Activision Blizzard Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2021

There are 16 speakers on the call.

Operator

Good afternoon, and welcome to the Activision Blizzard Third Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Chris Hickey, Senior Vice President of Investor Relations, please go ahead.

Speaker 1

Good afternoon, and thank you for joining us today for Solutions Blizzard's Q3 2021 conference call. With us are Bobby Kotick, CEO Daniel Alegre, President and COO and Armin Zuza, CFO.

Speaker 2

And for Q

Speaker 1

and A, Rob Kostich, Mike Ibarra and Heman Sacnini, the leaders of Activision Blizzard and King, respectively, will also join us. I would like to remind everyone that during this call, we will be making statements that are not historical facts. The forward looking statements in this presentation are based on information available to the company as The date of this presentation, and while we believe them to be true, they ultimately may prove to be incorrect. A number of factors could cause the company's actual These include the impact of the COVID-nineteen pandemic, The risk factors discussed in our SEC filings, including our 2020 Annual Report on Form 10 ks and Q3 2021 Form 10 Q and those on the slide that is shown. The company undertakes no obligation to release publicly any revisions to any forward looking statements to reflect events or circumstances after today, November 2, 2021.

Speaker 1

We will present both GAAP and non GAAP financial measures during this call. We provide non GAAP financial measures, which exclude the impact of expenses related to stock based compensation the amortization of intangible assets and expenses related to acquisitions, including legal fees, costs, expenses and accruals expenses related to debt financings and refinancings restructuring and related charges The associated tax benefit of these excluded items and significant discrete tax related items, including amounts related to changes in tax laws, These non GAAP measures are not intended to be considered in isolation from, as a substitute for or superior to our GAAP results. We encourage investors to consider all measures before making an investment decision. Please refer to our earnings release, which is posted on www.actvisionblizzard.com For a full GAAP to non GAAP reconciliation and further explanation with respect to our non GAAP measures, there is an earnings presentation which you can access with the webcast, which will be posted to the website following the call. And now, I'd like to introduce our CEO, Bobby Tothic.

Speaker 3

Thank you, Chris, and thank you all for joining us today. As I said during our last earnings call, I want Activision Blizzard to be the leader in our industry for workplace culture. Since then, The leadership team and I have been hard at work listening to employees and implementing meaningful changes. I'd like to review the actions we've taken over the past few months with you today. As we've made clear in certain instances relating to workplace culture, We should have done a better job ensuring our values were embraced across all parts of the company.

Speaker 3

Over the last few years, we've been focused on the improvements that are necessary to become a model workplace. We are of course taking these actions because any single instance of wrong Conduct at our company is unacceptable. But these actions we're taking are also the right ones for our business success. We can't achieve our business ambitions without the very best talent. People with the talents we need Have more alternatives for highly paid work opportunities than ever before.

Speaker 3

If we don't constantly evolve as a great place to work, We won't retain or attract the talent we need to realize our tremendous potential. As a company, we have more opportunities ahead of us than I've seen in almost all the years I've led the company. The success we've achieved thus far is the result of an overwhelmingly large number of extraordinarily talented people with high integrity And good values focused on delivering great games to our players, which has resulted in superior shareholder returns. This company and many of its leaders and so many of our talented employees past and present have shown strength of will dedicated to the achievement of bold aspiration. Our commitment to make Activision Blizzard the most welcoming and inclusive company in the world Will be accomplished the same way our industry leadership has been accomplished.

Speaker 3

Focus and commitment, persistence, Strength of WIL, the unwavering ambition of truly talented people with equally unwavering integrity and the continuous commitment to improvement. In September, we announced a comprehensive agreement with the U. S. Equal Opportunity Commission, which is subject to court approval to strengthen policies and programs intended to further improve the prevention of harassment, Discrimination and Related Conduct. As part of this agreement, we'll establish an $18,000,000 fund to compensate those who have experienced such behavior With respect to pay equity, another critically important issue that we have always worked hard to ensure we achieve, We recently disclosed to employees the results of a review of 2020 pay equity at our company, which was conducted by an independent research firm.

Speaker 3

The U. S. Analysis showed that women on average earned slightly more than men for comparable work in 2020. And we're committed to Last week, We also announced a number of important new workplace initiatives. We announced the 0 tolerance harassment policy company wide.

Speaker 3

This includes tougher rules and greater consistency across the organization to make certain reports are always properly and promptly handled. Now any Activision Blizzard employee found through our new investigative processes and resources To have retaliated against anyone for making a compliance complaint will be terminated immediately. In many other instances of workplace misconduct, we will no longer rely on written warnings, terminations will be the outcome, including in most cases of harassment based on any legally protected category. Future employment contract And Equity Awards will state that termination for these reasons will result in immediate forfeiture of future compensation. Another is our pledge to increase the percentage of women and non binary people in our workforce by 50%.

Speaker 3

Today, approximately 23% of our global employee population identifies as women or non binary. So within the next 5 years and hopefully faster, we will seek to increase our percentage of women and non binary professionals to more than 1 third across the entire company. To further this commitment, we'll be investing an additional $250,000,000 Over the next 10 years in initiatives that foster expanded opportunities in gaming and technology for underrepresented communities. Additionally, based on feedback from many employees, we are waiving required arbitration of future individual sexual harassment and discrimination claim. That means for any employee who chooses not to arbitrate an individual claim of sexual harassment, Unlawful discrimination or related retaliation arising in the future, the company will waive any obligation to do so.

