Dennis Durkin: Today, I will review our Q1 2020 results, as well as our outlook for 2020, and the second quarter; but before I start, I would just like to echo Daniel and Bobby’s sentiments about the unique environment we are in, and share my sincerest sympathies to those who have been affected directly by it; as well as my thanks and gratitude to all our teams and employees, who have so seamlessly transitioned into this new work environment we find ourselves in.
Our digitally native business model both on the production and the distribution side of our business makes us well-positioned to deliver world-class content and experiences for our players.
Our teams take our mission, and our responsibility to deliver fun and social engagement to our players in this tough time very seriously. They really didn’t miss a beat during all this transition, and you can see the strong results of those efforts in our Q1 results, and increased full-year guidance.
Our first quarter revenue and earnings were well ahead of our prior outlook. World of Warcraft continued to over deliver; and other key franchises and catalog sales also exceeded our outlook, benefiting from stronger demand towards the end of the quarter as consumers sheltered at home in many of our key regions.
To review the quarter, I will start with our segment results. Blizzard revenue was $452 million increasing 31% year-over-year, reflecting strong growth for World of Warcraft, and the release of Warcraft III: Reforged in the quarter.
Operating income was $197 million. Blizzard’s operating margin was 44%. Significantly higher year-over-year, primarily due to strong revenue growth.
Now let’s turn to our overall consolidated results. Unless otherwise indicated, I will be referencing non-GAAP figures. Please refer to our earnings release for full GAAP to non-GAAP reconciliations.
For the quarter, we generated Q1 GAAP revenues of $1.79 billion — a $148 million above our February guidance. This includes the net recognition of deferrals of $266 million.
Net bookings of $1.52 billion — or $247 million above our February outlook. We incurred GAAP-only restructuring, and related charges of $23 million, and we generated Q1 GAAP EPS of $0.65 and Q1 non-GAAP EPS of $0.76, which was $0.10 above guidance. These figures include the net recognition of deferrals of $0.18.
In terms of cash flow, the increasingly digital recurring and cash generative nature of our business remains one of our fundamental strengths.
This powers a strong balance sheet, which continues to be an important strategic asset for the company, especially now.
In Q1, we delivered operating cash flow of $148 million, lower year-over-year despite higher operating income, due to cash payments for tax settlements and working capital timing. Our cash investments at the end of March were approximately $6 billion, and we ended the quarter with a net cash position of approximately $3.3 billion.
And as previously announced, this week we will pay an annual dividend of $0.41 per share, 11% higher year-over-year.
Now, let’s turn to our outlook for Q2 and the full year. In April, Blizzard launched its latest Hearthstone expansion: Ashes of Outland; and through the quarter, we’ll continue to support other key franchises with game content.
Turning to the second half of the year, our plan slate includes Blizzard’s Shadowlands expansion for World of Warcraft. We will also continue to deliver in-game experiences for our other key franchises across our portfolio; and we continue to expect to begin regional play testing for Diablo Immortal and certain other mobile titles.
Although as discussed last quarter, we don’t include any material revenue from these new mobile titles in our guidance. Before I discuss the specifics of our outlook, I’ll provide some context.
The full extent of the impact of the pandemic on our financial results will depend on numerous evolving factors that we are not able to fully predict at this time.
While we have seen a positive impact on demand, there are also risks related to the global economic weakness, rising unemployment, pressures on retail channel, pricing, and other factors where we have limited visibility currently.
We have tried to be prudent in our guidance to account for these effects; and we believe there is a potential for over-performance if these risks do not materialize.
As discussed, we are also seeing increased demand for our other franchises as interest in gaming grows.
The current environment creates the potential for a structural opportunity to bring more players into our communities, who we can then engage and retain for the long term; and to accelerate the continuing shift towards digital sales in our business.
We have attempted to be conservative in our assumptions around the impact of these trends beyond the second quarter, but the backdrop does create greater potential for operating overperformance later this year.
Since we provided our initial guidance in February, the strengthening dollar has resulted in an additional FX headwind to full year net bookings of approximately $100 million; and the combination of FX and lower interest income from declining interest rates represent in aggregate approximately $0.08 of headwind to our full-year GAAP and non-GAAP EPS versus our prior outlook.
Overall though, with strong momentum across the business, we are raising our outlook for net bookings, revenue and EPS for the year; and in the case of EPS, we are raising by an amount greater than our first quarter overperformance, despite the FX and interest rate headwinds I just described.
Now, let me get into specifics. For Q2 on a GAAP basis, we now expect revenues of $1.69 billion including the net recognition of deferrals of $15 million. We expect net bookings of $1.68 billion, product costs, game operations and distribution expenses of 19% and operating expenses, including software amortization of 48%, and a GAAP-only restructuring charge of approximately $20 million. We expect a tax rate of 21%, GAAP and non-GAAP share count of $776 million and EPS of $0.54.
For Q2, on a non-GAAP basis, we now expect product cost, game operations, and distribution expenses of 19%; and operating expenses including software amortization of 43%, expected tax rate of 19% and non-GAAP EPS of $0.64 — including net deferrals of $0.01.
On a GAAP basis for 2020, we now expect revenues of $6.8 billion, including net deferrals of $100 million.
We now expect net bookings of $6.9 billion for the year; product costs, game operations and distribution expenses of 19%; operating expenses including software amortization of 48%; and a GAAP-only restructuring charge of approximately $50 million.
We now expect a GAAP tax rate of 20%. GAAP and non-GAAP share count of $778 million, and GAAP EPS of $2.22.
For 2020, on a non-GAAP basis, we expect product costs, game operations, and distribution expenses of 20%; and operating expenses including software amortization of 42%.
We expect a tax rate of 19%, and non-GAAP EPS of $2.62 — including the net recognition of deferrals of $0.02.
So in closing, our business has accelerating momentum from the dual tailwinds of strong execution in our largest franchises following last year’s investments; and increased development capacity, expanded reach, and engagement as people turn to our interactive content as they shelter at home.
We are humbled that so many people are turning to our content for solace, joy, and connection in this challenging time; and we will continue to stay focused on delivering the high-quality experiences that they have come to expect from us.
|ACTIVISION BLIZZARD Q1 2020 TRANSCRIPT|
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