 | Buy: 70.02 | Change -3.08 (-4.21%)
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First quarter revenues were down 2% on the previous year at $1.8bn, but still some way ahead of management's prior expectations. Profit before tax rose 6.5% year-on-year to $604m, reflecting the increased contribution of higher margin subscription, licencing and other revenues.

The group announced a $0.41 dividend, up 11% on 2019.

The group has upgraded revenue and earnings per share guidance for the full year by 5.4% and 20% respectively.

The share rose 4.5% in pre-market trading.

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Our View

With a large portion of the world's population confined to the couch it's not surprising gaming activity has surged. As the home of some the world's most successful computer game franchises Activision Blizzard is a natural beneficiary of that trend.

Call of Duty is the world's top selling console franchise, and has been for 10 of the last 11 years. World of Warcraft continues to top lists of the best games in its genre 16 years after it was released and Candy Crush remains among the most lucrative mobile games in the US.

Activision Blizzard attracts over 400m users a month and we particularly like the mix of console, PC and mobile gaming. In a rapidly changing industry the group has fingers in every pie and recent innovations have seen the group make the most of its varied portfolio. Profit growth has averaged 7.5% a year since 2008, but that's being ploughed back into the business for now - with a modest prospective dividend yield of 0.6%.

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

The benefits of that set-up are most noticeable when it comes to Call of Duty. A mobile version of the game has more than tripled the number of Activision players and, while these are likely to be lower revenue players, if Activision can hold onto them they could be lucrative. Meanwhile Activision's answer to Fortnite's Battle Royale format, Call of Duty: Warzone, has racked up tens of millions of players in just a few months. A recently launched Call of Duty League means the company's also looking to capitalise on the growing popularity of e-sports.

esports see professional gamers compete live, with fans watching on TV, online or in stadiums. Audiences have been growing and are now over 400 million globally. Activision's got experience in the space with the Overwatch League in its third season with 2019's grand finals attracting 1.1million viewers. In the past 70% of viewers have fallen 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. We think Call of Duty has the potential to dwarf Overwatch in advertising terms, but it's still early days. Nonetheless news that the King mobile gaming business has managed to grow advertising revenues even as other digital advertisers struggle is encouraging.

However, for all Activision's past successes it can't afford to rest on its laurels. Gaming is going through significant change, with games consoles giving way to cloud based gaming and the market place getting increasingly crowded. It's possible that the next generation of games consoles will be the last, and change is always more difficult for incumbents. Activision clearly recognises the threat and is increasing investment in its major franchises.

On balance we think the quality of Activision's intellectual property will give it the edge it needs to weather the storm. However, a premium catalogue of games comes with a premium price tag. The shares currently trade on a PE ratio of 24.2 times, more than 15% above the long run average.

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First Quarter Results

Activision averaged 102m Monthly Active Users (MAUs) in the quarter. The division reported revenue of $519m, up 63.7% year-on-year, and operating profits of $184m, up 152.1%.

Call of Duty: Warzone has reached 60m players since it was launched at the beginning of March while Call of Duty: Modern Warfare has now sold more units than any other Call of Duty title at this point in its release. Call of Duty Mobile increased its reach and engagement during the quarter while Call of Duty League successfully shifted to remote production.

Blizzard MAUs in the quarter averaged 32m. Divisional revenue rose 31.4% to $452 with operating profits up 258.2% to $197m. World of Warcraft's active player community increased again quarter-on-quarter, with all three key franchises (World of Warcraft, Hearthstone and Overwatch) gaining users as lockdowns came into force.

King revenues fell 5.9% to $498m, with operating profits down 12.4% to $178m. That's despite increased MAUs in each month of the quarter and a 75% increase in net advertising bookings year-on-year.

Free cash flow over the last 12 months fell 11.4% to $1.4bn, with net cash at the end of the quarter at $3.2bn.

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