Activision Blizzard Inc (ATVI) Com Stk USD0.000001
HL comment (5 August 2021)
Activision reported second quarter revenues of $2.3bn, up 18.8% year-on-year, and ahead of management expectations. That reflects double digit percentage growth across all regions, and very strong growth from the Call of Duty franchise.
Quarterly underlying earnings per share rose 48.1% to $1.20, and management has upgraded full year guidance for earnings per share to $3.54 from $3.42 at the end of the first quarter.
The group paid a dividend of $0.47 per share in May, up 15% year-on-year.
The shares rose 2.4% following the announcement.
Call of Duty, the world's top selling console franchise, saw players log more hours in the last three months than they did in the whole of 2019.
That reflects the launch of the Mobile and Battle Royale format of the game, but is also testament to the brand's incredible pulling power. Meanwhile, World of Warcraft continues to top lists of the best games in its genre 17 years after it was released, and Candy Crush remains among the most lucrative mobile games in the US. Activision Blizzard's intellectual property is formidable.
Legions of devoted fans spend big on expansions and in-game items - so unlike the days when gamers bought a single disk or cartridge upfront, established hits can keep on generating cash. Roughly 40% of all revenue in the last quarter came from in game spending, and 88% of sales were digital. Digital sales should be higher margin, and help explain why profit margins have increased from 30.3% in 2011 to 40.0% in 2020.
Unlike some rivals, Activision Blizzard owns its most powerful brands outright, so it doesn't have to share success with licence holders. That's allowed the group to rapidly expand its brands into new formats and underpins planned esport expansions.
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 fourth season, with 2020's grand finals attracting 1.6m 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, the group has recently faced serious allegations about its employment practices and corporate culture. This threatens future recruitment of key development staff and retention of current talent. The reputational damage also risks spilling over into sales in an increasingly competitive market. How destructive the episode proves will depend on whether management are seen to handle the complaints fairly and efficiently from here.
This is happening at a time when gaming is going through significant change, with consoles giving way to cloud-based gaming and the marketplace 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. However, a premium catalogue of games comes with a premium price tag. Even after a fall in valuation associated with the recent reputational damage, the shares trade on a PE ratio of 19.3 times earnings. That's based on profits that are higher than ''normal'' thanks to the Covid related boost.
Activision Blizzard key facts
- Price/Earnings ratio: 19.3
- 10 year average Price/Earnings ratio: 19.5
- Prospective dividend yield (next 12 months): 0.6%
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.
Second Quarter Results
Monthly Active Users (MAUs) in the Activision division came in at 127m in the second quarter, a modest improvement on the 125m reported in the same quarter last year. Hours played across all Call of Duty games in the quarter were higher than across the whole of 2019. Revenue continued to be driven by Warzone and Mobile.
The Blizzard business reported MAUs of 26m, down 18.8% reflecting the lack of a major modern expansion. However, World of Warcraft bookings grew by a double-digit percentage year-on-year thanks to the launch of Burning Crusade Classic. Development of new Diablo and Overwatch games is continuing.
The King mobile game business saw revenue rise 15%. Both revenues and operating profits reached record highs, despite MAUs of 255m being 5.9% lower than a year ago. Growth was driven by increased per player investment in Candy Crush, while advertising revenues doubled year-on-year.
Free cash in the quarter came in at $374m, down from $755m a year earlier. Net cash at the end of the quarter stood at $5.6bn, up from $5.0bn at the start of the year.
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 disclosure for more information.
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