Speaker 3

As we report regularly on our progress in our financial results, you'll continue to hear more about our workplace initiatives, which we firmly believe will help us remain one of the world's most successful entertainment companies. I want to thank our employees for their continued commitment to each other, the company and our players. For those employees past and present who have been brave enough to step forward and share their stories, we continue to be committed to investigating all claims thoroughly And holding people accountable. For those employees who have shared feedback, thoughts, suggestions, concerns and complaints, And there are many of you. We hope you can see from our actions that we are listening.

Speaker 3

We are evolving our organization through your ideas Your resilience in these challenging times is inspiring. We expect that we'll continue to face challenging and negative media attention Regardless of our progress, but we are determined to stay focused on providing great opportunities and the very best work environment for our talented employees Thank you for your participation today. And now I'll turn the call over to Daniel to share the results of our operations for the last quarter.

Speaker 2

Thank you, Bobby. Before I discuss our operating results, I want to take this opportunity to thank our incredibly talented teams across the entire company, We share the passion to make exciting and groundbreaking experiences for our players all around the world. Activision Blizzard's 3rd quarter results were above our outlook. Our monthly active users and time spent in our content were consistent with the year ago level even as regions continued to reopen, While net bookings and operating income grew year over year. This performance again illustrates the structural expansion in our largest franchises As we execute our strategy of delivering gaming experiences across new platforms with more regular content and leveraging multiple commercialization models, including free to play.

Speaker 2

Execution against this strategy enables us to grow our communities, including in geographies outside of our traditional regions to deepen engagement and to create more opportunities for player investment. Critical to this is a continued investment in creative talent. We continue to grow our developer headcount in the Q3 and have increased our development organization by hundreds of talented professionals year to date, including announcing new studios and expansions in multiple new cities globally. This geographic diversification strategy is paying dividend, allowing us to tap into critical talent pools in all corners of the world. As we grow our teams with new hires, We are keenly aware of the importance and responsibility we have to ensure a safe working environment for our people.

Speaker 2

This is our number one priority. Specifically, in recent months, we have taken actions that resulted in the departure of a number of individuals across the company. Additionally, we have seen increased competition in the market for our talent and higher voluntary turnover that has partly offset our success in hiring. As we have worked with new leadership in Blizzard and within the franchises themselves, particularly in certain key creative roles, It's become apparent that some of the Blizzard content planned for next year will benefit from more development time to reach its full potential. While we are still planning to deliver a substantial amount of content from Blizzard next year, we are now planning for a later launch for Overwatch 2 and Diablo IV that originally envisaged.

Speaker 2

These are 2 of the most eagerly anticipated titles in the industry, And our teams have made great strides towards completion in recent quarters. But we believe giving the team some extra time to complete production and continue growing their creative resources to support the titles after launch will ensure that these releases delight and engage their communities for many years into the future. These decisions will push out the financial uplift that we had expected to see next year, but we are confident that this is the right course of action for our people, our players Starting with Activision, where on average 119,000,000 people engaged in our content monthly in the 3rd quarter. Call of Duty continues to sustain reach, engagement and player investment well above levels seen prior to our introduction Free to play experiences across console, PC and mobile. Monthly active users in the franchise were consistent year over year on console, console and PC engagement trends were consistent with typical trends as we moved away from the premium launch, Even this regions continue to reopen through the quarter.

Speaker 2

Console and PC mouse and time spent exhibited very similar retention from Q2 to Q3 as our experiences in prior year years. In game player investment on console and PC remained well above pre warzone level at approximately 3 times the level of Q3 twenty nineteen and strong conversion from free to play Premium sales higher than in any Q3 prior the launch of Warzone. And our teams are all set to launch the next phase of exciting new Call of Duty content for players worldwide. This Friday sees the release of Call of Duty: Vanguard and on December 2, we will roll out Call of Duty Warzone Pacific, the biggest update to the Warzone experience since launch. As we've demonstrated with Modern Warfare and Black Cold War, the release of Vanguard is just the first step in delivering the community an incredible amount of ongoing content, live engagement and much more.

Speaker 2

Across campaign, zombies, multiplayer and Warzone, there's no bigger experience or better value over the duration of the game's lifecycle across our premium and free to play business. And then we expect Warzone Pacific and its new Caldera map To take the free to play experience to another level, the premium and free to play experiences are more integrated than ever before, sharing the same engine, Weapon Integration and Content Integration as well as Call of Duty standards of cross play, cross progression and more. Both titles are set to benefit from Ricochet, a new anti cheat technology aimed at addressing one of the key improvements requested by the community. We are confident that our players are in store for an incredible set of experiences this holiday season and beyond. On mobile, Call of Duty net bookings grew over 40% year over year in the 3rd quarter, driven by double digit growth in the West and a continued contribution from the game in China.

Speaker 2

The team continues to refine the player experience, Building on learnings from the title's 1st 2 years to optimize content, events and features for our communities around the world. And at the same time, we continue to ramp our teams working on new mobile title within the Call of Duty universe. In addition to hiring a substantial number of developers over the last quarter, we are pleased to announce last week the acquisition of Digital Legend, A Barcelona based mobile game developer that will further bolster the world class team we are assembling. Turning to Blizzard, Monthly active users were 26,000,000 in the 3rd quarter. For Diablo, our plan to deliver an era of unprecedented levels of content The franchise has experienced a strong start with the September release of Diablo II: Resurrected, the return of 1 of the most acclaimed titles and PC Gaming history.

