Microsoft's (MSFT 0.92%) offer to buy Activision Blizzard (ATVI) for $68.7 billion couldn't have come at a better time, and it's not because of the legal battles the company faces over allegations of discriminatory practices within its workplace. The fourth-quarter earnings report shows that the company was likely to be in for a rough year in 2022.
Here are a few reasons that this deal makes more sense after Activision Blizzard's latest earnings results.
1. Call of Duty sales are declining
Call of Duty was the company's primary growth engine through most of the pandemic. In 2021, it generated 36% of Activision Blizzard's total bookings -- a non-GAAP (adjusted) measure of revenue. But the numbers don't lie: This franchise has hit its peak and is in decline.
The company doesn't disclose specific franchise sales, but it did disclose that total net bookings for Call of Duty on console and PC declined year over year in the last quarter. Investors can blame lower sales of Call of Duty: Vanguard, released in November. Activision also called out "lower engagement" in the free-to-play Warzone title.
As a result of weak sales in the company's top franchise, total company bookings declined 18% year over year to $2.5 billion in the fourth quarter, while operating cash flow fell 42%.
2. Bleeding players
Some fans have expressed dissatisfaction with the state of Call of Duty on social media, and it appears those players are moving on to other games. Monthly active users (MAUs) within the Activision segment, which includes Call of Duty, peaked at 150 million names in the quarter that ended in March of last year, and have declined in every quarter since:
|Monthly Active Users by Segment|
|Segment||Q1 2021||Q2 2021||Q3 2021||Q4 2021|
|Activision||150 million||127 million||119 million||107 million|
|Blizzard||27 million||26 million||26 million||24 million|
|King||258 million||255 million||245 million||240 million|
|Total||435 million||408 million||390 million||371 million|
Activision's MAUs would have likely continued to fall in the near term, putting pressure on the company's revenue and bookings performance.
With Call of Duty in decline, Activision is severely lacking in near-term growth catalysts. Diablo Immortal is scheduled for release in the first half of 2022, but it's doubtful that this mobile title can carry the company this year. Mobile games can be a tough nut to crack in terms of player monetization.
Altogether, the development teams have their work cut out this year to keep players engaged by releasing new updates for existing games. This adds more uncertainty to Activision's business in the near term.
3. Cashing out at the right time
Activision Blizzard's fourth quarter shows how important the Microsoft buyout is for the company right now. With a lack of new games to drive growth in the near term, there was no reason for market participants to send the stock higher. In fact, analysts' expectations for adjusted revenue to grow 6.8% in 2022 might have been on the generous side.
If the acquisition receives regulatory approval, Microsoft will be integrating Activision Blizzard at just the right time in mid-2023. Activision disclosed that it's working on an as-yet unannounced but entirely new franchise, which ties a nice ribbon on top just in time for Microsoft to begin monetizing Activision's deep catalog of video games and franchises.
Activision's current share price is 22% above the closing price the day before news of the acquisition surfaced. Obviously, shareholders will miss out on any long-term gains they might have realized, but those gains are not guaranteed. Given the company's near-term challenges, many shareholders are probably pleased with Microsoft's offer.
For embattled Activision Blizzard CEO Bobby Kotick, the deal looks like a stroke of legacy-building genius. The acquisition puts an exclamation point on three decades of market-thumping returns since he took over as CEO. A $1,000 investment 20 years ago would be worth $49,500 today.