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Activision Blizzard, Inc. (NASDAQ:ATVI)
Q1 2018 Earnings Conference Call
May 3, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone. Welcome to the Activision Blizzard's Q1 2018 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Amrita Ahuja, Senior Vice President of Investor Relations. Please go ahead.

Amrita Ahuja -- Senior Vice President of Investor Relations

Good afternoon, and thank you for joining us today for Activision Blizzard's first quarter 2018 conference call. Before we start the call, we want to share with you an extraordinary error that was made by The Wall Street Journal earlier today, which caused trading volatility in our stock.

The Wall Street Journal made a mistake and prematurely released a completely inaccurate headline reporting our Q1 revenues as $1.7 billion, instead of our actual Q1 2018 GAAP revenues of a record $1.97 billion. Not only did they report inaccurately, they did so in violation of our written embargo agreement. They have since issued an apology.

Our actual results are now clarified and reflect our strong performance and plan for growth, including a record first quarter well ahead of our outlook and consensus and increased guidance for 2018. So, today, to review, those results, we have with us Bobby Kotick, CEO; Coddy Johnson, COO; and Spencer Neumann, CFO. And for Q&A, Dennis Durkin, Chief Corporate Officer; Mike Morhaime, CEO of Blizzard; and Riccardo Zacconi, CEO of King, will also join us.

I would like to remind everyone that during this call we will be making statements that are not historical facts. The forward-looking statements in this presentation are based on information available to the company as of the date of this presentation. And while we believe them to be true, they ultimately may prove to be incorrect.

A number of things could cause the company's actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements. These include the risk factors discussed in our SEC filings, including our 2017 annual report on Form 10-K and those on the slide that is showing. The company undertakes no obligation to release publicly any revision to any forward-looking statements to reflect events or circumstances after today, May 3, 2018.

We will present both GAAP and non-GAAP financial measures during this call. We provide non-GAAP financial measures, which exclude the impact of expenses related to stock-based compensation; the amortization of intangible assets; expenses, including legal fees, costs, expenses and accruals related to acquisitions, including the acquisition of King Digital Entertainment; expenses related to debt financings and refinancings; restructuring charges and the associated tax benefits.

These non-GAAP measures are not intended to be considered in isolation from, as a substitute for, or superior to our GAAP results. We encourage investors to consider all measures before making an investment decision. Please refer to our earnings release which is posted on www.activisionblizzard.com for a full GAAP to non-GAAP reconciliation and further explanation with respect to our non-GAAP measures.

There's also a PowerPoint overview, which you can access with the webcast and which will be posted to the website following the call. In addition, we will also be posting a financial overview highlighting both GAAP and non-GAAP results, and a one-page summary sheet.

And now, I'd like to introduce our CEO, Bobby Kotick.

Bobby Kotick -- Chief Executive Officer

Thanks, Amrita, and thank you all for joining us today. This was another record quarter for Activision Blizzard, with GAAP revenues of $1.97 billion driven by record quarterly digital in-game and mobile net bookings. We also achieved an all-quarter record non-GAAP EPS of $0.78, surpassing our prior outlook by $0.13. We generated record Q1 operating cash flow of $529 million, up nearly 30% year-over-year.

Our continued ability to set new records speaks to the breadth and enduring nature of our portfolio of franchises against the backdrop of a large and growing interactive industry. Gaming is constantly evolving and innovating, which often expands the marketplace. The success of Fortnite is no exception. This game is attracting new players of all ages and gender and it is helping gaming become even more mainstream entertainment.

Our biggest franchises are anchored by communities of tens of millions of players. While many of our players try new games, they always come back to the franchises that are the foundation of the communities that they are a part of.

World of Warcraft, Call of Duty, and Candy Crush are great examples. These long-standing franchises are driving innovation into games at a regular pace, with new in-game content, social features, and regular updates added to their ever-evolving, rich game universes. World of Warcraft is on a very positive trajectory with strong pre-sales for the upcoming expansion content. Candy Crush is demonstrating growth, holding both the No. 1 and 2 grossing mobile spots in the U.S. for the second quarter in a row.

We see strength across the whole portfolio, including Overwatch, where total franchise engagement is up, and Call of Duty, where the digital season and reach have been strongly ahead of last year. Of course, we're all very excited about the highly anticipated Black Ops 4 release. Gaming remains the most engaging form of entertainment. It's projected to grow faster than any form of media except messaging. Even faster than social media in terms of time spent.

We estimate that the interactive entertainment industry exceeded $120 billion in total revenues last year and grew at 20% year-over-year. We are the largest interactive entertainment company and yet we represent less than 10% of this rapidly growing industry, which illustrates the sizable opportunity we see ahead. Our core games business has always been our growth engine in terms of results and intellectual property creation. That will only get stronger as we focus on two especially large opportunities ahead of us.