Speaker 2

1st week of sales of the title were the highest recorded for remaster from our company And we have seen strong ongoing demand, particularly in Korea, where the game is proving one of the most popular titles in Internet game rooms. With such strong engagement, the team is now working hard to ensure that players have the smoothest possible experience as they explore the world of Sanctuary. This is just the first step in Blizzard's plans for the franchise. On mobile, Diablo Immortal is in public testing and remains on track for release in the first half of And with Diablo 4 set to be the foundation for great experiences for PC and console fans over many years, We believe the pieces are in place to expand and serve the Diablo community better than ever before. Turning to Overwatch, where millions of people continue to engage in both the game and the e sport, September saw the grand finals of the Overwatch League become the most Starting in the spring, the next season of Overwatch League will run on an early build of Overwatch 2's New 5v5 competitive multiplayer mode, giving the community a fantastic view into the development team's strong work on the next iteration in the franchise.

Speaker 2

And the team plans to follow this with new content and initiatives to engage existing, returning and new Overwatch players next year. Within the Warcraft franchise, World of Warcraft reach and engagement continues to benefit from the combination of the modern game and classic under a single subscription. The 2 games offer players more ways to engage and create more opportunities for our teams to deliver compelling experiences to fans of the franchise. With deep engagement across both Classic and Modern, Wow! Overall subscriber base is stronger than we typically see at this point after a modern expansion launch.

Speaker 2

And for 2021, World of Warcraft is on track to deliver its strongest engagement and net bookings outside of a modern expansion year in a decade. Our Wow! Team has been rolling out numerous quality of life improvements across the modern and classic games franchise in response to player feedback. And today, the modern game released its latest content update with classic soon to launch fresh servers with greater challenges to engage the passionate community. Hearthstone net bookings were stable year over year in Q3.

Speaker 2

And in October, the team launched Mercenary, an innovative role playing mode that gives the Hearthstone community an entirely new way to play the game. Initial results for mercenaries have been very encouraging, And we believe Hearthstone is positioned for a return to year over year growth in net bookings in the 4th quarter. Across the Warcraft franchise, our teams are working on a substantial pipeline of content planned for next year, including new experiences in Classic and Modern Wow, More innovations in Hearthstone and getting all new Mobile Warcraft content into players' hands for the first time. Blizzard cannot wait to share more details on their plan. The King business continues to deliver fantastic results with very strong year over year trends for both in app purchases and advertising.

Speaker 2

NOWs were $245,000,000 in the 3rd quarter. King's deep capabilities and live operations are driving engagement both existing and new players, hours played across the King portfolio grew year over year in the Q3 with players responding positively to a more frequent cadence of compelling in game content and events for key title. The team's prior actions to grow payer conversion Alongside ongoing strong execution and user acquisition saw payer numbers growing by a double digit percentage versus the year ago quarter. These initiatives drove over 20% year over year growth in in game net bookings for Candy Crush, With Candy once again the top grossing game franchise in the U. S.

Speaker 2

App Stores. Additionally, at the end of the Q3, King launched The All Stars U. S. Tournament, a competitive event that saw Candy Crush Saga players battle to be crowned the ultimate Candy Crush All Star. The event has driven meaningful increases in installs, game rounds played and in app purchases in recent weeks, highlighting competitive gameplay For several quarters now, King has been accelerating and refining content delivery in Farm Heroes, its 2nd largest franchise.

Speaker 2

This work continued to bear fruit in Q3 and year to date in game net bookings have grown around 20% year over year. And finally, King's advertising business again grew robustly with quarterly revenue growing sequentially and year over year to a new high. Both volume and pricing grew strongly year over year, benefiting from the team's growing relationships with demand partners and the ongoing ramp of new categories of advertisers. In summary, Q3 saw solid year over year growth in the business, And we see substantial growth ahead for our portfolio of internally owned IP. While we have seen some slippage in the release schedule for specific titles at Blizzard, We could not be more excited about our plans to unlock the full potential of our largest franchises and to drive meaningful expansion in our reach, engagement and operating performance.

Speaker 2

This is only possible because of our team. I want to share an announcement about the leadership of one of those teams. Jen O'Neil, who has been Co Lead of Blizzard, has been a passionate advocate for bringing positive changes to the video gaming industry and has been doing so as Board member of Women in Gaming International or WIGI, a non profit organization that cultivates and advances the quality and diversity in the global games industry. Jen has decided to leave the company at the end of the year, And we have agreed to support Jen in her involvement with Wiggi by making a donation to Wiggi in honor of Jen. In her remaining months for the company, Given her commitment to this work, Jen will build the foundation of programs funded by the grant.

Speaker 2

As such, Mike Ibarra will take on Jen's leadership responsibility. It is great to see how employees at our company are committed to bring about the positive changes in our industry and beyond, and our leadership team stands behind these efforts. Now, I will hand over to Armin, who will provide more color on our financial results and outlook. Arvind?

Speaker 4

Thanks, Daniel. First, I'd like to reiterate That ensuring a workplace that provides opportunity for all in the most welcoming and inclusive way is our top priority. Today, I'll review our Q3 results as well as outlook for the Q4 and full year 2021. Our 3rd quarter results were ahead of our prior outlook, with year over year growth Net bookings, revenue, operating income and EPS against difficult year ago comparable. Importantly, each of these metrics has also grown year over year on a year to date basis.

