Activision Blizzard Q4 2017 Conference Call Transcript

This is a partial transcript of topics relevant to Blizzard fans.

Kotick: This was a record quarter and record year for Activision Blizzard. We delivered record quarterly net bookings of $2.6 billion and record annual net bookings of $7.2 billion. We delivered record segment operating income of $2.4 billion and record non-GAAP EPS of $2.21 per share, above our initial February outlook of $1.70. And we also delivered record annual operating cash flow of $2.2 billion.

Each part of our business reached new milestones and demonstrated the durable and enduring nature of our franchises. Activision celebrated strong Call of Duty momentum and their best operating income year ever.

Blizzard delivered their highest operating income ever for year with no major game releases. And King returned to growth with the Candy Crush franchise stronger than ever.

2017 was also an important year for us for preparation of our future growth initiatives. We invested in new services, features, content and experiences to connect and engage audiences all across our franchises. One example is the launch of the Overwatch League.

Witnessing the passion of players at the opening matches of Blizzard Arena and the millions of spectators connecting via live stream from around the world was a thrilling moment in our history and a milestone in esports growth.

Watching fans road trip across the country, spectators in the stands wearing team jerseys, gears in the game wearing team skins, audiences leaping to their feet after daily play and viewing parties around the world; these were awesome moments that created incredibly rewarding experience and demonstrated the emergence of professional competition as a way to celebrate our players.

Launching a professional league is an ambitious undertaking and our teams executed on countless fronts, attracting 12 world-class team owners representing cities in Asia, Europe and North America, signing numerous league and team level sponsors, brining esports spectating and production values to new heights, and forming a media strategy that provides broad reach and fair value for our premium content while also preserving distribution on own platforms.

Overwatch League matches are broadcast live on our MLG and Twitch, and will be available on other broadcast outlets throughout the world.

In its first week, the league reached 10 million unique viewers and had more than 280,000 average viewers on a per minute basis, in the week since we’ve seen sustained levels of viewership globally with new spectators joining each week as the excitement continues to grow.

Of course, we are building this league for the long term, and we’re pleased with the early strong momentum that we have which has created value for players, spectators, team owners, partners and sponsors. Our efforts have already led to increased global demand for expansion teams, which we expect to start selling later this year.

We also believe in the growth potential of each new opportunity we are pursuing whether in-game advertising, consumer products, cinematic productions or esports, all of these support our communities and help to drive engagement with our franchises.

Each new experience we provide that enables our players to demonstrate their passion, creates a virtuous cycle of engagement, investment and growth.

Coddy Johnson: Activision Blizzard had a record year. And throughout 2017, we broke records and posted strong results each quarter by providing an ongoing year-round scheme of content, services, features and events, both large and small, to our passionate and deeply engaged communities.

While achieving these records, we also made important investments to drive future growth. We invested in marketing, to grow our franchise reach, and used services and features to enable more audience engagement, and player investment, and in new growth verticals to celebrate our fans.

Turning now to Destiny. Destiny 2 had an impressive launch, highly rated and second to Call of Duty as the highest grossing consoles in North America in 2017.

It added a critically acclaimed PC version with distribution offered at Battle.net, and the attach rate of Destiny 2’s first expansion released in December was higher than that of Destiny 1.

That said, we haven’t yet sustainably expanded Destiny community. The Bungie is hard at work improving the game. And the good news is that the Destiny community is a deeply committed, vocal passionate player base, as they responded in the past when we made improvements based on their sentiments.

To that end, last week, Bungie released an update outlining what the changes we made and the changes that are coming. So far, these changes have been received positively and the team has a robust slate of services, features and seasonal events still to come.

There are also two epic adventures on the horizon with expansion 2 in May and a major content launch later this year. There is magic in this franchise and we’re committed to meeting our own and our players’ expectations in the coming quarters.

Blizzard is celebrating its 27th anniversary today. Happy birthday, Blizzard. A lot of things have changed over the past 27 years as the business has grown across genres, platforms and geographies but a few things have not including Blizzard’s commitment to put players first and to release games at an incredibly high level of quality.