First, mobile gaming, which represents a unique opportunity for us to dramatically expand our reach to new and existing players. We're leveraging our powerful franchises across the company in the creation of our new mobile franchises and titles.

Second, we have room to grow our high margin and recurring in-game revenue streams through a persistent focus on continuing to add value to all of our players' experiences. We continue to be the leading innovators in professional e-sports, the inaugural regular season of the Overwatch League is progressing well, with millions of viewers each week, and average viewing time of over an hour, which provides our multiple global broadcast partners and sponsors with access to a highly engaged and hard-to-reach audience.

The Overwatch League continues to thrive and our players are getting even broader recognition of their incredible talents in mainstream media. We see even greater opportunity with the playoffs and Grand Final still to come. We've begun sales of our next round of Overwatch League teams and over time, we believe our e-sports initiatives could rival traditional sports for audience interest, advertiser interest, sponsors, ticket sales, and merchandise sales, both virtual and physical.

Our 5-year growth plan is in it's earliest innings and our greatest challenge remains prioritization of opportunity, which is an enviable challenge to have. We have the finest talents in our industry and we continue to attract the very best and brightest people drawn to the excitement, opportunity, and rewards our company provides.

We have a very exciting remainder of this year. We thank you, our shareholders, as well as our talented driven teams around the world for all of your support.

Now, Coddy will review the highlights of our operations of this record quarter.

Coddy Johnson -- President and Chief Operating Officer

Thank you, Bobby. As Bobby said, Activision Blizzard had another record quarter, growing year-over-year and setting top and bottom line records. We were able to deliver this results because of our incredible teams, with some of the world's best creative, technical, and operational talent; because of our passionate communities and strong franchises which have some of the world's most dedicated and engaged players, spectators, and fans; and because our teams continue to find more and more ways to serve our companies in those franchises will ongoing, year-round streams of content, features and services, to that even in questions without large content releases, we can deliver records.

Before diving into the specifics of the quarter, it's worth building on what Bobby shared about one of the genres where we already have some of the world's largest franchises and communities, the shooter genre. The new battle round modes that have recently entered the space have compelling survivor mechanics and large in-game player pools. They have also brought tens of millions of completely new players into gaming, both on traditional platforms like console and PC, but also on newer performs for the genre, like mobile.

We are very, very encouraged by this. The shooter genre was already one of the largest and growing. We are already one of the largest players in that space. New modes that attract new players bring us new opportunities to expand our own communities and to benefit from the significant pipeline of innovation that we have planned for our franchises. As you saw this quarter, many of our franchises delivered records, with continued success across our strategic pillars of reach, engagement, and player investment.

On reach, the company had $374 million monthly active users this quarter. For the second quarter in a row, King stabilized its player base with overall monthly active users just slightly down from last quarter and overall engagement remaining strong, with King's daily time spent per user at record levels. Importantly, the largest part of King's audience, Candy Crush monthly active users on mobile, grew for the second quarter in a row. King plans to grow its network even further with new game launches planned for later this year and beyond.

Activision's successful 2017 launches for Call of Duty, Destiny, and Crash Bandicoot continue to draw large audiences, with 51 million monthly active users this quarter, up 7% over last year. Call of Duty grew year-over-year with players engaging across the franchise, including Call of Duty World War II. As we look ahead to the fall, Activision plans to again be No. 1 globally with Call of Duty Black Ops 4.

The studio behind the Black Ops franchise is Treyarch, known for innovation and highly engaging games, with Black Ops sub-franchise drawing over 200 million players and 15 billion hours played to date. Treyarch is now hard at work to deliver yet another amazing game and everything about it will be community and engagement first, giving players more of the gameplay, features, and modes that they love, and bringing all of it to players earlier than ever before, in October. Tune in on May 17th, when Activision will share more of the Black Ops 4 global reveal.

On our last call, we talked about the Destiny 2 sentiment issues and the plan to address them. The next step in that plan is the launch of Destiny 2's second expansion, War Mind, set for next week, featuring fresh updates and new content from our partner, Bungie, that makes the game play more rewarding and the end game more fulfilling. Bungie has a number of additional updates planned for the remainder of a year, as well as a large expansion in the fall.

Activision continues to bring its rich library of its own IP back to some of the world's most passionate fans. Crash Bandicoot's launch on PlayStation last year was a phenomenal success. Activision plans to bring Crash to new audiences this summer on additional platforms like PC, Xbox One and Switch. Then, in September, Activision will release a new remastered collection of Spyro the Dragon on PlayStation and Xbox. Like Crash, it'll be 3 games in 1 -- the Spyro Reignited Trilogy. What we know is that when we bring back our beloved IP in the right way, the community responds. The Spyro reveal trailer has already had tens of millions of views and pre-orders are well ahead of expectations.

