Activision Blizzard Q3 2022 Financial Results

Financial Results (Source)

Bobby Kotick, CEO of Activision Blizzard, shared, “Our games are the result of passion and excellence. This comes from an environment that fosters inspiration, creativity, and an unwavering commitment to develop and support our talent. Our employees’ dedication and teamwork are at the heart of an extraordinary workplace that enables the magic embodied in our games. We look forward to continuing to release epic entertainment in service of our global community of players as a part of Microsoft, one of the world’s most admired companies. We continue to expect that our transaction will close in Microsoft’s current fiscal year ending June 2023.”

Financial Metrics

For the quarter ended September 30, 2022, Activision Blizzard’s net revenues presented in accordance with GAAP were $1.78 billion, as compared with $2.07 billion for the third quarter of 2021. GAAP net revenues from digital channels were $1.61 billion. GAAP operating margin was 27%. GAAP earnings per diluted share was $0.55, as compared with $0.82 for the third quarter of 2021. On a non-GAAP basis, Activision Blizzard’s operating margin was 34% and earnings per diluted share was $0.68, as compared with $0.89 for the third quarter of 2021.

Activision Blizzard generated $257 million in operating cash flow for the quarter as compared with $521 million for the third quarter of 2021.

Please refer to the tables at the back of this press release for a reconciliation of the company’s GAAP and non-GAAP results.

Operating Metrics

For the quarter ended September 30, 2022, Activision Blizzard’s net bookingsB were $1.83 billion, as compared with $1.88 billion for the third quarter of 2021. In-game net bookingsC were $1.36 billion, as compared with $1.20 billion for the third quarter of 2021.

For the quarter ended September 30, 2022, overall Activision Blizzard Monthly Active Users (MAUs)D were 368 million.

Microsoft transaction

As announced on January 18, 2022, Microsoft plans to acquire Activision Blizzard for $95.00 per share in an all-cash transaction. The transaction is subject to customary closing conditions and completion of regulatory review. The transaction, which is expected to close in Microsoft’s fiscal year ending June 30, 2023, has been approved by the boards of directors of both Activision Blizzard and Microsoft and by Activision Blizzard’s stockholders.

Conference Call and Earnings Presentation

In light of the proposed transaction with Microsoft, and as is customary during the pendency of an acquisition, Activision Blizzard will not be hosting a conference call, issuing an earnings presentation, or providing detailed quantitative financial guidance in conjunction with its third quarter 2022 earnings release. For further detail and discussion of our financial performance please refer to our quarterly report on Form 10-Q for the quarter ended September 30, 2022.

Selected Business Highlights

Successful content initiatives for key intellectual properties have positioned the company for a return to strong growth. Our expanded development teams are executing well as they deliver a wide range of compelling content across our portfolio. Following its October 28 launch, Call of Duty®: Modern WarfareTM II has broken records as the fastest-selling title in the history of the Call of Duty franchise. At Blizzard, the October 4 free-to-play launch of Overwatch® 2 has driven community engagement to new highs. These results build on the recent strong launch for Diablo® Immortal™ and a substantial content rollout underway for World of Warcraft®. At King, the Candy Crush™ franchise again delivered a record performance.

While the company remains cognizant of risks including those related to the labor market and economic conditions, we expect to expand our global audience, deepen community engagement, and deliver renewed growth in player investment in the fourth quarter and beyond. The company expects fourth quarter GAAP revenue to be 5% lower year-over-year or better. Net bookings and total segment operating income are each expected to grow at least 20% year-over-year.

Third quarter net bookings declined 3% year-over-year on a reported basis, and were slightly higher year-over-year on a constant currency basisE. The company continued to deliver strong results on the strategically important mobile platform, with mobile net bookings growing over 20% year-over-year to approximately $1.0B. Third quarter segment operating income increased versus the second quarter for each of Activision, Blizzard and King.

Blizzard

October 4 saw the global launch of Overwatch 2, with a free-to-play model designed to allow more people than ever before to experience the acclaimed team-based action game. Over 35 million people played the game in its first month, including many who were new to Overwatch. The expanded community is engaging deeply, with average daily player numbers for the first month of Overwatch 2 more than double that of its acclaimed predecessor. Player investment is also off to a strong start, positioning the title to be a meaningful contributor to Blizzard’s business in the fourth quarter. Blizzard is looking forward to delivering an ambitious slate of regular seasonal updates for Overwatch 2 that introduce new characters, maps and modes, including the game’s much-anticipated PvE mode planned for 2023.

In the Warcraft franchise, the September 26 release of World of Warcraft: Wrath of the Lich King® Classic contributed to a strong increase in WoW reach and engagement at the end of the third quarter. On November 28, Blizzard will release World of Warcraft: DragonflightTM, the innovative next expansion for the modern game, as the team increases the cadence of WoW content for the community. Elsewhere in the Warcraft franchise, mobile title Warcraft: Arclight RumbleTM is progressing well through regional testing.

