Tag Archives: Activision

WoW Carrying Blizzard Again in Q4 2020 Results

On Thursday afternoon Activision Blizzard held their investor relations presentation for their Q4 2020 and 2020 overall financial results.  You can find the presentation, financial results, and the recording of the inventor call on their investor relations site.

There was considerable good news for the combined company.  The Activision side of the house did especially well with their Call of Duty releases in 2020.  While that is always their big title, 2020 saw revenues for the franchise doubled, giving the Activision team a very merry Christmas indeed.

Activision Blizzard Q4 2020 Financial Results Presentation – Slide 12

Kind was up a bit, though they seem pretty consistent from quarter to quarter.

And then there was Blizzard, which did very well with World of Warcraft and the Shadowlands launch, but which was down somewhat year over year, which they blame on there being no BlizzCon and a decline across other titles.

The BlizzCon aspect probably shouldn’t be a surprise.  While I doubt it adds much in the way of net profit… it costs a lot to setup, leaving aside the amount of lost productivity it no doubt causes within Blizzard… selling 40K tickets at $250 a pop, plus however many $50 virtual tickets is still a lot of cash flowing into the company.

Meanwhile, the other titles statement seems to confirm what I was going on about in Q3, which is that we seem to have come full circle and are now back to a Blizzard where there is World of Warcraft and then there is every thing else.  WoW has been on an uptick since WoW Classic launched and Blizz is saying Shadowlands hasn’t started tanking yet, so that is where the money is.  WoW pays the bills.

And it looks like it will be that way for a while as the presentation doesn’t have a much of anything else in the forecast for Blizzard.

Activision Blizzard Q4 2020 Financial Results Presentation – Slide 7

The promise of Diablo Immortal is still out there.  I’ve read a report from somebody in the regional testing that was pretty favorable about the title, it being basically Diablo on your phone.  But it really has to ship to make some money and we’ve been wondering when that is going to happen since BlizzCon 2018.

And then there is BlizzConline coming up.  Unlike BlizzCon, this is free to watch, so no direct revenue boost is expected, though they will no doubt hype up the gear store and such.  The big deal is the future plans.  Where are the non-WoW franchises going and are we going to see anything new?

Otherwise, there isn’t even a Hearthstone expansion on the list.  Maybe they are holding that for BlizzConline.  They said on the call that we wouldn’t be seeing Diablo IV or Overwatch 2 in 2021.  In summing up BlizzCon 2019 I thought I was being a bit caustic suggesting that Diablo IV wouldn’t arrive until 2022, but there it is.

And how is Overwatch 2 not out yet?

I don’t follow Overwatch that closely, but back at BlizzCon 2019 they were talking about it like it was almost ready.  It is mostly a PvE campaign, right?  But then I guess Diablo freakin’ Immortal isn’t out yet either and that looked ready to go at BlizzCon 2018, so clearly we need to allow a lot of lead time for announcements involving anything besides WoW and Hearthstone.

Other Coverage:

 

The Friday Bullet Point is GameStop

January is almost in the rear view mirror and it has already been a strange year.  I figured it was about time for me to grab some smaller items from the month and do a Friday bullet points post.  Obviously, GameStop was the top item for me.  But, after that, everything else sort of faded into insignificance.

  • The Revenge of GameStop

A year ago, in my predictions for 2020, I said that GameStop was headed for bankruptcy.  That seemed like a gimme prediction given the company’s situation.  But then came the pandemic and we all needed video games and the company revived.

Still, things were not looking great for storefront video game sales.  The company’s stock price (ticker: GME) was around $4.00 a share a year ago and had buoyed up close to $20 thanks to holiday sales.  And then, earlier this week it was past $450 a share.

Melvin Capital Management (MCM) decided to short the stock… basically a bet that the price would go down… when it was sitting in the high teens, which the Reddit group Wall Street Bets decided to go all in the other way, driving the price up to punish MCM, costing them a lot of money as they had to cover their position.

