Joar Hits 110, and Still Lots to Do

So I managed to get to 110 yesterday on my warlock and then promptly got overwhelmed by the amount of things that I still needed to do.  Before unlocking world quests, I needed to get to Friendly with a number of factions, which meant doing a couple more quests in Stormheim beyond where I'd dinged.  It also meant heading to Suramar and doing a couple of quest chains there.

Then that opened up the window of world quests and all the fun to be had with those.  Plus I still have my Class Order quest line and a bunch of profession quests, and while I've been mucking about doing the profession quests, I haven't actually been doing much of anything to level my actual professions.  (Am I the only one that thinks its a bit odd that you don't actually get profession skill for doing all these quests?)

I also want to start working on fishing and cooking a bit to see how those go.  I figured out the recipe system with Nomi in Dalaran, so am accumulating lots of fun and exciting cooking recipes.  I just need some fish to go with a few of them.

So there's lots to do.  Oh, and I still haven't decided if I want to be affliction or destro.  Affliction was really annoying me while leveling with the little ghosts that it leaves for every mob that you kill, courtesy of your artifact weapon.  I also see all the posts on the forums and such as how affliction is absolutely bottom of the barrel in DPS right now, although given that I'm not going to be doing anything past LFR at this point, and we're still very early, I'm not sure that's even worth looking at.

In terms of leveling time on Joar, my first toon in an expansion is always extremely slow, because I do things like read quest text, and explore a bit, so he was at 25 hours and 11 minutes /played from 100 to 110.  This actually pretty in line with previous expansions.  Warlords was 24 hours and 30 minutes.  MOP was actually 28 hours.  The first toon that I leveled in Cataclysm actually was my paladin and not my warlock and he clocked in at 35 hours played to max level in that expansion.  And yes, I'm fully aware that it's a bit sad that I actually have all that data.

I'm also debating whether the death knight or the hunter will be up next.  I'm inclined to switch between melee and caster (particularly since we now have a nice even number of each thanks to the new DH hunter class, at least Horde side for me, alliance side tends to be melee heavy because I play both enhancement and feral there).

So far, I'm enjoying the expansion.  More updates next week.

Cheers!

Joar

Prepared for Legion, and Ding, Level 100 #27

So I've finished preparing the Joar empire for Legion, which is to say, I didn't do a whole lot.  The first four or five toons that I'm likely to level have had their bags cleaned out and they are more or less ready to go.  Folks are generally either in Orgrimmar, Stormwind, or their garrison, and most folks have done the Broken Isles quest line (although I wonder if that will actually even be needed after a while, I guess we'll find out for sure tomorrow).

I'm generally taking a much more casual approach to this one than I have in the past.  No lengthy to-do lists.  No significant advance preparation.  Even some basics like buying food I didn't bother with, because it has finally occurred to me that there's almost always better food and bandages available almost immediately in the new questing areas.  But hey.  I'm ready.  Ready enough.

In the meantime, I managed to get toon #27 to 100 purely on the back of doing invasions.  This was neither the fire mage or the shaman that I had been working on, but instead was a third druid.  Sunfiring the shit out of everything was just excellent for keeping that XP rolling in.  I managed to get him to 100 in slightly less than half the time that it would have taken to do purely by questing.  And with the added advantage that he was immediately iLvL 700 based on all the chests he had to open.

The one thing that I did do in preparation for launch was to get all the current /played times for my toons recorded so that I can appropriately measure the time to level to 110 for all them.  Strangely, it's not that I even care about the speed at this point.  That gets adjusted so much these days over the course of an expansion that I'm not sure it matters anymore.  But because I've been doing it since Cataclysm, I hate to stop now.

At some point tomorrow afternoon'ish, Joar will be embarking on the path to 110.  I'm actually not in any giant hurry at this point.  Just going to enjoy it for what it is.

Cheers.

Gearing Up Alts, and Ding #24, #25 and #26

OK, so #24 and #25 were quite a while ago, and were my boosted Outlaw Rogue, my third hunter and now a shiny new demon hunter.  I was going to go ahead and finish up the demon hunter quest line on the alliance side as well, but I noticed that I actually hit 100 pretty far before finishing the storyline, so I figured I'd wait so I could use the starting area to get a head start towards 110 on him.

So rather than work on #27, #28 etc using the invasions, I'm actually using them to gear up some of the lesser geared alts.  The goal is to have all 26 level 100's at a minimum ilvl of at least 660 by the time Legion releases.  I may bump that up a bit at some point, because at least now, I'm showing really fast gains using the invasions.  My lowest geared alt at the moment is at 626 and that's essentially with only working on this for a day since I was out on holiday all of last week.

So I may pick up and try to invasion my way through some levels on some toons at some point, but at least for now, I'm sticking with just gearing folks.

So here are some generally spoiler free thoughts on the invasions and Broken Shores questline.  My first thought on the Broken Shores quest line was to wonder when George R. R. Martin started writing content for Blizzard.  In general, I thought the story was pretty well done, although there were a few things that I was wondering (and I haven't finished the whole Harbinger series yet, so some of this may be expalined there).  Main question in my mind was where was Khadgar?

Also, portions of the main scenario still seemed a bit glitchy to me, which was disappointing, but in general, it was a really nice way to get a feel for your new class layouts and abilities if you hadn't done so already.