Blizzard continues to engage audiences across platforms with 38 million monthly active users this quarter. World of Warcraft is releasing more content, more regularly than ever before, leading to higher engagement sequentially, over-performance versus the prior expansion at this point in time, and strong community participation with in-game purchases. The next expansion, Battle for Azeroth, launches worldwide on August 14th and is already off to a great start with pre-orders ahead of plan.

Hearthstone continued to reach and engage its large global audience last quarter. First, with a novel promotional bundle -- Year of the Mammoth -- which offered new and existing players a chance to expand their decks and game play at a great value. Blizzard also recently released a new player versus environment mode -- Monster Hunts -- on the back of the most recent expansion and engagement has been great so far.

Overwatch continues to grow its community and engagement remains strong, with the most recent seasonal event, Retribution, having the highest participation rate to date. Now, Overwatch's performance is driven by commitment to the player community. With its ongoing stream of seasonal events, maps, and heroes, Overwatch was recently recognized at BAFTA as the world's best evolving game. To that end, Overwatch has now added new and innovative links between the game and the spectating experience for Overwatch League, which brings me to our second pillar, deepening engagement.

E-sports is, as you know and as Bobby said, a priority for the company. It's where we celebrate player achievement and community passion, and provide awesome spectating experiences for a rapidly growing number of e-sports fans, nowhere more so than Overwatch League, which continues to reach millions each week. We are seeing increased engagement for the franchise overall, with the hours combined spent planning and watching Overwatch growing quarter over quarter. As Bobby said, this is even before the playoffs and Grand Finals later this summer.

Overwatch League and its partners also introduced new engagement programs like token drops, cheer emotes, and the new Twitch League pass, which deliver even better viewing experiences and new revenue opportunities. Given all this progress, there is very strong demand for Overwatch League expansion teams. The League will therefore be highly selective in its approach, adding just a handful of teams in key strategic markets by end of year.

More broadly, building out the Overwatch League allowed the company to develop a unique set of capabilities and infrastructure and we plan to begin applying them to other franchises in the near future, including the Call of Duty. To that end, Call of Duty's 2018 World League completed it's first phase in mid-April and continues to have strong viewership with cumulative hours watched doubling year-over-year.

Turning last to our third strategic pillar, player investment. In-game content features and services continue to both engage our fans and contribute significantly to our results, delivering a Q1 record of $1 billion of in-game net bookings. King continues to drive player investment and had its highest net bookings quarter since Q1 of 2015, with 3% sequential growth and 13% growth year-over-year. For its core business on mobile, King had its highest net bookings quarter ever. Just as importantly, the absolute number of paying players increased quarter-over-quarter. For over 4 years, King has had 2 of the top 10 games in U.S. app stores and now, for the second quarter in a row, King had the top 2 games with Candy Crush Saga and Candy Crush Soda Saga once again showing the remarkable durability of this franchise.

King is also ramping up it's advertising business. Supported by industry-leading viewability, completion, and ad recall rates, King continues to attract new advertisers and, importantly, has repeat advertisers now coming across multiple industries.

Finally, on plan investment, Call of Duty's strong launch last year led to growth year-on-year for in-game net bookings, with World War II's Q1 second only to that of Black Ops 3. There's more on the horizon for Call of Duty fans this digital season, including additional in-game content and seasonable events.

Looking back, we had a great quarter that was the result of strong franchises with incredible teams innovating on behalf of passionate and growing communities. Looking ahead, we have a growth path that builds on these strengths. As Bobby said, over time increasingly includes mobile as a primary building block that expands our player and spectator communities. We are investing in our core franchises on mobile. As we said on the last call, we hope to see earlier results later this year with more meaningful impact in future years.

In summary, our franchises are as strong as ever. We are investing in building internal capabilities for the future with mobile, e-sports, advertising, and other forms of content, and all the while delivering record results.

Spence will now review those numbers in more detail.

Spencer Neumann -- Chief Financial Officer

Thanks, Coddy. Today, I'll review our better-than-expected Q1 2018 results, as well as our outlook for the full year. Once again, we outperformed our guidance thanks to our incredibly talented teams, our strong global portfolio of owned intellectual property, our compelling offerings of year-round content, and our commitment to relentless prioritization of fiscal discipline.

Now, turning to the specifics of the quarter. I'll start with our segment results, where revenue and operating income grew by double-digit percentages year-over-year, setting a new Q1 operating income record while we continue to invest in new capabilities. This performance is primarily driven by our in-game content with net bookings growing by double-digit percentage year-over-year. King grew segment revenue by 13% year-over-year and operating income by 15%. Margins also improve year-over-year with segment operating margin at 36%.

The King team's focused on continually investing and innovating its live titles resulted in the Candy Crush franchise achieving its highest net bookings since Q4 of 2013.