As if many were not convinced already that the stock market has simply become a casino for the wealthy, Robinhood, E*Trade, and TD Ameritrade, all of which cater to small investors, stopped allowing their users to trade GameStop (along with AMC, BlackBerry, Nokia, and a few others which was also seeing unexpected movement).  Robinhood denied it was a political move, claiming problems with margin exposure and reconciliation, and they are kind of a dicey edge case in the market, being already under investigation by the SEC and some states.

But TD Ameritrade E*Trade are not.  They’re really in the Wall Street club first, and no doubt this move was to defend the extremely wealthy… which includes themselves… as much as anything.  The casino gets upset if the suckers start costing them too much money and start changing the rules.  And there have already been calls for the SEC to control this sort of outsider behavior so that the peasants can’t rise up again.  Populist politicians on both sides of the divide are already looking to make hay out of this and there may be congressional hearings… because political donations from Wall Street are all important.

As a rule, small investors are only safe… or not at complete risk… investing in index funds, usually through their 401k retirement program, because Wall Street can charge a recurring maintenance fee and then use the money to prop up the stocks that benefit them the most.  The little guy is allowed to benefit, but only if Wall Street can make its money first.

And people may be cheering that MCM lost a bunch of money on this, but other big firms either sold off or got in with their shorts when the price was high and made money on the backs of the Redditors.  Meanwhile, individuals who saw GME prices taking off and jumped in later and who didn’t sell before the dive will lose out.  As always, Wall Street wins in the end and the small investors mostly lose.

In the end, none of this helps GameStop  the company even one iota. (Though I wouldn’t be surprised to find some senior execs and board members sold off part of their positions.)  The stock price only matters when the company offers new shares to the public.  This was all people trading shares the company had already sold, so the price… $4.00 or $400… doesn’t mean much to their daily operations.  The company is still in trouble.  This is all people trying to make money from nothing but perception… it is straight up gambling.

This sort of thing happens every so often.  The NPR podcast Planet Money did a story earlier in the year about Hertz Car Rentals when declared bankruptcy earlier this year… due to the fact that they had no cash reserves to speak of because they have spending all their money on stock buy backs which are what most benefit the CEO, board of directors, and Wall Street in the short term, so were completely unprepared for the pandemic downturn… and how their stock suddenly shot up because people were playing the market and wanted to make a quick buck.  The GameStop thing was only news because Wall Street lost control of the situation for a brief moment.

And yes, I am a bit cynical about Wall Street after watching them wreck the economy with sub-prime mortgages fifteen years back only to pay no price and get handed billions of dollars in quantitative easing so they could pay themselves bonuses while many suffered.

After the great depression of the 30s a lot of regulations were put in place to keep a titanic event like that from happening again.  For a brief time in history the stock market was what my finance professor described back in college, a way for company to raise money in order to expand or invest in the business.  That has long since been chipped away and we’re not so far from the days of Joseph Kennedy bilking small time investors.

Anyway, this seemed like something worth noting, even if it is only tangentially gaming related.  I’ll be interested to see where things stand in a year when I review this post.

For those interested in more details about GameStop:

 

Blizzard Hangs On During a Quiet Q3

We got the 2020 Q2 financial results for Activision Blizzard yesterday, and it confirmed that the video game market is still doing pretty well.

Overall the combined company had a very good Q3 2020, well up over last year, though much of the good news came from the Activision side of the house, where they were still riding the Q2 Call of Duty launch for all it was worth.  The company is even talking about hiring 2,000 more people to keep up with demand.  That is a long way from the 2018 results when they were cutting staff.

Activision Blizzard Q3 2020 Financial Results Presentation – Slide 9

The Activision team was up almost 3x over their Q3 2019 net revenue.

Blizzard, while up, was only up a small amount over Q3 2020.  However, Q3 2020 was the start of the Blizzard revival where, after two quarters in the doldrums, WoW Classic launched and revived their fortunes.

