Activision Blizzard Q4 2020 Investors Call Transcript

I'm incredibly proud of our employees and the way they responded with resilience, compassion, and dedication to support each other and our communities. And with almost 400 million players in 190 countries, our games welcome some of the most diverse audiences in the world. We have long understood that we simply cannot create broad appeal entertainment without diverse views, voices, and talents.

To that end, we continue to invest in initiatives to identify and develop emerging leaders and exceptional talent, both within our company and throughout our industry and other sectors, our company and our employees remain committed to the communities in which we operate. One important example of our community commitment is the Call of Duty endowment.

Our efforts to place veterans in high quality jobs provide our company as well as thousands of other employers with the most dedicated, ambitious, disciplined, and hardworking talent. We resolutely believe the heroes who serve their countries to protect Freedom and Liberty deserve special opportunities as a result of their service.

With unemployment rates, skyrocketing, we still manage to achieve our most successful year ever placing over 15,000 veterans into high quality jobs in 2020. Of those we helped place last year, 21% were women and 28% were black -- metrics in which we take great pride considering that women veterans, and black veterans composed just 10% and 12% respectively of the U.S. veteran community.

Since 2009, we funded the placement of 81,000 veterans into new jobs, but now more than ever, we must ensure that our dedicated public servants have access to the very best employment opportunities. We've also sought to create career pathways for talented young people, especially from backgrounds that have been historically underrepresented in tech and entertainment.

Our investment in Management Leadership for Tomorrow has allowed that organization to grow its extraordinary career preparation program, doubling the number of participants and equipping high achieving black, latinex, and indigenous Americans with skills and coaching to accelerate their careers. Our support for the United Negro college fund has funded scholarships for some of our nation's most promising youth.

These initiatives further remind the 10,000 people who work at Activision Blizzard that purpose and meaning is the most powerful way to broaden the connection and engagement that our games offer to so many. Our employees around the world, they're determined to serve our audiences and deliver exhilaration through accomplishment, provide welcome unnecessary distraction during turbulent times, and enable moments of solace and comfort throughout the day. We create safe venues that reward unity and celebrate our differences. Differences that sometimes unnecessarily divide our society. Gaming connects people more deeply than any other form of media; and video games are redefining what it means to interact socially.

In 2020, we introduced even more ways for players to connect and find community, particularly in Call of Duty. Our approach to the franchise has become the roadmap we are now applying to many of our other games. Within Call of Duty, we have meaningfully expanded social connections and improved engagement through free to play experiences on mobile phones, computers, and game consoles.

These initiatives expanded franchise reach with over 215 million people playing Call of Duty last year, more than tripling the 70 million people who played Call of Duty in 2018. Our approach has made the franchise more social than ever benefiting both our players and our business performance. Call of Duty players who play in groups with friends, spend over three times more hours in the game and invest around three times more on end-game content compared to other players.

And we've really only just started to scratch the surface of what's possible for social interaction within our franchises; and we have initiatives underway to enhance the social nature of all of our key franchises. Call of Duty is also established a clear blueprint for franchise-based innovation; and we're applying this strategy across our other core franchises to grow reach, engagement, and player investment.

As I mentioned, we had roughly 400 million monthly active players in 2020, and we're accelerating our path to reach 1 billion players as we apply the Call of Duty framework across our other wholly owned franchises. Of course, we always begin the process with inspiration and creativity. We then offer great gameplay through free-to-play access to all consumers, availability on their mobile phones and continuous regular delivery of in-game content and premium content.

In Call of Duty, we expect further growth, both in our traditional regions and new countries. As we continue to enhance the player experience across all platforms.

We saw early returns from our initiatives to transform our largest franchises through compelling, premium content, more robust in game operations expanding the mobile, and ramping new engagement models, including advertising and especially expanding free-to-play opportunities to attract new players. In Call of Duty, our new approach to player engagement and investment through adding free-to-play War Zone and mobile entry points have meaningfully expanded the ways in which players can interact with the franchise.

At Activision, 2020 was an extraordinary year for reach, engagement, and player investment in our Call of Duty franchise. Life to date consumer spending of around $27 billion makes it one of the most successful entertainment franchises of all time. Yet the franchise delivered a structural change in 2020 with net bookings, approximately doubling year-over-year; and we expect further growth this year.

Activision's monthly active users (MAUs), a 128 million, marking the fifth consecutive quarter with more than a hundred million players driven by Call of Duty. This level of scale for the franchise leads to better gaming experiences for the community, provides more data for us to continue to improve in our experiences and creates more opportunities for player investment.

Call of Duty momentum continued into the fourth quarter, the biggest quarter of the year with net bookings growing double digits year-over-year, the November launch of Black Ops: Cold War -- the newest premium Call of Duty experience -- further expanded the ecosystem across console and PC. Monthly active users (or MAUs) on console and PC grew approximately 70% year-over-year in the fourth quarter; and time spent in game more than doubled.

Our premium business has never been stronger. Full year premium unit sales grew over 40% year-over-year with a further strong shift to digital premium downloads. In December, we launched the first season of Black Ops: Cold War in-game content and integrated the game with Warzone. This drove strong acceleration and premium sales with unit scoring sharply year-over-year in December and January.