Activision grew segment revenue and operating income substantially year-over-year on the strength of Call of Duty War II. Growth in the Call of Duty digital season in particular drove a Q1 record for segment operating margin. Blizzard grew segment revenue to a new Q1 record driven by in-game content across their portfolio of franchises, strong World of Warcraft pre-sales and the launch of the Overwatch League.

Margins decreased year-over-year as Blizzard continued to invest in key growth initiatives, including the Overwatch League, MLG Network, Battle.net, and mobile incubation efforts. We expect these strategic investments to pay off in the coming years.

Now, let's turn to our consolidated results. Before I continue, I wanted to quickly review ASC 606, the new accounting standard for revenue recognition. We've now adopted the new standard, which is reflected in our Q1 results. The prior period results have not been restated. While ASC 606 affects our GAAP revenue recognition and some quarterly timing, it's not expected to materially impact our annual segment results, cash flows, or financial performance as reviewed for internal management purposes. Please refer to our 10-Q for more information.

Also, unless otherwise indicated, I'll be referencing non-GAAP figures, so please refer to our earnings release for full GAAP to non-GAAP reconciliations. For the quarter, we generated record Q1 GAAP revenues of $1.97 billion, $145 million above our February guidance. This includes the net recognition of deferrals of $581 million. Net bookings were also a Q1 record of $1.38 billion, which is $104 million above our February guidance.

We generated an all-quarter record GAAP EPS of $0.65, and an all-quarter record non-GAAP EPS of $0.78, which was $0.13 above guidance. These figures include the net recognition of deferrals of $0.40.

From a cash and capital structure perspective, our business performance continues to deliver strong cash flow with record Q1 operating cash flow of $529 million, an increase of 29% over last year. We finished the quarter with approximately $5.3 billion in cash and investments, $4.4 billion in aggregate debt outstanding, and a net cash position of roughly $860 million.

Looking ahead, we're maintaining our balanced approach to capital allocation, with Board authorization to pay down as much as $1.8 billion in debt this year, and plans to pay a cash dividend on May 9th of $0.34 per common share, which is a 13% increase over 2017.

We also recently had positive credit rating developments, receiving an upgrade from both Moody's and S&P. Each agency has now upgraded our rating 3 times in about 2.5 years as we continue to demonstrate the strength, diversity, and recurring nature of our business.

Before I turn to the specifics of our upcoming slate and outlook, I'd like to provide some context. Based on the strength of our Q1 bead and our confidence in our franchises and pipeline, we're raising our full-year outlook modestly. As I said on our last call, we expect revenues and operating income for 2018 to be more back-end loaded than 2017, given the timing of our content slate relative to the prior year.

For example, in Q2 of last year, we had Black Ops 3 Zombie's remastered maps, the Crash launch, and the Diablo Necromancer update. While we don't have those launches in Q2 this year, we do have an amazing full-year lineup, as well as a continuous stream of content, features, and services throughout Q2 and the year, as I'll discuss in a moment.

In addition, the back half of this year features not only an exciting Call of Duty Black Ops 4, but also another major release for the year with Blizzard's World of Warcraft expansion.

Now, let's turn to the specifics of our slate and outlook for 2018. In terms of slate for Q2, for Activision, Call of Duty's digital season will continue with additional map packs, content, and events. Destiny 2 will release its second expansion, along with other content and feature updates. Crash will be released on additional platforms.

Earlier this month, Blizzard released a new Hearthstone expansion and Overwatch seasonal event. Blizzard also plans to release more content and features across its portfolio, including a second anniversary event for Overwatch. And of course, King will continue to deliver innovative live ops across its portfolio.

In addition, marketing spend will begin to ramp in Q2 to support our heavy back-half release schedule. For Q2 on a GAAP basis, we expect net revenues of $1.555 billion, including the net recognition of deferrals of $205 million dollars, product costs and game operations and distribution expenses of 22%, and operating expenses including software amortization of 57%.

We expect GAAP net interest expense of $68 million, a GAAP tax rate of 23%, GAAP and non-GAAP count of 771 million, and GAAP EPS of $0.26. For Q2 on a non-GAAP basis, we expect product costs and game operations and distribution expenses of 22%, operating expenses including software amortization of 48%. We expect non-GAAP net interest expense of $30 million, a tax rate of 20% percent, and non-GAAP EPS of $0.46, including the net recognition of deferrals of $0.15.

Now, turning to the 2018 full-year outlook. Our strong Q3-Q4 release slate includes not only Blizzard's World of Warcraft expansion, Battle for Azeroth, and Call of Duty Black Ops 4, but also Spyro the Dragon Reignited Trilogy, Destiny's major expansion, King's new launches, as well as the continued ramp of growth initiatives such as advertising.