Meanwhile, Q3 2020 was in something of limbo state as the Shadowlands expansion was slated for a Q4 launch.  There was little new to entice people players back.  There wasn’t even the expansion pre-patch to raise some excitement.

But the slide deck rightly looks for Q4 2020 to be a big deal.

Activision Blizzard Q3 2020 Financial Results Presentation – Slide 7

Blizzard got the Shadowlands pre-patch out earlier this month, unveiling the big level squish for all to see and experience.  And now we have a date for the start of the expansion pre-launch events, November 10th, and the launch of the expansion itself, November 23rd.  Blizzard will be able to recognize revenue on all those pre-orders the day it launches.   The is usually a pretty big ka-ching moment.

However, outside of World of Warcraft there isn’t a lot of big news.  Hearthstone carries on, with a new expansion on the way.

Overwatch remains popular, though a year after the Overwatch 2 announcement it doesn’t feel like much has changed.  I flagged Overwatch 2 as one of the “big four” announcements at BlizzCon 2019, but I don’t pay enough attention to the game to know what has gone on since then, except for the fact I haven’t seen any headlines about it lately.

Diablo IV remains somewhere in the distant future.  I think I said 2022 last year when it was finally announced, and I might have been optimistic with that call.

And then there is Diablo Immortal, perpetually in some new stage of testing, but never quite ready to launch.  It can’t fail it they never release it I guess.

So Q4 is almost guaranteed to be big for Blizz, but unless Shadowlands gets more traction than Battle for Azeroth did, there isn’t a lot else to depend on after that.  For all the other franchises, it is still WoW that carries the load.

You can, as always, find all the numbers over at the Activision Blizzard investor relations page.

Blizzard Continues Its Pandemic Profit Roll in Q2

We got the 2020 Q2 financial results for Activision Blizzard earlier this week and it confirmed what many had probably already guessed; people staying home play (and pay for) more video games.

So, not really a surprise that they did well, though I am sure senior execs from Bobby Kotick on down will claim that their leadership was the magic ingredient.  It is always their work that causes anything good and unavoidable market conditions that cause anything bad.  So the execs get huge bonuses and the employees… well… and it isn’t just people on the Activision side of the house.

Anyway, as the presentation shows, revenue was up year over year.

Activision Blizzard Q2 2020 Financial Results Presentation – Slide 10

Of course, things were looking pretty meager a year ago, with the 2019 Q1 results showing people had fallen away from Battle for Azeroth with Q2 reviving slightly… margins up from 16% to 20%… on anticipation of WoW Classic and the Rise of Azshara update which unlocked flying in the expansion.

It wasn’t until the Q3 results that included the launch of WoW Classic that things began to look better.  And then, of course, the national disaster of the pandemic hit and kept everybody home.

So things are looking up for the company.  Surprising to me is the lack of depth in the portfolio at Blizzard and across the company.  The only thing new in Q2 was the Call of Duty: Warzone battle royale addon to the Call of Duty franchise and the promise of the Shadowlands expansion for WoW some time this year.

Activision Blizzard Q2 2020 Financial Results Presentation – Slide 7

Of course, maybe that shouldn’t surprise me.  Activision is mostly Call of Duty these days, and Blizzard has some other titles, but WoW is still the revenue juggernaut and when it sags there isn’t anything to take up the slack.  A new card pack for Hearthstone isn’t going to make a huge impact at this point and Diablo: Immortal still seems to be far from going live.

So I expect things will remain upbeat so long as we’re all encouraged to stay home as much as possible, and there no doubt be a spike when the Shadowlands expansion launches in Q4.  But the company remains the same.  It is WoW and everything else.

For those interested, the financial data, presentation, and audio of the conference call, can be found on the Activision Blizzard investor relations page.

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.