Blizzard finished the year with 40 million monthly active users, continuing a sixth quarter streak of 40 million monthly active users or more.

Overwatch continued to attract new players in the most recent Blizzard World content and it’s been well received by the community.

Overwatch’s model of delivering year-round content with seasonal events and new heroes and new maps continues to drive strong engagement.

Hearthstone’s monthly active users increased year-over-year this quarter as players enjoyed the latest expansion, Kobolds and Catacombs and the introduction of new free content.

While net bookings did not match the prior expansion’s record performance, players did log more play time, which brings me to our second strategic pillar, deepening the engagement.

For Activision Blizzard and King overall, daily time spent per user was over 50 minutes for the second quarter in a row, placing us on par with Facebook’s time per day across Facebook, Instagram and Messenger.

Now, that 50 minutes per day is just the time spent in our games; it does not include the growing popularity of watching our games on other online platforms.

For the year, Activision Blizzard had seven of the top 20 games on Twitch; the next closest publisher had just two, demonstrating the broad esports appeal of our franchises.

Bobby already shared that launching of the Overwatch League was a key milestone for us and that we’re seeing strong early momentum.

Blizzard also delivered a $2.1 billion of revenue and $712 million of operating income.

Blizzard generated record results for the year with no major game release, fueled by a steady stream of content and events across their franchises, in particular Overwatch, Hearthstone and World of Warcraft.

Revenue, operating income and segment operating income margin were down year-over-year as expected given the difficult comps to last year’s World of Warcraft expansion and Overwatch release.

We did see some incremental margin compression in Q4, primarily due to additional marketing initiatives.

Nonetheless, with 33% full-year OI margins, the team did a nice job delivering the core business while investing in key growth initiatives across the Overwatch League, mobile incubation and MLG network.

2017 was also an important year for us for preparation of our future growth initiatives. We invested in new services, features, content and experiences to connect and engage audiences all across our franchises.

One example is the launch of the Overwatch League. Witnessing the passion of players at the opening matches of Blizzard Arena and the millions of spectators connecting via live stream from around the world was a thrilling moment in our history and a milestone in esports growth.

It’s still early days for many of these efforts but making progress in these strategic growth areas will be an important focus for us in 2018 and beyond.

I have the privilege to lead one of the best teams in the entire business world; and as I begin my 28th year at helm, I have never been more energized to pursue with focus and determination the great growth opportunities that lie ahead.

Now, given the timing of launches in 2018 and the continued ramp of our new initiatives, we expect our performance to be further weighted to the back half of the year relative to what we saw in 2017.

We expect Blizzard to grow year-over-year with the release of World of Warcraft’s Battle for Azeroth this summer. I am glad to say the presales for Azeroth kicked off last week and are off to an encouraging start.

In addition, Blizzard has exciting plans for live ops and additional in-game content across franchises, including Hearthstone’s three expansions in 2018 and Overwatch’s in-game events.

Blizzard will also start to see the benefit of its investment initiatives, as we expect the Overwatch League to be profitable in 2018, its first full year of operations.

Activision and Bungie are hard at work on Destiny 2 to improve the in-game engagement through regular updates and events, which we anticipate will benefit performance later this year with the release of a new expansion in May and a major expansion in the second half of the year.

Q&A

Laura Martin: Let’s talk about the Overwatch League. It sounds like everything is going great. Could you sort of give us an update on how it did benchmark against your expectations and what surprised you, both on the upside and downside? And then, on the monetization, as we’re modeling 2018, you said you’re going to sell more teams. Could you talk about monetization generally and then where do you think the teams will sell for more than the first 12 teams?

Mike Morhaime: First off, I want to take a moment to thank everyone on the Overwatch League team for the amazing job they’ve done. Overwatch League was an ambitious undertaking, it required supported collaboration across Activision Blizzard starting from the Overwatch game team although up to Bobby who as you know has been a strong supporter of the league from the beginning, as well as from a host of stakeholders and the communities.