The invasions have been fun so far as well.  I'm a bit confused by the weapon drops and weapon upgrade items given that we'll all be replacing our weapons in a couple of weeks, but I guess that's okay.  The invasions are also making me very happy that I finally splurged and bought top level flying for all my toons.

So that's it for now.

Cheers.

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!

A Change in How Blizzard Reports Revenue

On Friday, Blizzard hosted a brief conference call with their investors to explain some changes that would be coming with this quarter in how they present their revenue.

As I've discussed in this space before, Blizzard presents their revenue on both a GAAP and a non-GAAP basis.  GAAP stands for Generally Accepted Accounting Principles.  GAAP requires that Blizzard record their revenue when it is actually earned and not necessarily when they collect the cash.  

As a quick example, let's look at the WoW Token.  On a non-GAAP basis, as soon as Blizzard sells that WoW Token to someone, they are counting that $20 as non-GAAP revenue as soon as they have your cash in hand.  But on a GAAP basis, they aren't allowed to record the cost of that Token as revenue until someone actually uses it for game time.

Similar differences occur if you are pre-ordering a product like Legion, or if you are paying for your subscription in 6 month blocks.

Back in May, the U.S. Securities and Exchange Commission (SEC), which regulates public companies like Activision-Blizzard that trade on U.S. stock exchanges, issued new rules and regulation on the use of non-GAAP measures by public companies.  

In response to those new rules, Blizzard announced that they will no longer be disclosing non-GAAP revenue in their earnings releases.  Only GAAP revenue.

They said they will continue to use non-GAAP revenue internally to measure their performance and incentivize their people, but just won't continue to disclose it externally.

Here is a link to a presentation that Blizzard used on the call on Friday that explains the differences:

non-GAAP presentation

So what does this mean for those of us that follow Blizzard closely.  Very little.  As you can tell from the presentation, while they won't have an actual line on their earnings release for non-GAAP revenue, all of the information that you need to calculate that number will still be there and easily available, so we'll continue to calculate it and talk about it in the analysis that I do every quarter on their releases.

Thoughts So Far on 7.0.3

So I've had the chance to give patch 7.0.3 a solid trial run at this point and have a few thoughts that I wanted to share:

• I don't like the new name plates, but am still hunting for an add-on that produces an option that I like better.
• Not a big fan of Outlaw so far, although I need to give it more of a try before reaching any final conclusions.
• Both destruction and affliction feel different but okay to me as a warlock at this point.  Haven't had much time with demonology yet.
• I've been leveling as BM on my hunter, which feels very different, but I like it being more about "send in the pets".  Marksmanship feels okay but very different.  Haven't had the chance to do much with SV yet.
• I like shadow priests, although other than the new voidform thing, it doesn't feel all that different.
• Loving the boomkin changes so far.
• Mages are still mages.

I think I'm probably going to get that third hunter to level 100 before Legion drops at this point.  He's working his way through Pandaria now, so feels like I've got a decent amount of time to get it done.  That'll be #25 along with my level 100 boost (which I've already used on an Outlaw rogue).

Cheers.

Step Away From the Mission Table!

Several things have recently come together at the same time to make me conclude that it's probably time to step back from the garrison gold-making efforts:

1. The background downloader just fired up starting to dribble the pre-patch bits and bytes onto my PC.
2. Yesterday was my best garrison gold-making day ever.  Granted, only by about 325g, but with what I feel was a still impressive 28,150g on the day, seemed like a good time to go out on a high note.
3. I also had two fairly arbitrary gold thresholds that I was targeting.  One on my Horde server and one on my Alliance server and I managed to pass them both yesterday.  

So with all of that coming together at more or less the same time, I've decided it's probably time to back off of the regular garrison gold mission stuff and just focus on leveling until the pre-patch comes out and I can run as many toons as possible through that stuff.

Right now, my third hunter is sitting at level 68 and just started working his way through Northrend.  If I can get him to 100 before the pre-patch, I'd then switch to working on mage #3.

The focus during the pre-patch originally will be on my three mains - warlock, hunter and death knight, and then will spend a little bit of time on trying to get gear for my three undergeared Alliance toons - rogue, warrior and monk.

So that's the plan folks. 

Cheers,

Joar

Happy 7 Year Blogoversary To Me!

So the 7th anniversary of this blog passed pretty uneventfully this past week.  I've been trying to come up with something profound to write about, but with our current massive lack of content, I just don't have much to say in celebration of the passing of this milestone.

Mostly what I've been doing in game has still be focused around garrison gold-making.  I've been averaging around 250,000g per month across all my toons.  That total is for a total of 22 characters across two different servers.  I'm also generally not playing every day.  In general, it's an average of just over 12,000g per day played.

This is mostly just doing garrison missions and using excess garrison resources and the trading post to sell various materials on the auction house.

I've also been working on leveling my third hunter.  He just hit level 58 and is on his way to Outland.  If the pre-patch hits in late July like most are expecting, he'll probably be the last toon to get to max level before Legion drops.  Counting my level 100 boost (which I'm going to use on a rogue, oddly enough), that'll give me 25 level 100's for Legion.  Which is pretty much certifiably bat shit crazy.

Of course, like the last 3 expansions, Legion isn't expected to be at all alt friendly, so I'm sure that'll be the last time I level a huge volume of alts, just like the last 3 expansions. [/sarcasm off]

Cheers!

Joar

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.

Cheers,

Joar

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 www.sec.gov, 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.

Cheers!

***  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).

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.