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Activision Blizzard - Call of Duty drives record quarter

Nicholas Hyett, Equity Analyst | 5 August 2020 | A A A
Activision Blizzard - Call of Duty drives record 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 Blizzard reported revenue of $1.9bn in the second quarter, up 38.4% year-on-year. That reflects strong growth in the online channel following the launch of Call of Duty: Warzone.

Earnings per share rose 74.4% to $0.75 and the group paid a $0.41 dividend per share, up 11% year-on-year.

The company expects a weaker performance in the third quarter.

Activision shares fell 1.9% in pre-market trading.

View the latest Activision share price and how to deal

Our View

With a large portion of the world's population confined to the couch for much of the first half of the year it's not surprising gaming activity has surged. As the home of some of 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 attracted over 400m users a month even before the lockdown, 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 0.5%.

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 a matter of months. A recently launched Call of Duty League means the company's also looking to capitalise on the growing popularity of esports.

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. Meanwhile 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 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 29.4 times, more than 58.9% above the long run average.

Activision key facts

  • Price/Earnings ratio: 29.4
  • 10 year average Price/Earnings ratio: 18.5
  • Prospective yield: 0.5%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

Digital online sales accounted for 82% of the group total in the second quarter, growing 47% year-on-year and more than offsetting weakness in conventional retail. Console sales performed particularly well, up 61%, although sales rose across all platforms.

Activision sales hit $993m in the quarter, with operating profits of $559m, up 270.5% and 916.4% respectively. Monthly active users (MAUs) reached 125m, driven by the Call of Duty franchise. Call of Duty: Warzone has now reached 75m players to date, with hours played in the Modern Warfare universe up 8-fold in the first quarter since Warzone was launched. Call of Duty in-game bookings more than doubled quarter-on-quarter, and were five times higher than a year ago. Call of Duty Mobile also continues to perform well.

Blizzard revenues came in at $461m, with operating profits of $203m, up 20.1% and 170.7% respectively. The division recorded 32m MAUs. That was driven by World of Warcraft, although Hearthstone and Overwatch also performed well.

King reported 271 MAUs in the quarter. Revenues of $553m and operating profits of $212m rose 10.8% and 24.0% respectively. Candy Crush remained the standout performer, with MAU growth in the double-digit percentages and payer conversion improving year-on-year.

Free cash flow in the quarter came in at $755m, compared to $127m last year. On a trailing twelve month basis free cash flow was up 17%. The group finished the quarter with net cash of $3.7bn on the balance sheet, up from $3.1bn at the start of the year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.