Speaker 4

So even as reasons continue to reopen, our business is operating at significantly greater scale And that's been prior to the successful growth initiatives across our largest franchises. Let me start with our consolidated financial results. Unless otherwise indicated, I'll be referencing non GAAP figures. Please refer to our earnings release for full GAAP to non GAAP reconciliation. Now for the quarter, we generated quarter 3 GAAP revenues of $2,070,000,000 $100,000,000 above our overall outlook.

Speaker 4

This includes net recognition of deferred of $190,000,000 Net bookings of $1,880,000,000 were $30,000,000 above our August outlook. And we generated quarterly GAAP EPS of $0.82 and quarter 3 non GAAP EPS of $0.89 which was $0.14

Speaker 5

above our guidance.

Speaker 4

These figures include the net recognition of the first of 0 point 17 Quarter 3 EPS included a $0.03 from an unrealized loss on an investment as well as the benefit from a lower than anticipated tax rate in the quarter. Now turning to cash flow and the balance sheet. Quarter 3 operating cash flow was $521,000,000 More than doubled the year ago level driven by lower cash taxes and favorable working capital movements. Our cash and investments at the end of September were approximately $10,000,000,000 and we ended the quarter with a net cash position of approximately 6 $400,000,000 Growing shareholder value through capital allocation is a key focus for us. And over the long term, investors should expect a balanced approach across investing in creative talent in our own business, Strategic M and A and returning cash to shareholders via share repurchases and dividends.

Speaker 4

Now let me turn to our segment results. Activision revenue was $641,000,000 Segment revenue was lower year over year as expected in our outlook. This was due to the launch of 20 Fox in the year ago quarter and declines in color beauty upfront and in game net bookings Against the quarter that benefited from Cheltenham Mendez and the early ramp of quarter. Year to date, Net bookings for the Activision segment and the Call of Duty franchise were higher year over year, with the franchise now consistently operating at greater And before our free to play and mobile initiatives, Activision's 3rd quarter operating income was $244,000,000 and operating margin was 38%. Business revenue of $493,000,000 Grew 20% year over year, driven by the successful launch of Diablo II: Resurrection.

Speaker 4

Year to date, Net bookings for Blizzard and World of Warcraft's largest franchise were higher year over year. Blizzard's 1st quarter operating income was $188,000,000 with an operating margin of 38%. King delivered another record quarter. Revenue grew 22% year over year to RMB652 1,000,000. That's a new high.

Speaker 4

1st quarter Indian net bookings grew in the mid teens year over year, but advertising grew approximately 60%. King's 3rd quarter operating income was a record $303,000,000 with an operating margin of 46%. The team's strong execution across life operations, marketing and advertising We have record for both revenue and operating income for the Q3 and year to date. King's ability to delight and engage players The robust live operation provides a lot of learning that we plan to apply to both Activision and Blizzard and not just in mobile. Looking across our segment, in game net bookings were $1,200,000,000 roughly flat year over year And approximately $500,000,000 higher than the level of Q3 of 2019.

Speaker 4

And during the Q3, mobile networking grew over 20% year over year, driven by the strength of both Activision and King. Consumer spending and advertising within our mobile content was almost $1,000,000,000 in the quarter, And we see substantial room for further growth as we take each of our key franchises to the largest and fastest growing platform, Leveraging our creative and life operations capabilities was Activision Blizzard and gaming. Now let me turn to our outlook for the Q4 and the full year. With regard to our slate, in addition to ongoing live ops Content across the portfolio. The Q4 will see activism release Call of Duty Vanguard this Friday, November 5, Followed by the biggest Wasson update yet, Wasson Pacific on December 2.

Speaker 4

This has launched the new mercenaries mode in Hearthstone In mid October, we released the next Hearthstone expansion later this quarter. And King continues to support Candy Crush and other games across his portfolio With numerous seasonal events and new features, our teams have done a phenomenal job building this content Even if many of them continue to work from home, and we can't wait for our players to get their hands on these experiences. With that said, we remain prudent in our revenue assumptions for the Q4. And regarding cost, we have decided to further step up investment In mobile marketing, given the strong returns we are currently seeing and inter compliance in this organization, We expect the earnings impact of these investments to be offset by a lower tax rate and we continue to expect full year earnings per share To be up strongly year over year and comfortably ahead of the outlook provided to the beginning of the year. Now let me get into the specifics.

Speaker 4

For quarter 4, on a GAAP basis, we expect revenues of $2,020,000,000 Including net debt growth of $763,000,000 we expect net bookings of $2,780,000 We expect GAAP operating margin of 30%, a tax rate of 26%, GAAP and non GAAP share count of 785,000,000 and EPS of $0.54 For quarter 4 on a non GAAP basis, we expect a tax rate of 25% and non GAAP EPS of $0.62 including net deferred of $0.67 This means that on a GAAP basis for 2021, we now expect Revenues of $8,660,000,000 including the net recognition of deferrals of $10,000,000 We now expect net bookings of 8.6 $5,000,000,000 We expect GAAP operating margin of 37%, a GAAP tax rate of 18%, GAAP and non GAAP share count of $84,000,000 and GAAP EPS of $3.27 For 2021, on a non GAAP basis, we expect a tax rate of 17% and non GAAP EPS of $3.70 Including net deferred or fixed income. With respect to risks, as you've heard, we're taking action To address stakeholder concerns and the adverse consequences to our business from workplace issues, If we experience further adverse publicity regarding our company and executives, increased competition per talent, Voluntary turnover, significant reduced productivity or other negative consequences relating to these issues, Our business likely would be adversely impacted, but therefore carefully monitoring all aspects of our business by any such impact And we're taking actions to help address them.