A Good Fourth Quarter for Blizzard… When Compared to the Rest of 2019

Activision Blizzard had their Q4 2019, and 2019 overall, financial results announcement and conference call yesterday.  You can find all the numbers, the slide deck, and the conference call recording over at the investor relations site.

The basic financials for the three groups were presented in the slide deck as usual.

Activision Blizzard Q4 2019 Financial Results Presentation – Slide 9

Revenue was down from last year’s Q4 results, when Blizzard pulled in $686 million, but operating income was up from $241 million.  They made more money from less income, so margins were also up from last year’s 35%.

Compared to the rest of the year, Blizzard’s revenue and income was heavily tilted towards the end of the year, giving it a distribution akin to its Activision stablemate, which tend to make most of its money when the latest Call of Duty launches every year in Q4.

  • Revenue / Income / Margin
  • Q1 $344M / $55M / 16%
  • Q2 $384M / $75M / 20%
  • Q3 $394M / $74M / 19%
  • Q4 $595M / $260M / 44%

For Blizzard the highlights were a bit of hand waving and repeated mentions and nods towards WoW Classic.

Activision Blizzard Q4 2019 Financial Results Presentation – Slide 7

A few things happened between the end of Q2 in June 2019 and the end of the year, but WoW Classic was the big one.  Bobby Kotick specifically said on the call that adding WoW Classic to the WoW subscription doubled subscribers over that period.  Yay WoW Classic.  But they didn’t mention a lot else, including what a rebuke to the current game the popularity of WoW Classic is, and were clearly avoiding bringing up some things.

I am reminded of the CEO of EA on the first earnings call after the launch of SWTOR where they declined to break it out or even mention it specifically.  He said that SWTOR was not their most interesting title or some such.  Battle for Azeroth is clearly not on the “interesting” list over at Blizz right now.

Nor is Warcraft III Reforged.

Over at Massively OP they reported on the question and answer segment of the call where Activision Blizzard was clearly ducking questions related to a few things they didn’t want to talk about.

The company also declined to break out total revenue and income numbers for the three divisions, something they have done in the past on their charts.  But we have the quarterly numbers.  I typed them in above.  I can also add them up to get totals.

In 2019 Blizzard made $1,717M in revenue for $464M in operating income, which gives a simple margin number of 27%.

In 2018 Blizzard made $2,291M in revenue for $685M in operating income, which put the simple margin number at 30%.

Basically, Blizz was down 25% in revenue and about 33% in income in 2019.  Not a good year for them in that regard, though all numbers are relative.  I am certain some smaller studios would think their dreams had come true if they pulled in a quarter of what Blizz did in 2019.

And will things get better?  The slide deck promises “follow-on” content for WoW Classic, but so far as I have seen that just means the remaining unlock phases.  Giving us Darkmoon Faire and the final raids will make people happy, but it isn’t going to grow the subscription numbers.  For what is in the plan, those numbers have peaked, dropped off some, then hit something of a steady state.  And we know that a steady state for an MMORPG is really a slow decline.

Other than that, there isn’t a lot on the horizon.  Yes, there is the Shadowlands expansion, but that won’t be until Q3 and, while it will likely cause a spike in revenues, it needs something special to hold people.

There will be more Hearthstone decks, because there are always more Hearthstone decks.  And Diablo: Immortal will go into regional testing at some point.  Didn’t NetEase claim that was done almost a year ago?  And Blizzard’s recent efforts like the 8.3 patch and Warcraft III Reforged have not been burnishing the company’s reputation for quality and polish.

Will 2020 revive Blizzard’s fortunes or just see them sink further?

Related:

Quote of the Day for WoW Classic Fans

World of Warcraft® Classic drove the biggest quarterly increase to subscription plans in franchise history, in both the West and East.

-Activision-Blizzard Q3 2019 earnings report

WoW Classic brings another ray of sunshine.

Given what SuperData told us about WoW Classic previously, this was not unexpected.

This ray of sunshine however comes amidst some cloudy skies at A-B.

