Body Blow to Blizzard Margins

Oddly enough, I had a sense that things were off.  I picked up Candy Crush Saga again… I know, I said I was done there, but another post on that later… a couple months back and noticed over the last few weeks that they had added a ways to earn boosters by watching video ads.  You can get an extra booster every level for watching a video, an extra spin at the booster wheel for watching a video, and so on.

When this showed up my first thought was, “Somebody is looking for a way to boost Q2 earnings.”

And then the Activision Blizzard Q1 2019 financial report showed up yesterday.

You can find all the data they have shared, plus a replay of the analyst call on the investor relations site, but let me just summarize by saying it isn’t pretty, at least for Blizzard.

Overall it wasn’t so bad I guess.  The bottom line exceeded the guidance they gave, and that counts for a lot.  Activision gave us a warning last quarter and laid off 8% of its workforce in anticipation of tighter times.  The over payed executive staff didn’t share any of that pain, but they never do.  It is hard to look bad when you spend money on share buy backs to support the stock price.  From the report:

Two-year $1.5B stock repurchase authorization, started Feb 14, 2019

But expectations were set that things would be slowing down for the company.  On the Activision side of the house you only get one Call of Duty release a year, so you only expect one big quarter a year out of them.  They’ll be back in Q4 with big numbers.

But Blizzard and King, they are the reliable revenue generators, or so it usually goes.

Activision Blizzard Q1 2019 Financial Results Presentation – Slide 10

King looks to about on par.  They are down some from Q4 but are hanging tough on the margins front and align pretty well with Q1 2018.  Down a bit, but not much.

Activision is way off but, again, no Call of Duty release this quarter.  Margins are a bit dicey compared to Q1 2018, though revenue was actually up just a bit.

And then there is Blizzard.

It is tough to compare them against Q1 2018 because they had the Battle for Azeroth pre-order going, which boosted sales.  And, of course, in Q4 the game was still on its Battle for Azeroth high, with some people dumping in some extra cash for the 6 month subscription for an exclusive mount.  Well, it was exclusive.  You can buy it straight up ala carte now in the cash shop.  I suspect, again, something to goose earnings a bit for Q2.

The operating margin for Blizzard though… 16% is abysmal for a software company.  And that is noted as having been offset by “lower costs.”  They laid people off and likely cut back on something.  We might be seeing a reason here why Blizzard isn’t going to Gamescom this summer as well as looking for ways to offset more of the cost of BlizzCon this year with higher prices and special big spender packages.  Conventions like BlizzCon, despite what you might think, are not money makers.  Blizz is just trying to limit the bleed.

And what does this say about Blizzard games?  I see people say regularly that nobody plays WoW now, though that is patently false.  The servers are more lightly loaded, certainly, but things still seem to be buzzing and I run into other players everywhere.  However, those people who bought in on the free mount deal got to skip paying Blizz any money in Q1, having paid for six months up front.  That certainly might have left a hole in the income column.

And the Blizzard MAU for Q1 2019 was 32 million, which is down from 38 million last year, but still pretty high.  And when you have other games, free or non-subscription games, mixed into that number, it is meaningless unless you can get further details.  But clearly fewer people are spending money on Blizzard games.  SuperData was saying that there was burnout on the Hearthstone front and Overwatch has been reported as sagging since last summer.

And what else does Blizzard have?  Diablo III is in its forever seasonal holding pattern.  StarCraft II is kicking around without anything to sell people.  Heroes of the Storm is now a hobby as much as anything, its professional league having be shut down.  It makes me wonder how much Blizzard made via with Diablo and Warcraft.

But more damning is perhaps what the presentation said about Blizzard, which wasn’t much at all.  Aside from a mention of the Overwatch League season, the Blizzard was pretty much left out.

But then, what else do they have to talk about on the Blizzard front?

WoW Classic is still out at some unspecified date in the summer.  The only new title on the horizon is Diablo Immortal, the mobile game that got such a bad reception at BlizzCon last year that I have to wonder if Blizzard is sitting on it until they have some other Diablo franchise news to report.  And that is about it.  There will be no announcements and Gamescom and BlizzCon doesn’t hit until November 1, 2019.  If it wasn’t for WoW Classic they would have nothing coming up.

And so it goes.

8 thoughts on “Body Blow to Blizzard Margins

  1. Quain

    I’ve never done the accounting for software subscriptions, but typically a company wouldn’t be able to recognize the entire amount of revenue from a long-term subscription in a singular month. So, while the six month subs would leave a hole in the cash column they shouldn’t have left much of a hole in the income column relative to Q4 as the pre-paid months would be deferred revenue unearned until each month passed.

    Take that with a huge grain of salt, I haven’t done that sort of accounting precisely, but typically you recognize revenue proportionally to services rendered.

    Liked by 1 person

  2. Wilhelm Arcturus Post author

    @Quain – I’m familiar with revenue recognition for software project delivery and gift cards and such. Somebody like Daybreak gets the money when you buy Daybreak Cash but cannot recognize the revenue until you buy something in the cash shop.

