The fourth quarter of 2017 was another great one for Activision Blizzard (ATVI), with revenue and earnings coming in ahead of management's own estimates. That may not be surprising given the company's recent history of beating expectations, but investors should be happy the streak continued.
What may be more important in the long term is the traction that growth initiatives like advertising and esports are gaining. Here's a look at the fourth quarter and what management sees for the future.
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Activision Blizzard: The raw numbers
| Metric | Q4 2017 | Q4 2016 | Year-Over-Year Change |
|---|---|---|---|
| Sales | $2.04 billion | $2.01 billion | 1.4% |
| Net income | ($584 million) | $254 million | N/A |
| Diluted GAAP EPS | ($0.77) | $0.33 | N/A |
| Non-GAAP EPS | $0.49 | $0.65 | (24.6%) |
Data source: Activision Blizzard.
What happened with Activision Blizzard this quarter?
The figures above tell part of the quarterly picture, but context is needed. Here are the important one-time impacts and the segment results for Activision Blizzard.
- Management recorded a loss of $1.03 per share based on the impact of the Tax Cuts and Jobs Act passed in December 2017.
- Operating margin was 11% on a GAAP basis and 25% on a non-GAAP basis, which beat guidance for 9% and 24%, respectively.
- User engagement is a key metric for Activision Blizzard, and results were mixed in the quarter. Activision monthly active users (MAUs) were up by 6 million to 55 million. Blizzard MAUs declined 2 million to 40 million, and King lost 3 million users to land at 290 million MAUs.
- On a segment basis, Activision revenue was $1.337 billion, up from $759 million in the third quarter, and operating margin was 47%. Blizzard revenue increased from $531 million to $599 million and operating margin was 27%. King revenue was $516 million, down slightly sequentially from $528 million, while operating margin was 31%.
- Call of Duty: World War II was the top-grossing console game worldwide, and with Destiny 2 the company had two of the top five console games in 2017.
- In-game content sales were over $1 billion in the fourth quarter and over $4 billion for the year. The strategy of selling content in-game, which can be refreshed more easily than a game launch, will drive more recurring revenue for Activision Blizzard.
- Overwatch League launched early in 2018, and while specific results weren't released, we know 10 million unique visitors watched league content and there was an average of 280,000 viewers on a per-minute basis. Management also mentioned the possibility of selling more expansion teams in the future, so keep an eye on that in 2018.
- Free cash flow in the fourth quarter was $1.09 billion. Over the past year, the company has gone from a net debt level of $1.67 billion to a net cash level of $340 million.
- A dividend of $0.34 per share was declared, an increase of 13% from a year ago, payable to shareholders of record March 30, 2018.
In general, Activision Blizzard had a lot of success with its new game launches from Activision and continued to report record results from Blizzard, despite the lack of new games in 2017. Looking into 2018, growth initiatives are what management says it's focused on, and they could transform the company into an even bigger -- and more diverse -- gaming company.
What management had to say
Activision Blizzard management has said the growth engine may just be getting started. New revenue streams will start contributing to the business in 2018, CEO Bobby Kotick said during the call with analysts:
We also believe in the growth potential of each new opportunity we're pursuing, whether in-game advertising, consumer products, cinematic productions or esports, all of these support our communities and help to drive engagement with our franchises. Each new experience we provide that enables our players to demonstrate their passion creates a virtuous cycle of engagement, investment and growth. It's still early days for many of these efforts, but making progress in these strategic growth areas will be an important focus for us in 2018 and beyond.
For now, we know these new products are gaining traction, but the financial impact won't be known for a few years. But you can look at advertising and esports as purely incremental sources of revenue, adding more leverage to the existing expense of developing games.
Looking forward
Activision Blizzard expects 2018 revenue to be $7.35 billion with operating margin on a non-GAAP basis of 34% and earnings of $2.45 per share. Guidance is only slight growth from 2017 revenue of $7.02 billion and earnings of $2.21, but given the company's history of underpromising and overdelivering, growth could be much stronger than they're guiding.
