Activision Blizzard Beats Q1 But Outlook For Full Year Remains Weak

by Trefis Team
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Activision Blizzard (NASDAQ:ATVI) recently reported its Q1 2019 results, which were above our estimates. This note details the company’s Q1 performance, and Trefis’ forecasts for the full year 2019. You can view our interactive dashboard analysis ~ How Did Activision Blizzard Fare In Q1, And What Can We Expect From Full Year 2019? for more details on the key drivers of the company’s expected performance.  In addition, you can see more of our Information Technology data here.

How did Activision Blizzard’s top line fare in Q1, and what’s the forecast for full year 2019?

  • Total revenues for Activision Blizzard vary every quarter depending upon seasonality, and release of titles, with Q4 generally being the strongest quarter.
  • Revenues declined from $1.97 billion in Q1 2018 to $1.83 billion in Q1 2019.
  • The decline can primarily be attributed to lower monthly active users (MAUs) for both Activision and Blizzard segments.
  • We estimate the revenues to be $6.67 billion for the full year 2019; a figure 11% lower than 2018.

What are Activision Blizzard’s key sources of revenue?

  • Activision Blizzard generates its revenues from games grouped under three segments:
    • Activision, which includes console games such as Call of Duty, and Skylanders. The segment accounts for around 37% of the company’s total revenues.
    • Blizzard, which includes franchises such as Overwatch, Diablo, World of Warcraft, and Hearthstone, and it accounts for 30% of the company’s total revenues.
    • King, whose mobile gaming portfolio includes games such as Candy Crush, Farm Heroes, Pet Rescue, and Bubble Witch. King accounts for around 30% of the company’s total revenues.

How did Activision segment fare in Q1 and how much can it grow in 2019?

  • Revenues of $763 million, representing 12.5% decline over the prior year quarter.
  • Revenue decline was primarily led by lower MAUs. This can primarily be attributed to the Destiny franchise, as its publishing rights were sold to Bungie in the previous quarter.
  • Segment revenues will likely see low single-digit growth for the full year 2019, led by Call of Duty franchise.
  • Call of Duty: Black Ops 4 units sold so far ~ 9.32 million.
  • Next release for Call of Duty franchise is scheduled for Q4 2019.

How did Blizzard segment fare in Q1 and how much can it grow in 2019?

  • The Blizzard segment revenues of $461 million were down 9% in Q1.
  • Revenue decline can be attributed to lower MAUs, which were 32 million, as compared to 38 million in the prior year quarter.
  • The revenue growth in 2018 was led by World of Warcraft franchise. However, revenues will likely see a sharp decline in 2019, given that there is no release planned for World of Warcraft franchise.
  • MAUs of 37 million, and ARPU of $63 in 2018 grew at a CAGR (2015-2018) of 20% and -4% respectively. These will likely decline by 28% and 32% to 26 million and $43 respectively for the full year 2019.

How much can the King segment grow?

  • King revenues of $526 million in Q1 were slightly below than what it reported a year ago.
  • While the MAUs were slightly down in Q1 (y-o-y), they were up 2% sequentially .
  • Of late, it is benefiting from its new game ~ Candy Crush Friends.
  • We expect the active user base to see growth in the coming quarters, led by the new launches in the Candy Crush franchise, and an uptick in advertising revenues.
  • Expect MAUs to be 274 million, and ARPU of $8.90, translating into $2.43 billion segment revenues in 2019; this reflects a low double-digit growth over 2018.

How did the changes in top line impact Activision Blizzard’s Q1 earnings, and what is the full year outlook?

  • Activision Blizzard’s Q1 earnings of $0.78 per share on an adjusted basis were similar to what the company reported a year ago.
  • The earnings reflect close to 220 bps improvement in adjusted net income margin, while its operating margins were lower.
  • We expect the adjusted earnings to be $2.14 per share for the full year 2019. This reflects 21% decline to the prior year.
  • The decline in earnings will likely be led by lower revenues, and lower margins.
  • The margins could contract in the near term, as the company spends more on marketing for new games.

 

 

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