The company took a lot of heat at the start of the year when it announced layoffs in practically the same breath in which it announced record financial performances.  While people were outraged, the 2019 financial reports have supported the company’s pessimism.  Blizzard was especially hard hit with its margins dropping from 30% to 16% in Q1 2019 as Battle for Azeroth shed players while the company had nothing else new to attract people.  And things have remained down.  The charts show that Blizz has recovered a bit on margins, but now Activision is was down.

Activision Blizzard Q3 2019 Financial Results Presentation – Slide 9

And the talk at the presentation was largely about the long term tent pole products, Call of Duty and World of Warcraft.  Even as they try to diversify their stable of titles, the old champions have to carry water for everybody.  Even the up part of company, King and its mobile games, the emphasis was on the Candy Crush franchise.

This is a very common problem, creating a popular and very profitable product then never being able to create something that could match, much less surpass, that product.

There was even mention of possibly beefing up the WoW team.  And, it was recognized that WoW Classic gave the company a boost during an “off” year when WoW did not have an expansion set to go.  There was some uncertainty about how sustainable WoW Classic would be over the long term.  And certainly, if they don’t do anything else with it, it will dwindle off to a much smaller population.

Finally, Q3 ended on September 30, 2019.  The Hong Kong debacle did not come to pass until mid-October, so that may put something of a damper on Blizzard numbers for Q4.  Opening up pre-orders for Shadowlands during BlizzCon may offset that somewhat, but that is a short term solution for a long term problem.

You can find all of the quarterly result information at the Activision Blizzard investor relations site.

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 GoG.com 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.

Quote of the Day – Possible Side Effects

Further, there can be no assurance that our business will be more efficient or effective than prior to implementation of the plan…

Activision Blizzard – SEC Filing about the impact of laying off 8% of staff

Activision Blizzard caught more than a bit of heat last month when it announced record revenue and layoffs in the same investor call when going over its 2018 financial reports.

But, you know, Activision Blizzard is a publicly held business and so cannot rest on its laurels.  It has to set expectations for the next period, which it said would see a decrease in revenue.  To show they were addressing that up front they opted to give the axe to 8% of the company.  It was their fiduciary responsibility.

I do wonder how fiduciary responsibility plays out when CEO Bobby Kotick is asked to explain the $33 million in compensation he received last year.  Is he really worth the 100+ senior developers that kind of money could hire?  That number was enough to earn him the #2 spot on the Top 100 Most Overpayed CEOs list, which ranked CEOs on the financial performance of their company relative to their compensation.  He is ranked worse than Virginia Rometty, the latest charlatan trying to keep the corpse of IBM shambling down the road just long enough to cash in.  Not a good look.

Anyway, people got the axe because the company needed to trim sails for 2019.  It was required.

And then this past week came the SEC filing that covered the planned staff reduction, which said this about it:

In February 2019, we announced a restructuring plan under which we plan to refocus our resources on our largest opportunities and to remove unnecessary levels of complexity and duplication from certain parts of our business. While we believe this restructuring plan will enable us to provide better opportunities for talent, and greater expertise and scale on behalf of our business units, our ability to achieve the desired and anticipated benefits from the restructuring plan within our desired and expected time frame is subject to many estimates and assumptions, and the actual savings and timing for those savings may vary materially based on factors such as local labor regulations, negotiations with third parties, and operational requirements. These estimates and assumptions are also subject to significant economic, competitive and other uncertainties, some of which are beyond our control. Further, there can be no assurance that our business will be more efficient or effective than prior to implementation of the plan,or that additional restructuring plans will not be required or implemented in the future. The implementation of this restructuring plan may also be costly and disruptive to our business or have other negative consequences, such as attrition beyond our planned reduction in workforce or negative impacts one employee morale and productivity, or on our ability to attract and retain highly skilled employees. Any of these consequences could negatively impact our business.

Basically, this planned layoff might not change anything and could possibly make things worse.

