Monday, May 23, 2016

Mission Accomplished - Level #100 #23

So that's mission accomplished on my leveling plans for Draenor.  I'm pretty happy with having got through all that, and will likely continue the garrison gold making charge as well as leveling a 3rd hunter and maybe a 3rd mage, at least until the pre-expansion patch comes out.  I'm guessing that's still at least a month out at this point.

The garrison gold making continues to go pretty well, average something over 60,000g per week using the techniques that I've outlined here.

My last two max level toons I've passed on fully building out their garrisons because I don't believe there will be time to recoup the cost between now and when garrisons get nerfed.

This toon was a monk, so I was heavily leveraging the xp boost that comes from the monk dailies on this one, so he ended up with a total played time from 1-100 of right at 1 day, 15 hours.



Tuesday, May 10, 2016

Review of Activision-Blizzard's First Quarter Form 10-Q

So for those of you that aren't dedicated public reporting and accounting geeks and were wondering about my title, a Form 10-Q is the quarterly document that public companies registered in the U.S. file with the Securities and Exchange Commission.  The document itself contains some of the same information that companies typically include in the press releases but can often have other valuable information worth reviewing.  For large public companies, the document is due 40 days after the end of the quarter (so for a calendar year-end company, that would be today for Q1)

The first section of the document is the financial statements and footnotes themselves.  The second section is called "Management's Discussion and Analysis of Financial Condition and Results of Operations", which you'll sometimes see referred to as MD&A.  This is where the company explains all the things that caused changes in their financial results for the quarter.  There's also a portion of this section that is dedicated to discussions of liquidity - how much cash the company has, how much debt and what the terms of that debt is and how they plan to manage all of that.

The final few sections are more specific and technical and may include information on significant legal cases as well as a discussion of any changes or issues with the company's internal controls.

So that's the background.  There are a couple of places you can usually find this document.  Most companies will have a copy of it on the Investor Relations section of their website (usually under SEC Filings).  You can also get it directly off the SEC's website at, and click the button on the top right that says "Company Filings".

So, couple of things from the Activision-Blizzard (ATVI) 10-Q that I wanted to go through today:  Segment Reporting, the Candy Crush Transaction, Monthly Active User disclosures and nuggets from MD&A.

Segment Reporting

The way the accounting disclosure rules work, a company determines their segments based on the way they provide information to top management for decision making and based on how they think about resource allocation.  Traditionally, ATVI has disclosed two segments - Activision and Blizzard.  Typically, when you do a major acquisition like the King deal, it gives you the chance to reevaluate whether that continues to be how you'd like to look at things.  In this case, it looks like the company decided to continue with business as usual, but of course with adding King as a third segment.  They also report a fourth category of "Other" which are things that aren't yet large enough to merit reporting as a separate segment.  Those include things like eSports, the studio and their distribution business.

The Candy Crush Transaction

So when you acquire a company like King, you're required to record all of the assets and liabilities of that company at their current fair value, including intangible assets that might not have been on the books of that company when you acquired it.  Then, to the extent that the amount that you paid is more than the value of those net assets, the difference gets recorded as goodwill.  Because technology companies and gaming companies don't typically have a lot of hard identifiable assets, this goodwill number can end up being quite large.

So the purchase price for King was approximately $5.8 billion.  And here is how they allocated that:

So you see a few interesting things here under intangible assets - a value for King's internally-developed franchises at $845 million, a separate value for the software itself at $580 million and then a value for their existing customer base at $609 million.  These things will all be amortized to expense over the periods in the right hand column, reducing King's profitability for those periods.

They also added $2.7 billion of goodwill related to King bringing the total goodwill on the books of ATVI as a whole to $9.8 billion.

Monthly Active User Disclosures

So in their MD&A, we got a little bit more detail on their monthly active users by segment than what they had put in the earnings call information.  Below is their disclosure by quarter, for the past year.