Speaker 4

Now I'd also like to provide an update on how we are planning for next year specifically. As a starting point, Our business continues to operate at much greater scale, and we have clear line of sight to expanding the reach, Engagement and financial performance of our business further in the coming years as we apply the framework that has worked So well for Paula Beauty and Candy Crush to other franchises in our portfolio. At the same time, as Daniel described, We've taken the decision to give the Overwatch and the Iowa team the extra time they need to deliver the experiences that their communities deserve And to set the franchisees up for maximum success over a multiyear period. We are therefore are currently not planning for material contribution From Overwatch to Diablo IV in 2022. While this development will push out the financial uplift that we are expected to see next year, We firmly believe that this is the right course of action for our people, for the long term success of these franchises and for our shareholders.

Speaker 4

We still have a lot of content in the pipeline for next year for our largest franchises that we can't wait to unveil, And we'll provide more color on that and we'll provide our full year outlook in early February. In conclusion, we see substantial opportunity for shareholder value creation ahead To unlocking the full potential of our portfolio, it will only be possible because of our people, And we remain focused on ensuring a safe working environment that is essential to enable creativity and professional growth for all employees. Now I'll ask Wap, Mike and Humam to join Bobby, Denham and myself to answer your questions. Operator?

Operator

We will now begin the question and answer session. And our first question will come from Matthew Thornton of Truist Securities. Please go ahead.

Speaker 5

Hey, good afternoon everybody. Maybe one just to come back on some of the workplace issues that the team has talked about. Can you talk a little more about just The progress around rectifying some of these issues, how we can think about the milestones and the timeline towards being resolved And being best in class and how you plan to kind of communicate that progress along the way. Any more color there would be really appreciated. Thanks guys.

Speaker 3

Yes. Thanks, Matt. This is Bobby. I feel very good about the progress actually. Right now, workplace leadership is my focus.

Speaker 3

Our opportunities for growth as we've talked about have never been better, but we won't be able to realize all that growth potential without talent. And to retain and attract the talent we need, we obviously have to be recognized as the very best place to work. This means we have to be the most welcoming, inclusive environment. And we've got to have The best industry leading programs for growth and development, we've got to have the best recruiting capabilities for the diverse talent we need to create the very best games And we have to have competitive compensation that is aligned with performance. If you think about it over the last 30 years, We've shown that we can consistently create the very best games and that has always translated into long term shareholder Returns that are far greater than the S and P 500 and compared to most companies.

Speaker 3

And we believe That superior shareholder returns will continue to be delivered through our franchise strategies, the operational excellence that we're recognized for. And we also recognize that to achieve the same level of shareholder returns we have historically and to ensure continued excellence and execution, We believe we and all great companies need to deliver workplace excellence. This means some of the things that we've discussed over the last harassment and discrimination free work environments, recruiting excellence to ensure we have diverse skills, abilities and talents and a culture that celebrates the rewards commitment to these principles. I couldn't be more passionate and committed Being the most performance focused welcoming and inclusive company in entertainment. What you heard me discuss earlier It's just the beginning of the actions that we intend to take to achieve that objective.

Speaker 3

And of course, We need accountability. So we'll continue to provide regular progress, in updates both quarterly to our shareholders And our functional leaders with respect to workplace initiatives, and that status will also be reported to our employees quarterly. Right now and going forward, communicating with our employees and getting feedback has been a crucial part of the process. We'll obviously continue to keep our investors informed, but the work that we've done with our employees has resulted in Very constructive new initiatives, more that we'll continue to announce over the next few months. But The long answer to your question is, I feel good about the progress that we're making.

Speaker 3

But thanks for the question.

Speaker 1

Thanks, Matt. Operator, can we have the next question, please?

Operator

The next question comes from Mike Hickey of The Benchmark Company. Please go ahead.

Speaker 6

Hey, Bobby and team congrats on

Speaker 7

the quarter. Thanks for taking my questions. Just to can you give us some more Caller here on the Aviso for the split in Overwatch 2 and Diablo 4. Can you give us a sense of how long we're going to have to wait? Thanks

Speaker 8

Hi, this is Mike Ybarra. Thanks for the question. I'd like to first Recognize Jen O'Neil, who has been an incredible partner here at Blizzard. So we will all miss her greatly. We wish her all the best as we work with her on a plan to make an industry wide impact through the Wiki grant.

Speaker 8

I personally want to thank her for her leadership. Since becoming the co leader of Blizzard 3 months ago and meeting with teams around the company, I have been impressed by their passion for what they are creating And their drive to build a more inclusive culture. Looking at our upcoming releases across all of our teams here at Blizzard, we have a deep bench of with over 30 years experience at the company between them. The teams have made great progress and passed important milestones recently, And we expect these to be fantastic releases, but there's obviously been a change in leadership. We looked at what was left in the final phases of production with fresh eyes, And we saw that allowing the teams more time would enable both great experiences at launch and also help ensure that everything will be in place to Engage the communities for many years to come.

