Activision Blizzard's first quarter results came with the news that the UK Competition and Markets Authority had blocked the Microsoft merger due to concerns about cloud gaming competition. Management intends to "work aggressively with Microsoft to reverse it on appeal".
Revenue was up 34.8% to $2.4bn, with strong growth seen across console, PC and mobile platforms.
Underlying operating profit from the company's three main segments, Activision, Blizzard and King was up 27%, totalling $476m. Much of the improvement was driven by Activision's flagship title Call of Duty.
Free cash flow of $540m fell 14%. Net cash stood at about $8.9bn.
For the full year Activision Blizzard expects high-teens revenue growth, and at least high-single digit growth in total segment operating income.
The shares closed down 11.5% on the day.
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Our view
Microsoft's proposed $95 per share cash takeover of Activision Blizzard has been knocked back by the UK's Competition and Markets Authority. The risk of the deal falling through has increased. Investors need to consider the investment case of Activision on a standalone basis.
Activision holds some of the world's most valuable gaming intellectual property, and the latest refresh of its most popular title, Call of Duty has injected new life to the franchise.
The gaming industry has enjoyed phenomenal growth since Atari first commercialised Pong in the early seventies. However it's not immune difficulties in the global economy and some of Activision's competitors are struggling. Unlike some rivals, Activision Blizzard owns its most powerful brands outright, so doesn't have to share success with licence holders. That's allowed the group to rapidly expand its brands into new formats and branch out into esports where professional gamers compete live, with fans watching on TV, online or in stadiums. Audiences are now over 500 million globally. Activision's got experience in the space with the Overwatch League. But for now, it's struggling to make a commercial success in this space.
Gaming is going through significant change though, with consoles giving way to cloud-based gaming and the marketplace getting increasingly crowded. Change is always more difficult for incumbents. However, mobile gaming now has more of than a 50% share of the industry and continues to grow rapidly. That's good for Activision who has a solid track record in the space and is still enjoying growth from Candy Crush, one of the most popular mobile games of all time. As the capabilities of mobile devices improve it opens up the possibility of more sophisticated multiplayer mobile games, with sales of Call of Duty mobile also on the increase.
Activision's recent launches have helped to underpin a return to growth in user numbers, revenues and profits. This gives us confidence that double-digit revenue growth in 2023 remains achievable. The difficulties in closing the Microsoft deal have seen the valuation suffer, and based on current guidance we don't think it looks too demanding against the peer group. However, in the short term we still see some downside risk if Microsoft walks away completely.
Activision Blizzard key facts
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