Activision Blizzard (NASDAQ: ATVI) investors recently witnessed a rare sight as the leading video game giant reported shrinking sales and reduced profits in the fiscal first quarter. A few of the company's biggest brands struggled to maintain their user bases through rising competition for gamers' time.
CEO Bobby Kotick and his team have a plan that they think will arrest these engagement declines, and they're confident that Activision has all the tools needed to engineer that turnaround. Management discussed those assets in a recent conference call with Wall Street analysts, and below we'll look at some highlights from that presentation.
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Why it beat expectations
Focus and operating discipline enabled Activision Blizzard to outperform our first-quarter outlook. Strong performance for Candy Crush, better-than-expected sales for Sekiro: Shadows Die Twice, and favorable cost timing were key factors driving upside.
-- COO Coddy Johnson
Activision reported $1.8 billion of revenue for a 7% decline year over year. Earnings fell 11%, meanwhile, to $0.58 per share. Yet both the top- and bottom-line results outpaced the guidance executives issued back in February.
Management said the improved performance was powered by Candy Crush, which grew its user base and reached a new high of daily user engagement at 38 minutes. Its Sekiro: Shadows Die Twice release was a hit, too, selling 2 million copies in its first 10 days and attracting high review scores. Finally, a few expenses that executives expected to book during the first quarter were shifted into future periods.
Gamers are playing fewer games longer, [and so] creating and sustaining new franchises remains one of the most difficult tasks in the entertainment industry. ... Only proven teams that have the vision, talent, scale, and resources [can] create breakout new intellectual properties. There are even fewer of those teams that have the capabilities to sustain those games over time and meet players' ever-increasing demands for ongoing features services and content.
The developer's results showed that it isn't immune from the industry stresses that have affected rivals like EA (NASDAQ: EA) and Take-Two Interactive (NASDAQ: TTWO) as free-to-play franchises like Fortnite soak up gamer play time. Activision's active gamer base shrank again this quarter, in part reflecting the loss of the Destiny franchise, but also due to slipping audience sizes in Call of Duty. In-game spending across the portfolio fell to $800 million after peaking at a quarterly pace of over $1 billion in each of the first three quarters of 2018.
We feel very good about how our content lineup is shaping up, but it's obviously still very early in the year.
-- CFO Dennis Durkin
It would be an understatement to say that Activision has a packed release calendar ahead. Besides its annual global event around the Call of Duty launch in the holiday season, the developer has huge content additions planned in the World of Warcraft, Candy Crush, Overwatch, and Diablo brands as the 20% increase in developer headcount it announced last year starts bearing fruit.
Executives are just as excited about their opportunities in taking more franchises mobile and in testing out free-to-play operating models. Activision says it is also making quick progress building the eSports platform and monetizing in-game advertising and consumer products.
All that said, management admits that they're still in the early innings of their rebound plan and the release calendar that will drive results for 2019 and 2020. Thus executives chose to simply affirm their full-year outlook following the first-quarter outperformance, saying only that while they've made important progress in "resetting the foundation for future growth," many of the bigger challenges are still to come.
"We still have plenty of work ahead," Durkin said, "and we need to remain focused on execution."
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Demitrios Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard and Take-Two Interactive. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.
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