So looking at the Blizzard line, there is a pretty significant spike in Q2 of 2015, which likely relates to the Hearthstone expansion and the full release of Heroes of the Storm during that period.

The decline in MAU's for King is also pretty interesting.

MD&A Nuggets

So reading through their MD&A, you see some pretty interesting detail.  For the quarter, they disclose that revenue for Blizzard as a whole was down because of declines in Warcraft, related to lower subscriber numbers, and also because of declines in Heroes of the Storm, because the comparable period in 2015 contained a one-time revenue boost from the sales of Founders' Packs.  However, this was offset by increases in revenue for Hearthstone, which was released on iPhone and Android smartphones beginning in Q2 of 2015.

Finally, they disclose for Blizzard that their profitability as a whole as impacted by the same factors, and also by increased sales and marketing costs being incurred to support future releases.

The other comment that I found interesting in MD&A was under Product Development expense where they disclosed that development costs actually decreased for Blizzard because of the timing of cost capitalizations.***

One additional item that I wanted to highlight from the 10-Q is from the cash flow statement, where they showed operating cash flow of $309 million, up from $209 million for the same quarter in the prior year, so they are continuing to show strong cash flow generation.

Last item that was a little bit interesting was in Part II, Item 1 of the 10-Q which is the section related to legal proceedings where they disclose that there is a class action lawsuit out there against King arising from their IPO.   They include the fairly standard language around believing the claims are without merit and intending to defend it vigorously, but it may merit monitoring in case they end up incurring lots of costs from a defense standpoint.


***  I was asked a follow up question on Twitter about what this means exactly.  Unfortunately, it's probably too detailed to fit into a 140 character response, so I'm updating it here instead.  The accounting policy note in their 10-K explains their accounting for software development costs as follows:

 Software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products. Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation, or the completed and tested product design and working model. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established. For products where proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. 

So prior to establishing "technological feasibility", the costs related to that particular game or piece of software are expensed under Product Development expense.  So what that means in general is the timing of a game getting to the point that they can call in technologically feasible so they can start capitalizing costs instead of expensing them can have a significant impact on the expense recognized for the period in this particular category.  What that would seem to imply is that something just hit that technological feasibility threshold recently, so costs are now being capitalized instead of expensed (or possibly they had a few things that were just short of that point last year).

Friday, May 6, 2016

An Analysis of Blizzard's First Quarter Earnings Release

So this quarter's earnings release was probably more notable for the changes in format than for the specific information about Warcraft that was available.  Most notably, we no longer have specific revenue information related to World of Warcraft being publicly disclosed by Activision-Blizzard ("ATVI").

So here is the table from the Q4 earnings release where they break-out the World of Warcraft information:

And here is that same schedule now.  Note the footnote at the bottom where they explain that the stuff that used to be broken out and separately identified as World of Warcraft has now been lumped in with all the other PC based stuff.

So this is coming on the heels of separate subscriber numbers no longer being disclosed after Q3 of last year.

But here is something we are getting that is new this time around, and that is overall Monthly Active Users for Blizzard as a whole.  Below is a really cool slide from Activision-Blizzard's earnings call presentation that talks about their total audience reach across all three segments.

So we have totals for Blizzard now, which was 26 million monthly active users, and was the fastest growing of ATVI's segments, growing 23% year over year.  But keep in mind, that includes all of Blizzard's franchises - Warcraft, Diablo, Starcraft, Hearthstone and Heroes of the Storm (and maybe even Overwatch - they didn't really say).  While it was the fastest growing, it's really interesting to see how much smaller it is than Activision and King on a relative basis.

So, now for the numbers.  For ATVI as a whole, they had a strong quarter.  GAAP revenues increased about 14% for the quarter to $1.455 billion and non-GAAP revenue increased 29% for the quarter to $908 million.  Note that Q1 is typically a very slow time for the Company from a non-GAAP standpoint, particular without any notable new releases typically occuring during that time.