Speaker 8

This extra time will also help us continue significantly increasing the size of our development teams ahead of the launch. Again, to ensure we are following up the releases with substantial content to continue delighting the community. We're not sharing release dates at this time, but I have absolute confidence in these new leaders and their teams to deliver. They care deeply about creating high quality products and allowing everyone on their teams to bring their best selves to their projects. Thanks for the question.

Speaker 1

Yes. Thanks, Mike. Operator, can we have the next question, please?

Operator

The next question comes from Clay Griffin of MoffettNathanson. Please go ahead.

Speaker 9

Hey, good afternoon. King was clearly a bright spot this quarter. I'm curious if you And maybe drill down on some of the fundamental drivers that we've seen, particularly from an in app, net bookings growth perspective. I know you've mentioned The frequency of content and seasonal content whatnot, but would love to hear Any color on player demographics or cohort analysis to help us get a sense of some of the trends here? Thanks.

Speaker 6

Hey, thanks, Kai for the question. This is Humam. As you can see from the Q3 results, And a terrific quarter. And can be achieved its highest in app revenue quarter since the acquisition. So let me focus in on that in our performance specifically.

Speaker 6

There are a number of initiatives that have really been contributing to the success over the recent quarters And we'll carry out into the future. We've increased the optimizations that we put in the game. So we think about Our player journey and we've continued to improve that player journey with strong live off execution. This benefits across cohorts of players. So we've delivered compelling content and events more frequently across all of our key titles.

Speaker 6

So to give you an example, in Kandi, we've increased that engagement by further developing the content slate into monthly seasonal events That really draw in new and existing players and provide fun experience across the board. With this quarter, we've complemented that The launch of the Candy All Stars competition in the U. S, and we've seen some very strong initial results across Reach, engagement and player investment. We feel we also found a successful formula over the past 12 months Invest and grow live ops and we are now playing that with great results, not just in candy, but at cost of other games too. Our 2nd biggest franchise, for example, Farm Heroes, over the past few quarters, we've been delivering this content cadence And great events and the farm season pass.

Speaker 6

And we've seen the results from that as well. Our in app growth in farm heroes It has been up 20% year to date as a result. With that, we've continued to reinvest Into the network and in our brands as well. So we've seen that our payer numbers have grown double digit percentage year on year versus the year ago quarter. And this is again down to the strong execution that we have in our teams around user acquisition.

Speaker 6

When you combine With the features and events that are happening in the game, really an amplification of all these great trends that we're seeing. So that's also allowed us to maximize our success in more marketing investments and continuing to broaden our player base. So overall, I feel like we've Demonstrated that ability to grow both revenue and operating income at the same time. We feel there's still quite a bit of runway ahead of us.

Speaker 2

And Clay, thank you for the question. This is Daniel. First, I just a shout out to Humam and the King team for what They've achieved, it really has just been an exceptional performance and journey. And just from an Activision Blizzard King Perspective, there are a lot of learnings that we really want to apply across both Activision and Blizzard. And it's not just in mobile from the King team's operations.

Speaker 2

For instance, King's live operation capabilities, Their deeply analytical approach to creating amazing experiences that truly engage the players and the disciplined Data driven approach to marketing is just very applicable across the rest of the business. So we're already making sure that these performance marketing learnings being applied to our work on Call of Duty Mobile and to Diablo Immortal and other mobile initiatives that will be coming in the not too distant future across the company. So similar to how we are looking to apply the Call of Duty framework to our other franchises, it's another example

Operator

The next Question comes from Alexia Quadrani of JPMorgan. Please go ahead.

Speaker 10

Hi, thank you. My question is really about Call of

Operator

Duty, can you discuss at sort of

Speaker 10

a high level how Activision will integrate Vanguard into Warzone, which now includes content from both Modern Warfare and Black Ops Cold War? And then can you remind us how the launch of Houston 1 black ops in mid December last year impacted the pacing of unit sales relative to prior years?

Speaker 11

Alexia, it's Rob. I'll take this question. Thanks. So to start, we're obviously excited about both the launch of Vanguard And also Warzone's new Pacific map called Caldera, which is releasing early in December. The new map represents really the first Built from the ground up new experience for Warzone since the launch of Warzone basically in March of 2020.

Speaker 11

So I think the community is going to be really excited to get it in play That and the experience of the entire Vanguard universe. Coming with that, of course, there are a lot of things, some of which were mentioned, I'll just briefly cover them. One of which was Warzone shares the same tech as Vanguard. And so what does that mean? This is the same tech that debuted with Modern Warfare.

Speaker 11

And so from player perspective, you can get a lot more seamless weapon and play balance experience across both experiences. And what's become a staple for us now is really The game is fully optimized for cross play, cross progression and cross gen support. We've seen that the last couple of years and that carries forward. And I think importantly for community, we're also going to be launching Ricochet. It's our new anti cheat system across Vanguard and Warzone, so that our players can have the best possible as we move forward here in the future.

Speaker 11

Now specifically as to the integration, we're going to continue to have the shared progression across Vanguard and Warzone Just like we had against Modern Warfare and Black Ops Cold War previously, so all the great weapons, operators, unlocks Everything that you get on the Vanguard premium experience will also be usable in Warzone. So how the 2 work together is absolutely intact and better than ever. Battle Pass and Store content, of course, will also go back and forth for players to use and have fun with. Now there is a new component for us here and the new Warzone experience is going to offer some new dedicated playlists that are very specific to the Vanguard theme that we think it's going to be really fun for the community. And of course to honor the players' investment, we'll also have unique playlists that are more of a combined arms Battle We achieved loadouts across Modern Warfare, Black Ops or Vanguard.

