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Activision Blizzard - strong Q4 revenue and profits

Sophie Lund-Yates, Equity Analyst | 5 February 2021 | A A A
Activision Blizzard - strong Q4 revenue and profits

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Activision Blizzard Inc Com Stk USD0.0000

Sell: 91.44 | Buy: 91.47 | Change -0.37 (-0.40%)
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Fourth quarter revenues increased 21.5% to $2.4bn, beating management's expectations. That reflected strong growth in the group's Activision division, which was helped by a record year for the Call of Duty franchise. This fed into operating profit of $594m, up 30.8% from this time last year.

Monthly Active Users (MAUs) totalled 397m, rising 7m from last quarter.

Management expects revenue of $2bn, and earnings per share of $0.59 next quarter. The company also announced a dividend of $0.47 per share, up 15% year-on-year.

The shares rose 8.4% in afterhours trading.

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Our View

With a large portion of the world's population confined to the couch for much 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.

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 13.7% a year since 2009, but that's being ploughed back into the business for now - with a modest prospective dividend yield of 0.1%.

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, racked up tens of millions of players in a matter of months, and the first season of Black Ops Cold War saw the highest number of battle passes consumed since the new format was introduced. 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 gives it an edge. However, a premium catalogue of games comes with a premium price tag. The shares currently trade on a PE ratio of 26.1 times earnings, above the long run average and that's based on profits that are higher than "normal" thanks to the Covid related boost.

Activision Blizzard key facts

  • Price/Earnings ratio: 26.1
  • 10 year average Price/Earnings ratio: 19.0
  • Prospective dividend yield (next 12 months): 0.1%

All ratios are sourced from Refinitiv. 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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Fourth quarter results

Activision finished the year with 128m Monthly Active Users (MAUs), up from 111m at the end of September. The November launch of Call of Duty: Black Ops Cold War contributed to that figure and the time gamers spent playing more than doubled. The Call of Duty franchise saw its sales roughly double, feeding into a 16.2% increase in revenue for the segment to $1.7bn. Operating profits rose to $780m, up from $696m in 2019.

Blizzard revenue was $579m, a $16m decline. That included a slight decline in MAUs to 29m. World of Warcraft sales were higher for the quarter, driven by strong sales of the Shadowlands expansion, subscriber growth and participation in value added services. Operating profit fell by $100m, to $160m.

Fourth Quarter MAUs hit 249m at King. Double-digit growth of in-game sales and 'robust' advertising income helped revenue rise 14.7% to of $577m. The segment's largest franchise, Candy Crush was the top grossing franchise in the U.S. app stores. The increase in revenue helped operating profit rise 22.8% to $242m.

Console was responsible for 35% of the group's revenue, compared to 30% in 2019. PC and mobile platforms contributed 23% and 29% respectively.

Total costs and expenses of $1.8bn rose 18.7% higher, and operating margins fell to 42.0% from 45.7% this time last year.

Free cash flow for the quarter rose 27% to $1.1bn and the group finished the year with a $5bn net cash position, compared to $3.1bn in 2019.

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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 Refinitiv. 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.