For Blizzard specifically, their non-GAAP revenue story was not nearly as good, declining 16% to $294 million for the quarter.  So while their monthly active users are up 23% year over year, that's not necessarily translating the revenue increases, at least at this point.

In terms of actual operating income, the decline at Blizzard was even larger, with a drop of 38% to $86 million for the quarter compared to $139 million in 2016.  There should be more detail explaining these particular changes in their Form 10-Q filing with the Securities and Exchange Commission, but unlike previous quarters, they didn't file their 10-Q on the same day as their earnings release.

From a cash flow standpoint, we'll also have to wait until that 10-Q gets filed to see the details on their cash flow for the quarter, but they did disclose on the call that they generated something north of $300 million of operating cash flow for the quarter, which would be a significant improvement over the $209 million of operating cash flow from the first quarter of last year.

As you may recall from previous posts, they took on an additional $2.3 billion of new debt in connection with the King acquisition, and they also disclosed on the call that they had already repaid $500 million of that new debt.  Lastly, they also disclosed that they had received approval from their board to repay an additional $1 billion of debt over the rest of the year.  So as of 3/31, the Company had $2.9 billion of cash on hand, compared to $5.9 billion of gross debt, or net debt of around $3 billion.  This compares to $1.3 billion of net cash (total cash minus total debt) on hand at year-end.

Only planning to use $1 billion of the $2.9 billion of cash that they have currently on hand to repay debt over the remainder of the year might create some interesting speculation around what plans they might have for that remaining $1.9 billion, plus the cash they will generate over the rest of the year.

Friday, April 29, 2016

Stop Building New Garrisons Now!

So I ended up having a little bit of an exchange on social media yesterday about when the break-even point might come with respect to constructing new garrisons.  I had done a little bit of analysis last year to determine how long it took to break-even on a garrison in pure gold terms, but that analysis assumed an unlimited amount of time.  (And by the way, as a quick refresher, that analysis showed that it took 21 days of operating with a fully built out garrison and slate of followers to recover the approximately 10,500g investment for fully building it out).

So just to level set, here is what I'm generally looking at in terms of a fully stocked garrison for gold-making.  It is a level 3 garrison, a level 3 inn (for the treasure hunter missions) a level 3 salvage yard and a level 1 trading post.  It is also a full slate of 20 followers with the ones with specific i-level requirements for particular gold missions geared to those points.  Note that you could increase that to 25 followers with a level 3 barracks, but the cost of doing that in both gold and garrison resources would be higher, and it's not going to change the answer at this point.  The cost of building that out is approximately 10,500g and 3,550 garrison resources.

Now, if I'm leveling a toon from scratch, I am typically finishing up that process with around 1,000 garrison resources (that assumes that I'm using them to buy experience potions from my garrison quartermaster as I go).

So now it comes down to how long it would potentially take me to get to that break-even point.  One of the gating items is how long it would actually take to accumulate the garrison resources to fully build out the garrison.  At 2,550 net garrison resources needed, and an accumulation rate of 144 resources per day, that works out to 17 days, or just slightly under 3 weeks.  You could speed this up by building a lumber yard, but this would take quite a bit of extra time every day on that character to go out and collect the lumber, and at this point, that's not a time investment I'm willing to make.  You can of course feel free to choose differently.  In my case, my next max level character is going to be my 23rd 100, so I've got less willingness to invest additional time in those alts.

So between building, and then accumulating gold, that brings us to 6 weeks total. The real gating item from a time perspective is accumulating the followers.  I am typically finishing the leveling process with somewhere between 9 and 10 followers, just from working through the typical leveling process.  I am not generally going out of my way while leveling to collect specific open world followers because generally those followers do not have the traits that I'm looking for - which are scavenging and treasure hunting.