Q1 over-performance benefited in part from timing and we still have a lot to deliver in the year. Still, as I just mentioned, we feel great about the remainder of the year and we're modestly raising our full-year outlook.

On a GAAP basis, we expect full-year revenues of $7.355 billion, including deferrals of $120 million, product costs and game operations and distribution expenses of 22%, and operating expenses including software amortization of 53%.

Our GAAP net-interest expense is expected to be $135 million, and our GAAP tax rate is expected to be 18%. We expect 775 million fully diluted shares, both for GAAP and non-GAAP and GAAP EPS is expected to be $1.79.

For 2017, on a non-GAAP basis, we expect product costs in game operations and distribution expenses of 22%, and operating expenses including software amortization of 44%. We expect non-GAAP net-interest expense of $94 million, a tax rate of 20%, and non-GAAP EPS of $2.46, including deferrals of $0.05.

In summary, our results this quarter once again illustrate the power of our franchises. We expect them to continue to consistently deliver into the future while we invest prudently in exciting new businesses. And as always, we'll focus on fiscal discipline and operational excellence across the company.

Now, I'll welcome Dennis, Mike, and Riccardo to join us for the Q&A portion of the call. Operator?

Questions and Answers:

Operator

Thank you. At this time, if you do have a question, please signal by pressing *1. Once again, that will be *1 for questions. We'll hear first from Eric Sheridan with UBS.

Eric Sheridan -- UBS -- Analyst

Thanks for taking the question. Maybe go back to Fortnite. I wanted to know if we can get any color on any impact on either engagement or monetization across some of your key titles and what are the key learnings you have as a management team from what you've seen from Fortnite that you might apply to your own titles? Thanks so much.

Spencer Neumann -- Chief Financial Officer

Sure, Eric. This is Spence. I'll take this one. So, as Bobby and Coddy mentioned earlier, the Battle Royale mode, it's contributing to the innovation and expansion we're seeing in the industry. It's not only bringing the younger audiences and millions of new gamers that both Coddy and Bobby mentioned into the shooter genre, where we're already a leader in space, but importantly it's also highlighting the ability to successfully bring immersive gaming experiences like Battle Royale to mobile in both Western and Eastern markets. That's really encouraging as we think about our future mobile opportunities and our growth opportunities, generally, as gaming becomes increasingly mainstream.

So, yes, we've seen some near-term impact from Battle Royale. But as you heard on the call today, our business continues to perform at record levels. We've got one of the broadest and most diverse portfolios of successful franchises across genres, across platforms, and across business models. We're continuously innovating within those existing franchises, and we've got a really exciting future development pipeline. So when you put all that together, we feel great about where we're positioned and our ability to continue to deliver on our growth plans going forward.

Bobby Kotick -- Chief Executive Officer

Eric, this is Bobby. I would just add the long history of our company. When we see people innovate in an interesting and impactful way, we are very quick to figure out how to capture inspiration from innovation. We as a company, in our DNA, in our culture, when we see things that appeal to our audiences, we are very good at being inspired by those.

Eric Sheridan -- UBS -- Analyst

Thanks so much.

Operator

We'll hear next from Evan Wingren with KeyBanc.

Evan Wingren -- KeyBanc -- Analyst

Thanks. Coming into Black Ops, how do you anticipate this edition of Black Ops will differ from historical Call of Duty games that you guys have released?

Coddy Johnson -- President and Chief Operating Officer

Thanks, Evan. This is Coddy. I'll take that one, and glad to. As I said in the prepared remarks, Black Ops 4 is going to be an awesome game. Given the community, it's really just an incredible experience for us. Gameplay features and modes, and we think not just for existing community members, but also for the significant number of players that are coming into the shooter genre.

There's a number of reasons for the strength of our belief in this. First, it's just Black Ops. It's the most played Call of Duty sub-franchise to date. That's saying something in a franchise like Call of Duty that's had the success it's had. The Black Ops, 3 iterations so far over 8 years have drawn in 200 million players and billions and billions of hours of game play. By the way, that's still ongoing. As we speak, there's millions of people playing in the Black Ops franchise right now.

It leads to the second advantage, which is what we see from billions of hours of gameplay, where we get to see in-depth in real time what really engages our players. Black Ops 4 build on all that and on everything Treyarch has learned about what players love to play. That's the third main area, is the confidence we have in Treyarch and their ability to execute on their creative vision. It's an incredible developer with a deep understanding of the community in the first-person genre, but also a real proven track record of motivation, including zombies and multiple multiplayer innovations that have really transformed the industry.

It's kind of the most important last point, which is that this is a game that's not going to just build on our strengths. It will continue to push the envelope in innovation. You'll see that in that in the core game itself, where we have a number of new exciting developments to roll out very soon. But also in the game's appeal on growth platforms like PC, where we've invested significant dedicated resources and design time to make sure we can deliver a great PC game to serve that community.

