Activision Blizzard (ATVI 0.41%) still has all the tools needed to win in the competitive gaming industry. The company showed off that strength in its recent third-quarter earnings report, which included surprisingly high sales and earnings despite a continued shrinking of its gamer base.
CEO Bobby Kotick and his team held a conference call with investors to put those numbers into perspective with their long-term rebound plan. In the highlights below, executives describe how they're encouraged by the success of their latest launches, while cautioning shareholders to expect higher expenses during the crucial holiday quarter.
Unusually strong franchises
Our recent success with Call of Duty highlights the potential for our portfolio [of] fully owned intellectual property.
Rival Electronic Arts (EA -0.26%) has struggled in recent quarters to establish new brands in the ultra-competitive mobile gaming space, but Activision Blizzard had no problem in this arena over the summer. The Call of Duty franchise's mobile launch established it as a global powerhouse, with over 100 million downloads in its first month. The game landed in the top 10 highest-grossing charges in over 100 countries and regions, management said, and has quickly tripled the brand's reach.
Activision struck gold with its other major releases, too, with World of Warcraft Classic surpassing expectations. At the same time, Candy Crush continues to dominate the casual gaming niche. Overall, management is thrilled with the value of the intellectual property it has at its disposal. "We are excited by the momentum we are seeing in many of our franchises and the growth opportunities they present," COO Coddy Johnson said.
A competitive landscape
We are entering the holiday season with strong momentum, but at the same time, we wish to remain prudent as we focus on execution for the rest of the quarter.
-- CFO Dennis Durkin
Activision noted some weak spots in the portfolio, namely the Hearthstone and Overwatch brands, which are seeing sluggish engagement levels in a crowded industry. That factor played a role in the tech company projecting conservative sales for the holiday quarter, with revenue landing at $2.6 billion, just below the $2.7 billion that investors were expecting.
But management said the bigger factor in the weak outlook was caution, since so much depends on strong execution against hefty competition over the next few weeks.
Costs will be elevated for now
For the fourth quarter, we decided to increase investment in consumer marketing and user acquisition, as we aspire to reach more players in more countries on more platforms than ever before.
Activision isn't yet back to growing its gamer base, but management is doing everything it can to position the company for that achievement in 2020. To that end, executives plan to prioritize user growth over profits during the holidays in the Call of Duty mobile game and in other targeted areas.
That strategy will pressure earnings in the key fourth quarter, which means profits might underperform over the broader 2019 year. But if the company can win a bigger audience and higher engagement, as it did in the third quarter, then it will be easier to shift toward a profitability focus deeper into the next fiscal year.