So using my inn to recruit one follower per week, it is going to take me at least 10 weeks to pull together the full slate of treasure hunters.  Now the three week time frame to accumulate the garrison resources to fully build out your garrison runs simultaneously with this, and you will be accumulating some gold while you are recruiting those followers, but not enough to make a significant dent in the break-even calculation.  It will likely also take you at least a week to fully level those 20 followers to max once you have your full slate of 20 collected, unless you're doing nothing but garrison mission for this particular toon.

So if I assume it takes 10 weeks to accumulate the followers and then 3 weeks to break-even on the gold (assuming the gold accumulated while recruiting helps to offset the additional time needed to level those followers to max), you're at a minimum of 13 weeks to break-even, which from today, puts you at July 29th.  So if you think 7.0 is going to drop on or before July 29th, it is likely too late to break even on a new maxed out garrison at this point.

What I would recommend instead, is to go ahead and upgrade your garrison to level 2, and build out a level 2 salvage yard, a level 1 trading post and a level 2 inn (or conversely, don't worry about the inn and just head out into the world and grab some followers), continue to accumulate garrison resources to use at the trading post and sell, and then do whatever base gold missions you can.  The cost of doing that is only 2,800 gold with the level 2 inn and only 1,350 gold if you ignore the inn, so is much more likely to be profitable over the next few months until launch.

Tuesday, April 26, 2016

Ding! Level 100 #22

So I just hit level 100 on the alliance warrior, giving me my 22nd max level toon.  The sad thing is, I really used to enjoy leveling and playing as an arms warrior, but that was definitely not my favorite this time.  He seemed fairly squishy the entire way.  Not a particularly fun leveling process.

Next up is going to be the alliance monk, who is currently sitting at level 61 in Hellfire Pensinsula somewhere.  I expect with the monk xp boosts, this one should be really fast.

After that, I will likely start working on a third hunter if I still have time, and maybe then a fire mage.

My total leveling time on the warrior was 2 days, 10 hours and 16 minutes, which is about the same as the last couple of toons that I've finished.

Tuesday, April 19, 2016

Not Quite There Yet

A week long business trip to Europe delayed my plans on my Alliance Warrior, but he's back in the swing of things, and just started working his way through Gorgrond today.  That was my 22nd toon to run through the Tanaan Jungle starting experience.  Ugh.

It's a busy week this week, so not sure I'll be able to finish him up, but should be in relatively short order.  Then it'll be time to finish up the monk and finally nail down the goal of a level 100 of each class for each faction (plus one extra warlock, and maybe an extra hunter if I have time)

I'm still doing a little bit of the garrison thing, but not with the same level of urgency that I have in the past.

I was excited to see a release date for Legion as well.  August 30th will be here before you know it, so I've now got a fairly limited amount of time to get these last few toons done.

Wednesday, March 30, 2016

A Return to Garrisons and Leveling

So as I foresaw in my last blog post, I think I've finally reached the point where I've lost interest in SWTOR again, so I've started to pick up my garrison activities and leveling in a bit more earnest now.

I've got two toons to finish up in order to reach the stated goal of having a max level toon of each class for each faction.  My alliance warrior is current at level 87 and working his way through Pandaria.  I've then got a pandaren monk that is sitting in Hellfire Peninsula at level 61.

I've gone back to looking working on my garrison's more regularly to keep the flow of gold coming.  All 11 of my characters on the Horde side have fully outfitted garrisons with all their followers at 675 and all are essentially always maxed on garrison resources as well so they can continue to use the Trading Post to make lots and lots of money.

With those 11 toons, I tend to average somewhere around 6-10K gold per day, so if Legion goes live around the end of September as expected, I should be able to conservatively add another million gold to the pile by then.

I've also started to do the same thing on the alliance side.  At this point, I've only got 6 toons that are fully equipped, 3 that I'm working on and then the two that are still leveling, so needless to say, things aren't nearly as lucrative alliance side for me, but I'm still amassing a pretty reasonable cash horde on the alliance side as well (see what I did there?)

I'm hoping to finish up the alliance warrior sometime in the next week or two and then focus on the monk.