Investors knew Activision Blizzard (ATVI) was going to have a rough year in 2019, but now that it's here, the results are a little shocking. First-quarter 2019 revenue and net income both dropped sharply, as competitors' games like Fortnite and Apex Legends attracted the attention of gamers.
The good news is that management's expectations for the year held steady. And if Activision Blizzard can just make it through 2019, there could be some bright spots in 2020.
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Activision Blizzard: The raw numbers
| Metric | Q1 2019 | Q1 2018 | Year-Over-Year Change |
|---|---|---|---|
| Sales | $1.83 billion | $1.97 billion | (7.1%) |
| Net income | $447 million | $500 million | (10.6%) |
| Diluted EPS | $0.58 | $0.65 | (10.7%) |
Data Source: Activision Blizzard, Inc. Q1 2019 earnings release.
What happened with Activision Blizzard this quarter?
The headline numbers tell the broad picture, but segment results reveal where strengths and weaknesses were. Perhaps somewhat surprisingly, mobile games held up best in early 2019.
- Activision's monthly active users (MAUs) fell from 53 million in Q4 2018 to 41 million in Q1 2019. Blizzard's MAUs declined 3 million to 32 million. King was the one segment that gained users, with MAUs up sequentially from 268 million to 272 million.
- The Activision Blizzard segment rose $5 million from a year ago to $317 million, but segment operating income dropped from $92 million to $73 million. Call of Duty continues to drive growth, and the launch of Sekiro: Shadows Die Twice helped results.
- Blizzard segment revenue was $344 million, down sharply from $480 million a year ago, and operating income was down from $122 million to $55 million. Q1 2018 was a tough comparison with the launch of Overwatch League and World of Warcraft expansion sales, but the decline is notable nonetheless.
- King segment revenue fell just $5 million to $529 million, and operating income dropped from $191 million to $178 million. Candy Crush active users were up versus a year ago, and advertising revenue more than doubled compared with a year earlier.
- Operating cash flow was down 14.9% to $450 million, and free cash flow was down 13.3% to $432 million.
- Esports continues to be a focus, even if it isn't driving revenue growth. Call of Duty eSports League has been announced, with five team sales already completed, so look for esports to be a more important part of this business going forward.
Management is hoping launches in 2019 will turn around some of the weak results. Call of Duty: Mobile will debut in North America, South America, and Europe later this year, and Candy Crush Friends Saga has driven King's growth. But with few new titles, it's going to be a slow year for Activision Blizzard.
What management had to say
CEO Robert Kotick continues to think Activision Blizzard has the right long-term strategy in betting on durable franchises rather than chasing the latest shiny object in gaming. During the conference call, he said, "In today's content landscape, our franchise-focused approach is more relevant than ever. Gamers are playing fewer games longer; creating and sustaining new franchises remains one of the most difficult tasks in the entertainment industry."
Long term, he may be right, but that doesn't mean 2019 won't be rough. New games from competitors are attracting attention, and Activision Blizzard's biggest launches won't come until late in the year, but as durable franchises are expanded it should help the company grow.
Looking forward
One thing that didn't change after the first quarter was guidance for 2019. Management still expects revenue of $6.03 billion and non-GAAP earnings of $1.85 per share. As long as Activision Blizzard can keep hitting its numbers and generating free cash flow, it will be able to bide time before impactful games are released later in 2019 and into 2020.