So on May 17th we'll have a lot more to say at the Black Ops 4 global reveal. I hope you tune in. You should.

Evan Wingren -- KeyBanc -- Analyst

Thank you.

Operator

We'll hear next from Chris Merwin with Goldman Sachs.

Chris Merwin -- Goldman Sachs -- Analyst

Thanks for taking my question. I was wondering if you could talk about how Overwatch League viewership has been trending relative to your expectations so far. I think in the prepared remarks you mentioned that you started the second round of team sales already, so maybe you could comment about how that's going and how we should be thinking about the value of the new teams you might sell? Thanks.

Bobby Kotick -- Chief Executive Officer

Chris, this is Bobby.

Mike Morhaime -- Chief Executive Officer, Blizzard

Hi, this is Mike. Go ahead, Bobby.

Bobby Kotick -- Chief Executive Officer

Mike, sorry, you go first, Mike.

Mike Morhaime -- Chief Executive Officer, Blizzard

Okay. I wanted to say we're extremely happy with both the launch and how the inaugural season for Overwatch League has been going so far. The League is definitely outperforming our expectations. Starting with viewership, viewership has been very strong and consistent each week. We've had millions of fans tuning in and our average viewer spends about an hour, over an hour watching each day.

Our broadcast partners, like Twitch and MLG, and our partners in China have been great. We've also been introducing some exciting new engagement programs that are unique to e-sports. We have partnered with some great sponsors, as well, like HP, Intel, Toyota, T-Mobile, and Sour Patch Kids. These sponsors now have access to a highly engaged and hard-to-reach audience.

We've been adding to our e-sports team. We've recently added professionals with strong sports, marketing, and broadcast expertise. We think that overall it's been a great success. We think it's good for the whole ecosystem. It's good for owners, our owners who have partnered with us on this exciting new venture. It's great for the players who have increased ability, as well as a great venue to showcase their talents. And it's great for the Overwatch franchise, which has benefited from increased total engagement.

With respect to team sales, we are currently in process. We've been meeting with potential new owners and new geographies. Demand has been really strong globally. We don't have an update on exact timing, but we do expect that new teams to the league this year. And so looking ahead, we're heading toward the end of our inaugural season. We'll be holding our playoffs, Grand Finals, and All-Star Game this summer. And so we've got a lot of great stuff planned. We're Very excited. And I'll turn it over to Bobby.

Bobby Kotick -- Chief Executive Officer

You said most of what I was going to say and probably better than I could've said it. But the only thing I was going to point out is that for our almost 40 million players, what I think the League has really done is it's reinforced that the thing that they spend hours and hours a day playing is something that they feel like is now being validated in a way that it never has before in a video game. And so all of our players in almost 190 countries around the world feel like this is truly a recognition of the sense of belonging that they get playing the game, and the sense of accomplishment they feel playing the game. I think more than anything, that's been an enormous benefit as a result of the creation of the League.

Chris Merwin -- Goldman Sachs -- Analyst

Thank you.

Operator

From Sanford Bernstein, we'll hear from Todd Juenger.

Todd Juenger -- Sanford Bernstein -- Analyst

Hi, thanks for taking the question. I'd like to ask about King if I could. So probably for Riccardo. Riccardo, what can you share with us about what you're continuing to do to drive the reach of King and just any other general insights you have to share with us on current trends you're seeing in your space? Thanks.

Riccardo Zacconi -- Chief Executive Officer, King

Hi, Todd. It's Riccardo. First of all, I'd like to say that to grow again the reach is a key priority for us. In Q1, we had 285 million monthly active users. This is slightly down sequentially, but we stabilized the active user base over the last several quarters, which I believe is a very important achievement. And if I look at the other metrics, these are also very encouraging. Daily active users were stable across the network and specifically, daily active users in the Candy franchise increased slightly.

Now, we have achieved this focusing primarily on the player experience in the live games. In the live games, we have increased the pace of releasing fresh content, so we have released more levels. We have released live operations. We have released new features. And we will do more of this. Further on, we believe there is an opportunity to grow the reach, not only innovating in the game, but also innovating in the marketing.

Now, to change the trend more meaningfully requires major new game launches. Our best teams are at work building a great pipeline, and we have, as we speak, games at various stages of development. We have games at the conceptual level, we have game prototypes, and we have games in production. We have games that we will release, as you heard earlier, this year.

Todd Juenger -- Sanford Bernstein -- Analyst

Fantastic. Thank you.

Operator

Next, we'll hear from Brian Nowak with Morgan Stanley.