    But subscriptions, that I am unsure about as well. Does Blizzard with WoW subs or say the local health club with your membership have to recognize revenue monthly as the subscription plays out, which would have been a nightmare in pre-computer days, which is why I question it, or do they get to recognize it up front?

    Liked by 1 person

  3. bhagpuss

    All of this makes WoW Classic even more intriguing than expected. If it turns out to be a frontloaded flash in the pan that fizzles in a month or two, it’s going to be a suppurating would for Blizzard. All that effort blown for not much at all. On the other hand, if it turns out to be a big win, a lasting success that picks up big numbers in MAU or Subs or whatever measure they use, that will be extremely helpful to the bottom line but what will it say about WoW Live?

    Of course, since we’ll need a “WoW Subscription” to play Classic, not a “Classic WoW Subscription”, I guess they can finesse the numbers as much as they want to keep us from knowing exactly who is playing what, but word will out. It’s also not so much what a runaway success or an abject failure for Classic wil do to the finances as what it will do to Blizzard’s self-image.

    In some ways, a runaway success might actually be worse. Imagine Blizzard becoming not just “the WoW company” but the “WoW nostalgia company”. They’d be Daybreak on steroids. Invest in popcorn futures now.

    Liked by 3 people

  4. Marathal

    Candy Crush. Yep. I know what you mean.

    Looking back I realized that there are certain levels where it is like doing a Mythic Raid the first week available. You have to make exact choices if you play it through Facebook. That said, the work around is to use the app and stack bonuses by watching the commercials etc. I have even noticed many now are going beyond just the commercial, but encouraging you to install their App. I don’t know what I would do if I started seeing adds on buildings in the game, or references made to products by NPCs. They are catering to a new demographic, the kids that expect it to be there.


  5. seanas

    I remember reading somewhere, a long time ago (ie, 10 years ago – and I think it was here) that WoW’s operating margin was well over 50%. This was back when WoW was a licence to print money. I’m sure it’s decreased somewhat, but still: that says that other Blizzard games are cost centres, not profit centres.

    On the question of subs: isn’t *the whole point* of multi-month subs that you get to book all the revenue at the point of sale, not months ahead? It’s quite literally about booking future revenues early – so a: WoW is looking weak cos of all those 6 month subs for the mount; and b: the 6 month sub was trying to paper over a real dearth in revenue.

    We’ve seen the cost-cutting leading up to today – the lay-offs, the cancellation of Gamescom, the sunsetting of HoTS – but that was all to shore up this quarter. What will need to be cut to shore up next quarter? And given those margins – when will the cut be an entire game?


  6. Wilhelm Arcturus Post author

    @seanas – In my experience with public companies, you take any and all revenue you can claim in a given quarter and worry about next quarter when that rolls around. The only time I’ve ever seen a company defer revenue to the future was at a pre-IPO company in the early 90s that was trying to show steady, solid, regular growth in the run up to going public. They closed the books a week early on one quarter. And, come the quarter before the IPO we stuffed the sales channel with units in the final week to look good.

    This must be odd for Blizz. Before WoW they could just walk away from games and move on. Warcraft, StarCraft, Diablo, they had to keep up for those and, while that isn’t as cheap as people think, it is still a lot less than having a dev team payroll to support ongoing. Now their latest games are online all the time and they feel the need to feed in content.

    I think the first thing to go will be Diablo III seasons as soon as they announce Diablo IV. But that won’t be until BlizzCon likely, so who knows. In the shorter term… well, I mentioned that exclusive mount is now in the cash shop. I wonder if they will have anything else like that ready to go.

    Liked by 1 person

  7. Naithin

    @Wilhelm @Quain I don’t work in software, but another industry with a monthly service charge. There is certainly still some scope for this not to be a 1:1 parallel, but with that said…

    …For us, revenue recognition even in the case of a pre-commitment from the customer to a certain term still gets applied to the period of service it was covering.

    So even if this 6 month deal was a full payment up front rather than simply a contract to stay subscribed for the period (or else lose the mount or whathaveyou), you’d perhaps be in a cash flow positive state from having it upfront, but the accounting treatment would still amortise it.

    Whether this is a fairly consistent standard though is another matter entirely, and that I will freely admit I don’t know. So perhaps we’re no better off than before. ;)


  8. Redbeard

    I guess it doesn’t shock me all that much, given that the people I know in my neighborhood and at local stores I frequent are tightening their belts and are seeing reductions in sales. Sure, the market still seems to love how things are going, but a stock buyback is a big clue that Activision believes they need to prop up their stock as much as possible ahead of a downturn in the industry (and likely a larger economic downturn overall).

    What I see around my hometown is spending behavior that signals a recession is coming, and items that fall under discretionary spending –such as games– are feeling the heat. I’ve been talking to people at local game stores and they’re now doing about half the business they were doing a year ago, and that doesn’t exactly bode well if that’s translating upstream to the rest of the gaming industry.

    As for Activision/Blizzard, they could have kept the HotS League going for a while longer to help keep them in the public eye, but I guess we’ll have to see what happens to Vanilla WoW instead.


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