Speaker 11

So I think that will be really fun for the community to choose how they want to experience The new map and the new content. And also I think what's become a staple for us as we move forward, our players can expect a ton of free post launch Content and updates from Vanguard and from Warzone to keep them having fun for the long haul. So both games Really just going to get bigger and better as they evolve over time for the community. Now going back to your question on The impact of black ops last December. So we certainly saw an uptick last December and I believe we talked about that in previous earnings call.

Speaker 11

And similarly, we expect another uptick this Q4 for our premium sales as we go through that cycle, launch the new map and see how the community engages more broadly, Both within Warzone and within our premium experience. Thank you, Alexia, for the question.

Speaker 1

Thanks, Alexia. Operator, can we have the next question, please?

Operator

The next question comes from Kunal Malde of Atlantic Equities. Please go ahead.

Speaker 2

Hi, thanks. I was just wondering if

Speaker 1

you could talk about the performance of Diabolo II Resurrected and what it sort of informs you about the opportunity for the Diabolo franchise overall?

Speaker 8

Hey, Kunal, thanks for the question. This is Mike again. The reception of Diablo II: Resurrected has been great. As you heard Daniel mention, 1st week sales were the highest recorded for a remaster from Activision Blizzard as a whole. This alongside the continued engagement with Diablo III really is confirmation that our plan for the Diablo franchise as a whole is the right one.

Speaker 8

There's a huge appetite from our player community for more content from this dark gothic universe and it's our job to exceed player expectations. Delibody Resurrected is an early step towards meeting this demand. We have ignited nostalgia in players who experienced the original way back in 2000 As well as brought all new players into the fold. Diablo Immortal being in its next stage of testing is incredibly exciting And we'll give players another window into the world of Sanctuary. They'll be able to take part in an all new narrative in a persistent free to play social experience All from their mobile devices, Immortal provides an even easier entry point for players into a game broader in scope and scale than Diablo 3.

Speaker 8

Vendeeble 4, which will be the darkest expression of the universe yet, is an immersive world players can dive into together On PC and console, this is one of the most highly anticipated games in the industry and we are confident that we are building something Incredible. These experiences combined create an ecosystem where players of all types can feel at home and it doesn't stop there. Diablo will always be living and breathing with broad content updates over time to continue to delight our players. Seeing the first step of this plan executed with the release Diablo II Resurrected off to such a strong start is invigorating to the teams across Blizzard and we can't wait to get more into the hands of our players.

Speaker 1

Thanks for the question. Thanks, Kunal. Operator, can we have the next question, please?

Operator

The next question comes from Mario Lu of Barclays. Please go ahead.

Speaker 2

Great. I have a follow-up on Teams with respect to IDSA. So you reported a very strong quarter despite being the 1st full quarter of the IDFA changes on iOS. So just curious if there was anything to call out in terms of its impact that you saw to Candy Crush or your other mobile titles? Thanks.

Speaker 6

Yes. Thanks, Mario. This is Humam again. Look, we're still early on in the journey with IDFA, but so far, we're seeing this Create opportunities for us on the user acquisition side. And as you would have seen on the advertising side, We are continuing to grow quite robustly.

Speaker 6

So on the user acquisition side, we have a very large and sophisticated And they've been really hands on and granular when they run our campaign. And so when we see these changes in dynamism In the industry, because of IDFA, they've created market opportunities that we've been able to capitalize on. And the tailwinds that we are seeing in our There conversion and spending gives us a lot of flexibility to invest in these ROI positive opportunities. So much of our UA is aimed at win back. So over 1,000,000,000 people, we believe, have downloaded Kandi in the past.

Speaker 6

So this gives us also a very great brand advantage. Now on the advertising side of the house, We've seen 60% year on year growth, which points to our ongoing strength. We believe we have a very differentiated product there. It's Premium positions with advertisers, and we're still early in building our ads business. So we continue to focus on ramping up these relationships with demand partners with continued positive momentum for both new demand partners and our existing ones.

Speaker 6

So overall, we've seen a lot of opportunity in both volume and pricing in the ag business as well. Thanks for the question.

Speaker 1

Operator, can we have the next question please?

Operator

The next question comes from Matthew Cost of Morgan Stanley. Please go ahead.

Speaker 12

Hi, thanks for taking the question. I was wondering how you're thinking about the durability of Call of Duty from here,

Speaker 1

as well as the

Speaker 12

kind of Innovation and content pipeline we should expect over time going forward. Thanks.

Speaker 11

Hey, Matt, it's Rob. Look, on your question, I guess I'll start with just saying, in short, I don't think we've ever well, I know, we've never felt better about the future Of the Call of Duty ecosystem as we look forward. Today, the strategies that we've employed, which include, of course, our expansion into free to play with Warzone and Call of Duty Mobile, Our continued push to deliver incredible new premium experiences and how the overall ecosystem is really connected and works together is actually just the beginning of what our plans entail long term. Looking ahead, we see significant opportunities across gameplay expansion, platform expansion and geographic expansion To take this ecosystem to an entirely new level for our players around the world, I'd say put another way, we feel there's more opportunity in front of And that's a pretty incredible thing to be able to say given the success that we've seen today. Of course, the next phase begins in the coming days weeks with Vanguard and the new map, Caldera and Warzone, but really there's so much more as we look ahead in the future, Both near and long term.

