You Really Can't Go Wrong With a Third Warlock

So I went ahead and started a third warlock last week so that I could have one of each spec at max level when Legion came out.  That warlock is now sitting at level 60 and working his way through Hellfire Peninsula.  Good progress for just a few days worth of work.

After the warlock is done, I'll likely go back to my alliance group, where I have four more toons that need to be pushed from somewhere in the 60's or 70's through to max level.  Rogue will be up next, followed by priest, then monk then warrior.  Because warriors are always last with me.  For absolutely no good reason.

If I'm able to finish those four up, I'll probably go back and start a third hunter on my new third Horde server.

Meanwhile, Garrison operations alliance side are now making good progress and starting to generate some cash for my toons on that server.  One of the interest side effects of leveling some of these toons from pre-90 is that they didn't have time parked in their garrison accumulating garrison resources, so most of them are running very short on resources by the time they hit max level.  What that means is having to wait a few days in some cases to accumulate enough to upgrade to level 3 and then to build out the various buildings I need for my gold making and leveling strategies.

And yes, I'm well aware that I could build lumber mills for each of them or fly around looking for treasures, but I'm not interested in investing that kind of time.  I'm looking for something that I can do in a minute or two per day with each toon.

So that's the update at this point.

Cheers,

Joar

Thoughts on Legion Info From Blizzcon and Ding, Level 100 #18

So I could spend the next several hundred words going completely nuts over this and that gameplay element that was introduced at Blizzcon and that we can expect in Legion.  But I went back and looked at reactions that I'd written after the last couple of Blizzcon intros of new expansion content, and it seems I pretty consistently missed the mark.  What I was most excited about in each case either never happened, or ended up being something disappointing.

So I'm going to go with these general comments:

• The idea of zones scaling to fit where you are and give you more choice about which order you quest in is fantastic.  How it actually works in practice will likely depend on if you are able to leave one of the zones out completely and still hit max level (which I'm guessing will be possible with full heirlooms and other xp boosts).  If that's the case, then I'm a huge fan.  Otherwise, I'm not sure the ability to just change the order in which I quest does all that much for me.  But we'll see.
• Transmog stuff.  I know this is going to bug most of you immensely, but I'm just not a big transmog guy.  Can't be bothered.  So I honestly don't care.  Big fan of freeing up tabard space though!
• Artifact weapons.  Sounds cool.  Reserving judgment until I see how it works.  My main worry here is if you'll have the ability to go back and complete an artifact for a second spec on the same character without it being too insanely time consuming.  In the meantime, I'm almost feeling like I need a separate character for each spec.  Of course, that's absurd.  But, we may try that anyway.
• Class halls.  Same deal.  Sounds cool.  But so did garrisons.
• Profession overhaul.  Anything that you can do to fix professions at this point will be hugely welcome.  That being said, I'm also going to reserve judgment on this one until I see it in action.

I also managed to hit level 100 on my mage this week, making him my 18th max level character.  Technically my rogue is up next.  He's currently sitting at level 69 in Borean Tundra, so he's got a ways to go.  The mage was fun, but started to feel extremely squishy toward the end of the leveling train.  After the rogue, it'll be shadow priest, then warrior then monk (how did the monk end up last?).

There is a big part of me that wants to go ahead and start another warlock and level them all the way up on another server.  We'll have to see how that goes. If I get around to leveling a third set of toons (probably Horde side, either on Thrall or Drenden), it'll be warlock for sure and then hunter.  After that, not as sure.

Cheers,

Joar

Analysis of Q3 Earning Release and King Entertainment Acquisition

Activision-Blizzard released their third quarter earnings last night followed by an earnings call this morning.  A few highlights from the release:  GAAP Warcraft revenue was down 5% for the quarter.  Non-GAAP revenue was down 26%.  See my post on the second quarter release for explanation of what the differences between those two are.  On a year-to-date basis, GAAP revenues were up 14% but non-GAAP revenues were down 18%.  Note that based on discussions in the slide deck that they went through in their earnings call, it appears that foreign currency is actually driving a lot of these decreases rather than any real decrease in results.

For those of you wondering how the whole foreign currency thing works, I'll use an average European subscriber to illustrate.  The subscription rate in Europe is €12.99 per month.  Last year, during the third quarter, the average exhange rate was 1.32 dollars per Euro, so last year, in the third quarter, that subscriber would have shown up on Blizzard's financial statements as generating US$17.15 per month.  This year, the average exchange rate in the third quarter was 1.11, so that same subscriber paying the exact same thing shows up as US$ 14.42, a decrease of 16%.  On a year-to-date basis, that decline would work out to 17.8%.  So that's what I'm referring to above.

