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.

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