Brian Nowak -- Morgan Stanley -- Analyst

Thanks for taking question. I'm curious for an update on Destiny. Maybe talk about some of the challenges you've seen on it over the course of the last six months and what are the biggest steps do you think you need to implement in Destiny to sort of fix it, bring back the users, and drive monetization higher?

Coddy Johnson -- President and Chief Operating Officer

Sure, thanks. This is Coddy. I'll take that one. The first thing, one of the best parts about Destiny is just how passionate and engaged that community is. The bright side of that is it gives us the chance to really build and iterate upon the feedback.

As I said in prepared remarks, the 3 things that we know we're going to do and that the community is looking for is make the play more powerful, provide more rewards, and make the end game more meaningful.

As we look ahead, we have a chance to continue to build on that, particularly in feedback that really engages the community. Maybe just as an example to share, Bungie recently hosted a large cohort of the top worldwide Destiny players, on site up at their studio in Seattle. They walked through the roadmap of features and updates they're planning, but they also gave hands-on, with not just War Mind, the expansion coming out shortly, but also with a part of the big fall release planned for later this fall. It was a very positive response to the three things that I just mentioned: the power, and the rewards, and the new end game.

But even more of what's coming this fall into the innovations and game play there, including to what we think will be an incredibly engaging new mode, one that introduces a whole new style of play for first-person-shooter gaming generally, and certainly for the shooters that Destiny created. It's a really exciting development. It's one of the things that we feel will really speak to the community when it comes out in the fall. We're really excited to share more about that. We won't do that until E3. So, with this next expansion and heads toward E3, we hope we'll see you there and be able to talk more about it.

Brian Nowak -- Morgan Stanley -- Analyst

Okay, great. Thanks.

Operator

We'll hear now from Mike Olson with Piper Jaffrey.

Mike Olson -- Piper Jaffray -- Analyst

Good afternoon. Maybe back to Riccardo on King. Riccardo, could you update the expected timeline for more material King ad revenue? Can you talk about some of your findings during this testing period and how extensive should we expect the roll-out to be as far as how much of the King portfolio is kind of ready for advertising? And then lastly, will advertising change any game design or game play mechanics? Thank you.

Riccardo Zacconi -- Chief Executive Officer, King

Hi, Mike. Riccardo here. Thank you for your questions. Let me start first giving an update on how the business is going. I'm very pleased with the progress that our ad business has made in Q1. We hit an internal milestone. The business is still relatively small, but was modestly profitable this quarter. So the goal is to build a strong long-term business and we will ramp up further investments during the year.

The other thing we've done is our key priority is to build a strong team and we have continued to build out our leadership team and our capabilities in this area. We have made some key hires in product development in B2B marketing and in measurement and insights. We have also continued to work on our next product offering. We have introduced new placements and new times where ads appear in the player journey.

As Coddy mentioned earlier, our ad products perform well. Players are completing our video views more than 90% of the time, and our ad recall rates are much higher than industry norm.

Our ad teams are working very closely with the game teams to create ad experiences that are supportive of the game play. So, for example, you can get a booster watching an ad and that can help you in the game.

In regards to the rollout of our ad business, currently ads are live in selling games, including the Candy Crush franchise. But we have not turned yet on ads for all the players in these games. We're taking a measured approach where we AB test before showing ads to new segments of players. So, we expect the ad business to ramp throughout the year, particularly in the second half as we serve more players.

Mike Olson -- Piper Jaffray -- Analyst

Thank you.

Amrita Ahuja -- Senior Vice President of Investor Relations

Operator?

Operator

We'll go now from Jefferies, Tim O'Shea.

Tim O'Shea -- Jefferies -- Analyst

Yes, thank you for taking my question. There are some other big markets like China, like mobile where free-to-play is the dominant business model already. So I'm just wondering if Fortnite's success, if it changes how you think about the $60.00 full-price business model for console games going forward? Thanks.

Coddy Johnson -- President and Chief Operating Officer

Sure, hey, Tim. This is Coddy. Thanks for the question. I'd say broadly, we think in a growing industry like ours that there's room for multiple business models to succeed in parallel. We see this just in our own portfolio across Activision Blizzard. Right now, today, we have a full range of business models: free-to-play, subscription, upfront payments, downloadable content packs, ongoing micro transactions, all of these succeeding at scale.

There's no one better positioned to see the nature of how you think about bringing a value proposition to consumers. We think it's true of our of our industry broadly, as well, where that direct, ongoing, interactive connection with players and audiences, it allows an enormous amount of iteration innovation on how to provide the most satisfying avenues for investment. We get to see that real time in the loops that we create and the things that we roll out, but not just interactive.

We think there's a number of areas across broad entertainment that prove this out as well, where multiple business models work at the same time. In linear viewership, you have Netflix and YouTube, both coexisting, both growing, both with their own kind of value propositions. For us, that's really the most important piece is the value proposition and Northstar, and for us that is deeply compelling and engaging gameplay.