On mobile, Diablo Immortal expanded its global reach with a strong launch in China in July. The title reached the top of the download charts and has ranked in the top 10 grossing mobile games in China since launch. Around the world, Diablo Immortal is being supported with major new content, features, and events aimed at keeping the community engaged. Meanwhile, work on Diablo IV and its substantial ongoing post-launch content continues to progress very well ahead of its launch planned for 2023.

Blizzard’s third quarter segment revenue grew double-digits year-over-year against a year ago quarter that included the release of Diablo II: ResurrectedTM. The third quarter benefited from the recent launch of Diablo Immortal, while Warcraft franchise net bookings were stable year-over-year. Segment operating margin was lower year-over-year, due to marketing investment to support the strong release slate and the shift in the mix of business in the quarter.

Currently, we have licensing agreements with a third party covering the publication of several Blizzard titles in China. These agreements, which contributed approximately 3% of Activision Blizzard’s consolidated net revenues in 2021, expire in January 2023. We are in discussions regarding the renewal of these agreements, but a mutually-satisfactory deal may not be reached. We continue to see substantial long-term growth opportunities for our business in the country. The co-development and publishing of Diablo Immortal is covered by a separate long-term agreement.

Balance Sheet

Cash and short-term investments at the end of the second quarter stood at $10.9 billion, and Activision Blizzard ended the quarter with a net cashF position of approximately $7.3 billion.

1 Based on data.ai Intelligence

A Net effect of accounting treatment from revenue deferrals on certain of our online-enabled products. Since certain of our games are hosted online or include significant online functionality that represents a separate performance obligation, we defer the transaction price allocable to the online functionality from the sale of these games and then recognize the attributable revenues over the relevant estimated service periods, which are generally less than a year. The related cost of revenues is deferred and recognized as an expense as the related revenues are recognized. Impact from changes in deferrals refers to the net effect from revenue deferrals accounting treatment for the purposes of revenues, along with, for the purposes of EPS, the related cost of revenues deferrals treatment and the related tax impacts. Internally, management excludes the impact of this change in deferred revenues and related cost of revenues when evaluating the company’s operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team. Management believes this is appropriate because doing so enables an analysis of performance based on the timing of actual transactions with our customers. In addition, management believes excluding the change in deferred revenues and the related cost of revenues provides a much more timely indication of trends in our operating results.

B Net bookings is an operating metric that is defined as the net amount of products and services sold digitally or sold-in physically in the period, and includes license fees, merchandise, and publisher incentives, among others, and is equal to net revenues excluding the impact from deferrals.

C In-game net bookings primarily includes the net amount of downloadable content and microtransactions sold during the period, and is equal to in-game net revenues excluding the impact from deferrals.

D Monthly Active User (“MAU”) Definition: We monitor MAUs as a key measure of the overall size of our user base. MAUs are the number of individuals who accessed a particular game in a given month. We calculate average MAUs in a period by adding the total number of MAUs in each of the months in a given period and dividing that total by the number of months in the period. An individual who accesses two of our games would be counted as two users. In addition, due to technical limitations, for Activision and King, an individual who accesses the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard, an individual who accesses the same game on two platforms or devices in the relevant period would generally be counted as a single user. In certain instances, we rely on third parties to publish our games. In these instances, MAU data is based on information provided to us by those third parties, or, if final data is not available, reasonable estimates of MAUs for these third-party published games.

E Year-over-year growth on a constant currency basis is calculated by translating current quarter local currency amounts to U.S. dollars based on prior period exchange rates. These amounts are compared to the prior period to derive constant-currency year-over-year performance. We present constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of currency rate fluctuations.

Total net bookings declined by 3% year-over-year for the third quarter of 2022. On a constant currency basis, total net bookings increased 1% year-over-year for the third quarter of 2022 as currency rate changes negatively impacted the quarter by 4%.

Activision segment net revenues declined by 25% year-over-year, Blizzard segment net revenues grew by 10%, and King segment net revenues grew by 6% for the third quarter of 2022. On a constant currency year-over-year basis, Activision segment net revenue declined 22%, Blizzard segment net revenue grew 16%, and King segment net revenue grew 11% for the third quarter of 2022, as currency rate changes negatively impacted Activision segment net revenue by 3%, Blizzard segment net revenue by 6%, and King segment net revenue by 5%.

F Net cash is defined as cash and cash equivalents ($7.7B as of September 30, 2022) and short-term investments ($3.2B as of September 30, 2022) minus gross debt ($3.7B as of September 30, 2022).