Daily Archives: May 6, 2020

The Restoration of Blizzard Margins and the Resurgence of WoW

What a difference a year can make.  Back in May 2019 I was writing about the sorry state of margins for the Blizzard portion of the Activision-Blizzard-King combo.

The numbers for Q1 2019 were somewhat grim for Blizzard.  While they brought in $344 million in revenue, the operating income… the profit… was only $55 million, giving them a 16% margin, which is horrible for a software/service company.  They were lagging behind King, which made more money and had a higher margin, and Activision, which made less money but still ended up with a higher operating income and thus a higher margin.

What was going on at Blizzard?  We had the meager offerings of the 2018 BlizzCon still fresh, with Diablo: Immortal being the centerpiece announcement.  StarCraft and Heroes of the Storm were on the outs.  Overwatch was slipping.  And the jewel in the Blizzard crown, World of Warcraft, was having a tough time holding on to people due to the myriad annoyance of the Battle for Azeroth expansion.  It was a bad time for the company.

Things began to turn around for Blizzard when WoW Classic hit late in 2019.  But it took the events of Q1 2020 to really boost Blizzard’s fortunes.

I feel like I should quote an exchange early in the movie Schindler’s List, where he talks about this missing ingredient that had kept him from business success in the past.  For him it was war, for Blizzard it was COVID-19.  Winter was keeping some people at home already, but worries about the virus and stay at home orders in many parts of the world helped fuel Blizzard’s quarter.

It was visible on the WoW servers, where things felt more crowded, and on the WoW Classic servers, where login queues and free server transfers appeared again.  As they laid it out on slide 8 of the presentation:

  • After doubling in the second half of 2019, World of Warcraft’s active player community increased further in Q1, as the team continued to deliver more content between expansions than ever before
  • Reach and engagement were particularly strong as regions introduced shelter-at-home measures through the quarter, with momentum increasing further in April
  • Increased engagement in modern WoW drove accelerating pre-sales for the upcoming Shadowlandsexpansion, slated for the second half of this year

While they had some modest praise for Hearthstone and Overwatch,

  • Hearthstone engagement improved sequentially, driven by the new Battlegrounds mode launched in November, and strong execution in live operations
  • Overwatch engagement increased meaningfully in March as its latest seasonal event coincided with stay-at-home effects

The words “sequentially” and “meaningfully” are pretty soft.  And then there was a mention of Diablo: Immortal, which may ship some day.

  • Diablo Immortal , developed for mobile in partnership with NetEase, remains on track to begin regional testing in the middle of the year

Given that, WoW was clearly the shining star this quarter, which led to the following revenue numbers.

Activision Blizzard Q1 2020 Financial Results Presentation – Slide 10

Blizzard is actually in third place for overall revenue out of the three company units, but that revenue was up by $108 million over last year and the increase was all profit, so that on the actual income line Blizzard was ahead of its two stable mates with a huge jump in operating margin.

Of particular note to me was the measure of Monthly Active Users, MAUs, between Q1 2019 and Q1 2020.  They were both the same, ringing in at 32 million active users.

For me, that seals the deal on my assertion that MAUs are a bullshit metric… or would have sealed the deal if I wasn’t already of that mind.  Any metric that stays flat as when revenue is up nearly 25% and margins have nearly tripled clearly isn’t measuring anything worthwhile in the case of a company like Blizzard.  The company ought to be embarrassed by the need to explain how detached their favored metric is.

And the future seems fairly bright for Blizzard in Q2.  As they noted, momentum was increasing in April, with people still at home and Blizz keeping some incentives, like the 100% xp boost, like to tempt people to work on just one more alt.

And beyond that… well, the Shadowlands expansion is coming, and any WoW expansion delivers a boost to revenue no matter how bad it is viewed after the fact.  They did say on the call that the target for Shadowlands is currently Q4 2020, so no August/September release this time around.  (Quote here) But unless they totally drop the ball with the expansion, Blizz looks like they are pretty well positioned for 2020 and into 2021.

The information, financial reports, presentation, and recording of the investors call can all be found over on the Activision Blizzard investor relations page if you wish to scope it out yourself.