Again, demonstrating the power of our free-to-play experience in driving demand for our premium content; and in-game player investment also continues to have momentum. In game net bookings on console and PC are more than 50% year-over-year in the fourth quarter. And the first season of black ops and war zone content that is still underway has seen the highest number of battle passes consumed since we introduced the investible season content pass in late 2019. Call of Duty mobile delivered its best quarter yet with strong double digit growth in that bookings year-over-year. As we increase developer resources for mobile, the expanded team has continued to enhance gameplay and deliver even more compelling seasonal content for players.

This increased capacity on the mobile title is clearly paying off with monthly payers in the West, reaching the highest level yet in Q4 with average spend per payer increasing strongly year-over-year. And then late December, Call of Duty mobile also launched in China, bringing the franchise to the largest mobile market in the world.

The game quickly reached the top of the download charts with over 50 million installed to date. Once again, illustrating the global appeal of a franchise and setting the foundation for a meaningful contribution in 2021. The Call of Duty League will kick off its second season next weekend. Fans will get to enjoy even more large-scale competitive play this season as it's 12th city-based teams compete in a new tournament style format in the Black Ops: Cold War era.

Call of Duty is entering 2021 with the largest player community it has ever had to start a year; and with a compelling pipeline of live operations and seasonal content across PC, consolen and mobile; and now mobile momentum in China, our focus will be to continue to expand the reach of our franchise while sustaining deep engagement for existing players.

Dennis Durkin: Today. I will review our 2020 and Q4 results as well as our outlook for 2021 and the first quarter. All growth comparisons are year-over-year, unless otherwise indicated I will be referencing non-GAPP figures.

Please refer to our earnings release for full GAPP to non-GAPP reconciliations. Our full year results were substantially above our original outlook. This was a record setting year in which successful growth initiatives for several of our key franchises saw net bookings growth 32% year-over-year. GAPP revenues increased 25%, operating income through 70% and EPS grew 45% -- all reaching new highs.

For the year, we generated GAPP revenues of $8.1 billion. This includes the net deferral of $333 million. Net bookings were $8.4 billion. We generated GAPP diluted EPS of $2.82 and non-GAPP EPS of $3.21. These figures include net deferrals of 26 cents. Over the fourth quarter GAPP, and non-GAPP EPS were ahead of our prior outlook, reflecting business over performance at a lower tax rate.

Now let's look at segment results. For the full year, Activision revenue grew 78% with Call of Duty revenues approximately doubling. oOperating income increased 120% and operating margin expanded 9 percentage points to 47%. For the quarter, Activision revenue of $1.66 billion grew 16% driven primarily by Call of Duty in-game revenues. Operating income rose 12% to $780 million with an operating margin of 47%.

Blizzard's full year revenue increased 11% and operating income grew 49% with a 9 percentage point expansion and operating margins. Blizzard Q4 revenue of $579 million with slightly lower year-over-year as growth for World of Warcraft was offset by a decline for other titles and the absence of BlizzCon in the quarter.

Operating income was $160 million -- lower year-over-year driven primarily by increased marketing investment and amortization of development costs behind the launch of Shadowlands. Blizzard's operating margin was 28% in the fourth quarter. For the full year, King revenue grew 7% with operating income growing 16% and margin expanding three percentage points.

King grew revenue 15% year over year to $577 million in Q4 with both in-game net bookings and advertising growing strongly. Operating income was $242 million with an operating margin of 42%, three points higher year-over-year driven by high incremental margins from advertising. Our business continues to shift to more recurring and digital revenue streams driving structurally higher margins over time. In 2020, in-game net bookings grew 44% year-over-year to reach 58% of net bookings; and digital net bookings grew 45% to represent 85% of total net bookings.

A record performance on the income statement also drove record full year cashflow. Annual operating cashflow grew 23% to $2.3 billion despite cash payments for tax soundness. For the full year, free cash flow defined as operating cash flow, less capital expenditure grew 27% to $2.2 billion.

Our cash investments at the end of December was approximately $8.8 billion with net cash of approximately $5.2 billion. Turning to capital allocation, we entered 2021 with a strong balance sheet and significant flexibility. As always, we continue to take a disciplined and balanced approach to capital allocation. With this in mind, our board has authorized for the 11th year in a row and increase in our annual dividend. This year to 47 cents per share and increase of 15% over the prior year, which will be payable in May.

And also our board has adopted a new two-year $4 billion share repurchase authorization. An increase from our prior $1.5 billion share repurchase authorization. Now let's turn to our outlook for 2021. First, I will provide some context. Much of our success in 2020 was due to strong product and commercial execution, driving structural improvements in our largest owned franchises.

While we believe we benefited from various sheltered-at-home requirements, we are seeing continued strength, even in markets where restrictions of the East. Overall, we were entering 2021 with momentum in our biggest franchises and a pipeline of content and growth initiatives that we expect will enable each of our segments to grow operating income for the full year 2021.