When we get that right, when we find the fun and deliver that rich, meaningful, ongoing experience for players, we think we have to really deliver the right business model that supports and adds to the experience. We do think $60.00 games will continue to be an important part of that equation. We believe the level of investment in content and features and services that we provide will continue to make that a very attractive proposition for players.

Tim O'Shea -- Jefferies -- Analyst

Thanks, Coddy.

Operator

And our final question today will be from Colin Sebastian with Robert Baird.

Colin Sebastian -- Robert Baird -- Analyst

Great, thanks. My question is related to World of Warcraft, including higher engagement that you're seeing with the title. In particular, wondering what we should expect then in terms of WoW usage and engagement leading up to and following the launch of Azeroth this summer. Thank you.

Mike Morhaime -- Chief Executive Officer, Blizzard

Hi, Colin. This is Mike. Thanks for the question. Before I go into the expansion, I just want to quickly thank the World of Warcraft team for their amazing work in delivering great content for that community. Over the last couple of years, they have really shifted their pipelines and invested in not only the expansions, but also creating ongoing and an increasingly steady stream of content in between expansions, which is really important to keep people engaged all the way from one expansion to the next.

Battle for Azeroth is our next expansion. At Blizzard, we're really excited about this expansion. It's coming along great. It looks like our players are also very excited about it. As Coddy mentioned, our pre-sales are ahead of plan.

As always, this expansion features some exciting new features. I'm just going to mention a couple of them that we're particularly excited about. Island expeditions, where players will explore uncharted islands that include randomly generated elements. We've built AI that will give players a different experience every time they visit an island and that should create a highly dynamic experience.

Warfront, where players will join large groups and get the feeling of being part of a massive battle with different objectives. Warfront is sort of a throwback to Warcraft Real Time Strategy Routes. We think that players, veterans and new players, will really enjoy it. We design these new features with our players in mind. We think they should get increased engagement, as well as more replayable content. So that's really important with a game as massive as World of Warcraft. But this is some really exciting stuff that we're adding.

We just entered wider beta testing. Player feedback has been excellent so far. So, when the expansion launches in August, we are looking forward to millions more joining us in World of Warcraft.

Colin Sebastian -- Robert Baird -- Analyst

Thanks, Mike.

Operator

It's now time for closing remarks. I'd like to turn things over to our CFO, Spencer Newman.

Spencer Neumann -- Chief Financial Officer

Yes, thank you. I'll make this quick. I have a happy organizational announcement to make and I thought I'd do it while we have everybody on the call. First, I want to congratulate Amrita, our fearless leader of investor relations on her promotion. Amrita is going to become the next CFO of Blizzard, which we're ecstatic about. I hope you guys have all gained an appreciation for Amrita and her skills and capabilities over the years and her 3 years leading investor relations as the company has been on a tremendous growth curve.

We've exceeded the performance of all kinds of indices during that 3-year period. We really appreciate all of her efforts along the way. She's a star in the organization and we're looking forward to that next chapter for her.

And I'm excited to announce even though we've got very big shoes to fill, that we're thrilled with our new Head of Investor Relations that is coming on board next week. His name is Chris Hickey. Chris is someone who many of you on the call may know. He comes from Atlantic Equities, where he is not only an equity analyst, he's a co-founder of the firm. So, he's really an entrepreneur at heart as well. We couldn't be more happy to have him join our team. Chris knows our company well. He knows our industry. He's covered a number of industries across not just gaming but technology, payments, and services. So he'll be joining officially on May 14th.

Amrita, since she's not going far, will ensure a smooth transition as well as Colin and Jason and the team have done a terrific job supporting all of us, especially as Amrita's been transitioning down to Blizzard. So, hopefully you all will welcome Chris to the team. We're really happy to have him be part of the Activision Blizzard family. I'm sure you'll get to know a lot more of him in the coming months and years ahead. Thank you.

Operator

That will conclude today's conference. We do thank you all for joining us. You may now disconnect.

Duration: 49 minutes

Call participants:

Bobby Kotick -- Chief Executive Officer

Coddy Johnson -- President and Chief Operating Officer

Amrita Ahuja -- Senior Vice President of Investor Relations

Spencer Neumann -- Chief Financial Officer

Riccardo Zacconi -- Chief Executive Officer, King

Mike Morhaime -- Chief Executive Officer, Blizzard

Eric Sheridan -- UBS -- Analyst

Evan Wingren -- KeyBanc -- Analyst

Chris Merwin -- Goldman Sachs -- Analyst

Todd Juenger -- Sanford Bernstein -- Analyst

Mike Olson -- Piper Jaffray -- Analyst

Tim O'Shea -- Jefferies -- Analyst

Colin Sebastian -- Robert Baird -- Analyst

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