Now, I know that in the litigious world in which we live a public company has to cover its ass lest their publicly announced plans not go as expected, leading to lawsuits.  It is pretty much the same way that drug companies have to list all possible side effects… and I love when “death” gets its own spot on those lists… so that they can later claim that they warned you that you might end up with eczema, high blood pressure, sleeplessness, or death.

But it still undermines the confidence shown on the call that laying off almost 800 people from the company was necessary to see it through 2019.  And it further exposes the assumption that a CEO like Bobby Kotick is paid so much because he knows what to do, that his expertise is somehow worth all that money.  The ATVI stock price, the all important absolute measurement of a company’s value for Wall Streets, seems to indicate that over the last he wasn’t all that.

Meanwhile, as a side note, buried in that filing, is a statement about the top franchises of Activision Blizzard:

For the year ended December 31, 2018, our top three franchises—Call of Duty, Candy Crush, and World of Warcraft—collectively accounted for 58% of our net revenues.

So if you’ve been gloomy about WoW, or worried that something else might be taking over the main focus at Blizzard, you can feel a bit better.  If you’re an Overwatch fan though… well… Overwatch made the “top franchise” cut in 2016 and 2017, but appears to have fallen below the line for 2018.  The line is apparently set at the 10% or more of total revenues mark.

Activision Blizzard – Famine in the Midst of Plenty

I already had a post queued up for today, one about EverQuest and the anniversary progression servers they just announced. But events have overtaken that, so it has been pushed off until tomorrow.  It can wait.  Instead there is a fresh turd in the punch bowl calling attention to itself and which I can’t seem to ignore.

Let’s talk about Activision Blizzard for a moment.

There are few things that can raise the ire against capitalism than a company declaring record revenue and announcing layoffs on the same day.  And yet that was yesterday for Activision Blizzard.

Unless this blog is literally the only video game site you read… in which case I am sorry… you have probably seen the news of yesterday’s earnings call spread around.

Bobby Kotick led the investor call yesterday and was able to declare that Activision Blizzard had its best year ever, earning $2.38 billion in revenue.  However, it wasn’t as good as he had previously promised.  Wall Street was led to believe that the numbers would be closer to $3 billion.  Furthermore, there was expected to be some decline from this earnings summit, with 2019 being described as a “transition year.”

To appease Wall Street for this it was announced that the company would be laying off 8% of its staff, adding up to roughly 800 people.  In my mind I see the scene from The Fifth Element where Jean-Baptiste Emmanuel Zorg callously approves a layoff, though that probably flatters the Activision.

The company was quick to follow that with a statement that these layoffs would not be hitting the actual game developers and that “in aggregate” it was expected that game development staffing across the company and its many titles was expected to grow 20% over the course of the year.  What “in aggregate” means is left to the imagination, since I doubt that we’ll every see any follow on indicating if or how this came to pass.  In aggregate some more developers at NetEase working on mobile games for Blizzard might count.

But this ritual sacrifice apparently worked for the moment as ACTI stock has been up a bit today, though the share price is still almost half of what it was back in October before BlizzCon.  I’m not saying that BlizzCon tanked the stock completely.  The price was already down to 65 before then.  But the week following BlizzCon it was down to 50, after which it fell into the 40s during the tough December for the market, finally dropping to its recent nadir in anticipation of the overall company not meeting its estimates.

And so it goes with public companies, where stock price and margins are everything.

When I was younger, back in college, there used to be concern about the dividends that stocks paid.  That was a key factor in their valuation.  It was, you know, an actual investment.  There were programs from companies like Coca-Cola that would allow you to buy some of their stock and then use the regular dividends to buy more so that over time you might have an investment that provided a decent income, something to help you later on in life.