Total Blizzard revenue was down 5% for the quarter with operating income down 22%.  Unlike a lot of multinational companies, the currency declines may have a bigger impact on their bottom line, because a lot of their expenses are in the U.S. in dollars, so don't benefit from the same foreign currency changes decreasing expenses as well as revenue.

Year to date, total Blizzard revenue was down 7% with operating income down 30%.

Despite those results, for Activision Blizzard as a whole, it was still an extremely profitable quarter with year to date earnings per share up more than 50% over prior year.  They are sitting at the end of September with almost $4.4 billion of cash on their balance sheet and $4.1 billion of debt, or $300 million of net cash.  Of course, the transaction with King Entertainment, which I'm going to discuss a bit more is going to cause cash to go down, and debt to go up.

One other interesting point came out of the earnings call itself.  The Company noted that they would no longer be disclosing total subscriber metrics for World of Warcraft after this quarter.  What they said on the call was that they believe there were better metrics out there for tracking "engagement."  I suspect this means that rather than information on subscribers, we'll begin to see data disclosed on Monthly Active Users ("MAU's") which is the metric that they use for most of their other platforms, along with information on play time per day per user.

Last but not least, there were absolutely no Warcraft related questions in the Q&A session following the call, which is not completely surprising given the King transaction.

King Entertainment Transaction

So in terms of the King Entertainment transaction, here are a few highlights.  The total purchase price of $5.9 billion is going to be paid using $3.9 billion of cash that they have on hand and $2.3 million of new debt (that is basically just being issued under their existing credit facilities).  They will inherit almost $1 billion of cash from King, so their cash balance following the deal should still be in the $2 billion range.

For the first six months of the year, King Entertainments revenue has been declining at a rate of around 11%.  However, their SEC filings are reported in US dollars, so they are subject to the same foreign currency issues mentioned above for Blizzard.  Their monthly active users grew at about a 3% rate over prior year.

King Entertainment is a little bit more profitable overall than Activision Blizzard.  Here is a great slide from their call this morning that shows how the two companies compare in terms of revenue and EBITDA for the previous twelve months:

Following the completion of the transaction, the combined company will have approximately $6.4 billion of debt.  However, the two companies combined generated around $1.8 billion of free cash flow in 2014, so there should be some really strong opportunities to pay down debt over the next few years.  Even at $6.4 billion, their debt stands at only 2.5x their expected EBITDA, which is a very reasonable ratio.

As further evidence, Activision Blizzard's debt was actually upgraded to investment grade by Moody's following the announcement last night.  Some very interesting comments below from Moody's in connection with the upgrade:

"Activision Blizzard's upgrade to a Baa3 senior unsecured rating reflects its leading position in the growing and fragmented gaming industry, strong diversification across multiple genres and gaming platforms, and strong track record of developing profitable and sustainable franchises with international appeal. The ratings and stable outlook take into account our expectation that management has the ability to make strategic investments to create new intellectual franchise properties to replace aging ones which face the potential risk of decline over time, and leveraging existing ones across various platforms."

The only other interesting point to note, is that unlike a typical transaction like this, there doesn't appear to be any kind of break-up fee built into the deal if the transaction doesn't close.  In the press release, they indicated that they expect the deal to close in Spring 2016 and they expect it to improve Activision Blizzard's earnings for 2016 by 30%.

So all indications are that this is a good deal for both companies.  It gives Blizzard access to a big player in mobile gaming as well as shfiting up their demographic a bit (King has a much larger percentage of female users than Blizzard, something both companies highlighted on the call).  For King, it gives them a partner than can hopefully help reignite their growth.

What will this mean for the average World of Warcraft player?  I'm sure there will be a lot of discussion on this in the coming months, but my initial reaction is probably not much.  They plan to continue to manage King Entertainment as a separate business unit, much as they do with Blizzard now.  While there is certainly some opportunities for cross promotion and increase mobile interfaces, that was something that Blizzard was working on anyway.  There isn't currently much of anything in terms of cross promotion between Activision and Blizzard, so not sure that aspect of how they operate will change adding one more party to the equation.  So while this is a great overall strategic move for Activision Blizzard as whole, it may not have much impact down in the trenches with individual titles.

One interesting data point that I ran this morning.  If you had chosen to invest 11 years worth of your subscription dollars in Activision Blizzard stock back in late 2008 / early 2009 after they acquired Blizzard from Vivendi, that $1,980 would be worth $8,400 today.  And things continue to look up for Activision Blizzard from here.