Friday, August 5, 2016

An Analysis of Blizzard's Second Quarter Earnings Release

So this quarter again marked more changes in what Activision-Blizzard reports in their earnings releases on a quarterly basis, and we'll get to more information that later.

Overall, it was a fantastically successful quarter for Activision-Blizzard.  They reported non-GAAP revenue of $1.6 billion for the quarter, compared to $759 million in the prior year, an increase of 112%.  Non-GAAP EPS increased from $0.13 per share to $0.54 per share, and increase of 315%, and soundly beat the consensus estimates by the analysts that follow the company, which were $0.42 per share.

The company also generated an enormous amount of cash during the quarter, with free cash flow of $435 million for the quarter and $717 million year to date.  They paid off another $816 million of debt taken on from the Candy Crush acquisition during the quarter.  Combine that with the repayments from Q1, and that means that they've already repaid $1.3 billion of the $2.3 billion in total debt that they took on to help finance the King / Candy Crush acquisition just FIVE MONTHS AGO.  This company continues to be a cash generating machine.

On Monthly Active User's ("MAU's"), the company's new organization-wide user engagement metric, MAU's as a whole were down, with declines in both King and Activision more than offsetting a significant increase for Blizzard, driven mostly by the release of Overwatch.

Here is the table from their 10-Q:


The decline at Activision from prior quarter is due to the release of Call of Duty:  Black Ops III in the fall of 2015, which caused numbers to be high for the last couple of quarters.

So overall, a very positive quarter for the Company as a whole.

The one interesting change that I referenced earlier is that for the first time in recent history, the company did not include any detailed financial information for their individual segments (i.e., Activision, Blizzard and King) in their earnings release.  That information is still publicly available, but as I discussed last quarter, you now have to hunt down their Form 10-Q filing with the SEC to find it (see my discussion of what's in their 10-Q here).

So in terms of information for Blizzard specifically, revenue for the quarter was up 92% from $385 million to $738 million.  Operating income for the quarter was up 185% from $117 million to $333 million and operating margins increased from 30.3% to 45.1%.  For the first six months of the year, revenue for Blizzard was up 40% from $737 million to $1,032 million.  Operating profit for the first six months increased 64% from $256 million to $419 million.  Operating margins increased from 34.7% to 40.6%.

According to their 10-Q filing, the increase in Blizzard revenue was due to increases for Overwatch and Hearthstone, offset by declines in Diablo III (which released in China in the second quarter of last year).  Revenue was also impacted by declines in Heroes of the Storm and Warcraft (due to a smaller subscriber base).  They also mentioned that sales and marketing costs were up for Blizzard due to current and future product launches.

The other specific item that was mentioned on the earnings call was the pre-purchases of Legion were tracking in line with where they were with pre-purchases for Warlords.

So that's it for this quarter.  Stayed tuned later this month for more from @AlternativeChat and I in podcast form as we'll dive into more details on the earnings release, quarterly reports and other developments!



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