Speaker 11

Driving this ambition for us, of course, is our talented development teams and the resources we have there, which we're committed to greatly expanding, Both at our existing studios, but also geographically to find new talent around the globe, so we're expanding in locations like Austin, Guilford, Krakow, Melbourne, Mexico City and Toronto to augment our teams. And you may already know we recently acquired Digital Legends In Barcelona, they joined our mobile development roster, which now includes our new internal team, solid state as well as the mobile teams at BNOC In Shanghai, we're all coming together on an unannounced project in the Call of Duty universe that's very exciting. So I'd say overall, we feel really good about our plans, our outlook, our team and our gameplay innovation as we look out over the next few years and beyond. Thank you.

Speaker 1

Thanks, Matt. Operator, can I have the next question please?

Operator

The next question comes from Andrew Uerkwitz of Jefferies. Please go ahead.

Speaker 13

Hey, great. Thank you. Guys, your stock is at, I think, a 5 year low as far as valuation goes. You're sitting on a ton of cash. You say that you couldn't be more excited about the pipeline.

Speaker 13

Why not do a stock buyback at this point? Or could you talk about capital allocation and kind of M and A at this point? Thanks.

Speaker 14

Andrew, this is Armin. Thanks for your question. On your question on capital allocation, as you know, We do have a strong track record of being balanced and disciplined and we allocate capital Across all areas that you mentioned, investing in our business, returning capital to shareholders via buybacks and dividends As well as strategic M and A, starting with investing in our own business, you've heard today, we continue to have a very, very strong pipeline. Investing in our business and in our development teams remains our key priority. And as Daniel mentioned, we'll continue to We look to accelerate organic hiring in this area with ACWI Hiring.

Speaker 14

This was announced Digital Legends purchase last week, But these type of transactions are typically smaller in nature. Now with regards to larger M and A, we are all going to look out for large established franchises That have potential for global scale and for strong management teams with a track record of profitability and of course an attractive valuation That hits our return threshold. Now as you know, we have been very disciplined and patient in this area. But the longer term for opportunity for M and A means that we place significant option value on having a strong and flexible balance sheet.

Speaker 4

Now at the same time,

Speaker 14

with respect to buybacks, to come to the core of your question, we do have a $4,000,000 authorization. And While you haven't seen us do anything in a long time here, we do evaluate our position with respect to buybacks frequently. Now obviously, the increasing cash generation The company gives us more and more flexibility over time. But bear in mind though that we don't announce when we're buying

Speaker 4

back stock ahead of time.

Speaker 14

And sometimes there may be restrictions on our ability to commence the buyback. So in summary, expect us to be continue We balance and discipline in how we allocate capital, always with a view to long term shareholder value creation. Thank you for your question.

Speaker 1

Thanks, Andrew. Operator, can we have one last question, please?

Operator

Our next question comes from Mike Ng of Goldman Sachs. Please go ahead.

Speaker 15

Hey, good afternoon. Thank you very much for the question. You touched upon the increased competition for developer talent and the Higher voluntary turnover. I was just wondering if you could talk a little bit in more detail about Activision Blizzard's effort To attract and retain talent, whether that's moving more towards a distributed workforce or being more aggressive in hiring? Thanks.

Speaker 2

Great. Thanks for the question. And this is Daniel. I guess I'll take the last question. This is obviously something extraordinarily important and we're putting a tremendous amount of effort into and we've made some very substantial Progress in this area, particularly over the last year.

Speaker 2

Retaining and attracting our top talent, As Bobby has mentioned, it's critical to us being able to meet the needs of our players, of our communities and of growing our business. And this is there's really nothing more important to the company than our talent. And it really starts with making sure that our existing teams have the best Possible working environment. It's an imperative and it's also setting a setting that fosters creative excellence And importantly, fantastic career opportunities where people are willing to invest their time and their careers at our company. You've heard from us today some of the measures that we're taking to ensure that and we will continue to make significant progress.

Speaker 2

And when it comes to hiring, We're really fortunate that many individuals want to work on our franchises for which they have just tremendous affinity. They played it for a very long time, oftentimes as they were little. And we can offer that with some of the biggest franchises in the world. We also have a financial scale that enables us to compete for that talent. But I know that's not enough And especially with many people's attitudes to where and how they want to work changing during the pandemic, we have to keep that in mind.

Speaker 2

And we're giving our teams the flexibility they need. And we have also been investing in studios, as Rob mentioned, In many locations that are new for us, including Crocodile, Melbourne, Toronto and Mexico City, where I'm from. We've had a lot of success in hiring in recent months in those franchises that were earliest in embracing this geographic expansion and flexibility, Particularly for Call of Duty and for Candy Crush. And we've already started to pursue that same approach for Blizzard and Blizzard's franchises. And Mike is completely on board with this as we continue to invest and grow our teams in multiple locations.

Speaker 2

So thank you for the question.

Speaker 14

Well, thank you everybody for your questions and your interest and participation. We hope we see you all later this week in

Speaker 4

the game during the call of Peter Jones. Thank you very much again.

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Earnings Conference Call
Activision Blizzard Q3 2021
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