I want to especially thank all the pro players who compete, the team owners who really got behind our vision for the league, our partners over at Twitch and our sponsors who believed in what we were building.

I want to also thank the viewers who tune in especially those people who are coming to the studio and bringing their passion and energy and filling up the stands. They’re an inspiration to everyone who works on Overwatch League.

It’s really been wonderful to see how everything has worked out so far. We’re very pleased with the high-quality that we have been able to enjoy every week.

The games have been exciting to watch and the reception from our viewers has been really spectacular. So, so far everything has either met or exceeded our expectations.

We made a landmark two-year media rights deal with Twitch and more than 10 million people tuned in to week one, worldwide.

We had an impressive audience per minute of over 400,000 on opening day. We’ve also been very happy that several major brands have partnered with Overwatch League including Intel, HP, Toyota, T-Mobile, and Sour Patch Kids.

While we’re pleased, it’s important to note that this is only the beginning. Our focus is going to be on continued growth of the audience through improvements to the broadcast and the live viewer experience.

In the mid to long term, we think the audience growth is the key to seeing impact both to the bottom line results and to the Company as a whole, and I think also to drive popularity in the game as well.

In terms of selling expansion teams, we are very excited with the reaction and the interest in expansion teams. I’m pretty confident to say that the price is going to go up.

Michael Olson: You talked about the opportunity for the actual league; but could you talk about the Overwatch League impact on Overwatch, the game itself, as it relates to engagement, monetization and/or core game sales?

Mike Morhaime: The Overwatch League has increased overall engagement with the franchise, between viewership and game play. When you consider the hundreds of thousands of fans watching each match and average watch time of over an hour each night, we’re tapping into a whole new avenue for players to express their passion for Overwatch.

Of course, there are other positives for the game overall. The Overwatch League has driven a ton of buzz and awareness for the game; and so as that increases, our players have new ways to customize their playing experience with in-game digital skins as well as physical merchandise; and we’ve seen our players respond well to both of those.

We’re also looking forward to launching additional initiatives to tie the viewing experience better with the play experience. We think that over the long term, the league will bring in new players as people see the excitement around the league and may even start to train to become the next pro player.

Outside of league, we have additional plans to keep Overwatch fresh and players engaged. We already released a new map called Blizzard World in January.

We have the Lunar New Year event launching today and there’s additional plans later this year for new heroes and seasonal events to come out.

What are your expectations for World of Warcraft: Battle for Azeroth in terms of the size, engagement or any other innovation in the game for this expansion?

Mike Morhaime: At Blizzard, we always get excited about new launches. And we in addition to our players are very excited about Battle for Azeroth’s features, which include new Allied Races, to give players even more character customization options, players who preordered the expansion have been enjoying early access to some of the Allied Races already, and that has helped drive early preorders.

We’re very pleased with the results so far. Battle for Azeroth also includes two huge continents for players to explore as well as some new game play modes. Warfronts is a new cooperative mode where players will band together in massive battles inspired by Warcraft’s RTS roots; and the Island Expeditions mode will include randomized elements for small groups to enjoy with great replayability which is very important in a game like World of Warcraft.

Content always drives engagement. So, just like we did with Legion, we are planning a steady stream of content after launch to maintain engagement.

As for what’s ahead in 2018 with Battle for Azeroth, we’re looking forward to sharing more in the months to come and releasing the expansion this summer.

There’s a ton of buzz right now in the community and at Blizzard. The team is very excited about this expansion.

Tomas Hernandez is owner of Blizzplanet.com since 2003. I post news about World of Warcraft, StarCraft II, Diablo III, Hearthstone, Overwatch, Heroes of the Storm, Blizzard Careers, and the Warcraft film.

Blizzplanet is a leading fansite covering news about upcoming Blizzard Entertainment licensed products. I also post previews and reviews. I have interviewed book writers and Blizzard game developers.

I was previously an employee of the OGaming Network (2003), and IncGamers (2008-2010). I was a guest newsposter for GosuGamers (World of Warcraft) a few years ago and for Diablofans.com (formerly Diablo3.com)

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