That changed, largely because of Silicon Valley, with the trend in the late 80s that companies would deliver value in the form of growing stock prices.  Companies like Apple and Microsoft pay dividends rarely and very reluctantly. [Edit: Okay, those two do now, but they fought doing that for ages, and a lot of tech companies do not.]  Thus the stock market became became much more about speculation.  What was important was not how consistent a company had been in paying dividends in the past but how much the stock would be worth in the future.  You didn’t buy stock to hold but to sell.

So stock price became all important, and margins became the key measure by which Wall Street valued stock.  Margins, the ratio of expenses to revenue, as the Wall Street obsession has its own distorting effect.  You can boost margins easily by laying people off, or at least look like you’re attempt to boost margins.  You can also boost margins by buying other companies for their products rather than building your own.  Activision spending $5.9 billion to develop a mobile games library?  A huge hit to margins.  Activision buying King for $5.9 billion?  No hit to margins at all since it is assumed in all such transactions that what you bought was worth what you paid for it.  Want to know why EA buys so many studios?  That’s why.

Anyway, that is all based on my experience over the last 30 years in Silicon Valley, where the CEO, the board of directors, and the major investors all care primarily about stock prices if your company is public, and about setting up an optimum structure for going public if you are not already.  I don’t like it.  But if I attempted to avoid companies that behaved that way, which is almost every publicly held company and most larger privately held companies looking to go public, I’m not sure how I would get by.  Go read this series about what it takes to avoid the big five tech giants.

More interesting I suppose is what all this will mean for Blizzard, the one part of the company I actually care about.

On that front things do not look good.  On slide six from the investor call presentation the Blizzard portion stands out in its tepidness.

Activision Blizzard Q4 2018 Financial Results Presentation – Slide 6

You may have to click on that to view it full size for it to be legible.

Both Q4 and in 2018 overall Blizzard was third place in margins and second place in revenue, with King running close behind on that front.

Meanwhile the highlights listed are pretty stark.  Activision had a huge Q4 because that is when the release the latest Call of Duty every year, so you expect that to be huge for them.  But this year it set records.

King also showed quarter over quarter and year over year growth and was recognized for having a leading entry in the mobile games market.

And Blizzard?  I don’t think “sequential stability” is a winning phrase on Wall Street.  Signing a renewal with NetEase is nice, but I don’t think that was a surprise after BlizzCon, where we found out that they were building Diablo Immortal.

And World of Warcraft seeing “expected declines” post expansion already is downright depressing.  That used to be what happen at least a year after an expansion launched, then maybe something that was referenced six to nine months down the road.  But Battle for Azeroth launched in August, in the middle of Q3, and we’re being told that the “expected declines” hit in Q4?  That’s not good, not good at all.  I’m tempted to double down on my “early launch for WoW Classic” prediction from the beginning of the year.

I’ve already seen somebody suggest that this means that Blizzard will abandon WoW, which is ludicrous.  It doesn’t track logically at all because Blizzard doesn’t have anything else to fall back on.  Heroes of the Storm getting set aside was easy, it wasn’t a key revenue generator.  WoW is practically the company’s right leg, and the left leg, Overwatch, hasn’t been doing so well recently either.

And, on top of all of that, it has come out that Blizzard has no major “frontline” releases slated for 2019.   I am assuming that WoW Classic doesn’t count towards that and, as I have said, I expect it will do well.  But reviving the WoW subscriber base for the months that WoW Classic with be hot doesn’t sound like it will be enough.  A remaster Warcraft III isn’t going to be a big enough draw either.  And you can only have so many Hearthstone expansions in a single year.  That doesn’t leave much.

So I expect 2019 will become the year that is marked as the one that Blizzard became something else.  The departure of Mike Morhaime, the Diablo Immortal fiasco at BlizzCon, the rumors and leaks that Activision is getting more and more into the daily operation of the division to make it more like the rest of the company… a company run by a man who said he wanted to take the fun out of game development… and less like the Blizzard that could take the time to hone and polish a product before launch.

Anyway, we shall see what happens.  But I do not think it bodes well.

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