Activision enters the year with strong momentum for Call of Duty and has a fantastic pipeline of in-game content ahead, across all platforms. We will benefit from a full year of Warzone, driving upgrades to our premium content and incremental in-game player investment; aand we have a substantial opportunity to continue migrating the community to Black Ops: Cold War, as well as another strong premium release planned for Q4 in 2021.

In our outlook, we are conservatively assuming Call of Duty premium units are lower year-over-year. However, with opportunities in in-game, across all platforms, including the ramp up of Call of Duty: Mobile in China, we do expect growth in net bookings overall for the Call of Duty franchise.

We assume relatively little contribution from the release of Crash Bandicoot: On the Run as is customary for new mobile titles. From a margin perspective, our outlet perfects further GAPP and non-GAPP operating margin improvement year-over-year, building off-the-record margin performance in 2020 with ongoing benefits from an increasing mix of digital revenues and operational discipline.

Now let's turn to the numbers: on a GAPP basis for 2021, we expect revenues of $8.23 billion, including net deferrals of $225 billion. We expect net bookings of $8.45 billion. A GAPP operating margin of 36% GAPP and non-GAPP share count of $787 million and GAPP EPS of $2.83.

For 2021 on a non-GAPP basis, we expected operating margin of 41% and non-GAPP EPS of $3.34, including net difference of 26 cents. Now let's turn to our Q1 outlook. On a GAPP basis, for Q1, we expect revenues of $2.02 billion -- including the net recognition of deferrals of $265 million. We expect net bookings at $1.75 billion, a GAPP operating margin of 30%, GAPP and non-GAPP share count of $784 million, and GAPP EPS of 59 cents.

For Q1 on a non-GAPP basis, we expect an operating margin of 42% and non-GAPP EPS of 84 cents, including the net recognition of deferrals of 19 cents. In summary, 2020 was a record year for the company; and as our 2021 outlook indicates, we believe the business has reached a new structurally higher financial profile following our actions to expand our largest franchises, but there is much more to come.

Tyler: Hey, thanks for the question guys. I'd like to touch on Call of Duty first, I guess. So first off now that you've launched a new addition to the franchise with Black Ops: Cold War and integrated data in the Warzone, I guess what we are learning so far has it gone as expected and then following up on that, does this reinforce your competence, maybe in the strategy going forward, or did you come away with any new ideas on how to integrate this feature releases into the Warzone experience?

Rob: Thanks for the question. You know, as you mentioned, Warzones now, tightly integrated both with Black Ops: Cold War and Modern Warfare; and this was a really big effort by our development teams across content progression and game systems, and a lot more. And overall, as we've noted on the call, it's gone extremely well.

Now, we had historic fourth quarter engagement across our premium games and Warzone. We have record second year sales for modern warfare in 2020. And also the black ops cold war sales started strong, even gained momentum, you know, in December when we launched season one. And the great news is we're seeing positive momentum early in this quarter as well.

Now that sets your question. We learned a lot through this integration and I'd say here's probably a few of the top lines. Black Ops: Cold War brought a ton of content to Warzone. It had over 30 new weapons, new operators, and a lot more; and this was a massive update that required a lot of resources on our side.

And having gone through this integration, we now have even a greater sense for how we can make these transitions work even better and smoother for all of our players in the future; and this is really important for us because Warzone's going to be front and center for us for a long time; and on that front, I'd like to take a moment to thank our players for their content and continuous feedback on all aspects of the game.

It's something we listened to each and every day, and it's important to our process. Now overall on the content side, the community responded really well to Blck Ops content. As we saw with battle passes, as you heard those being increased in off to a record start, our upsell was strong and our engagement really spiked in the fourth quarter, particularly around the season one launch in December when a ton of Black Ops content came in. Now, this has only strengthened our commitment to the community to continue to bring compelling new content to both premium and free-to-play players on a regular basis. And that said, we know our player expectations are very high for new content and rightly so. We want to make sure we over-deliver on that front as we move forward.

I'd say another insight that became evident to us over the course of the year and in the fourth quarter, is that Warzone has just become the best way for us to communicate with our fans. So in the game itself, events like the reveal of Black Ops: Cold War were fun for the community. It attracted like a large and engaged audience.

It also had a great impact on our results. On the marketing front, on a year-on-year, now we've more than doubled the number of players who have opted into marketing from us and that'll provide a great ongoing benefit; and additionally, we've also seen great results on conversion with our free premium trials with the free-to-play audience in Warzone.

So net, having this direct relationship and dialogue with our community really puts us in a unique position relative to other forms of entertainment, to communicate to really a broad, broad audience, and also relative to other many other games. So your last part of your question overall, we feel really good about, and very confident in our strategy going forward.

Warzone will continue to be a central part of that future content planning. It's where our entire community can come together and experience the latest franchise has to offer; and our goal remains the same, whether you're a premium or free-to-play Call of Duty player, we want to provide everyone with incredible gameplay experiences and we're going to continue to invest significantly across all fronts to support that effort for the community. Thank you.

Operator: The next question will come from Kunaal Malde with Atlantic Equities. Please, go ahead.

Kunaal: Hi, congrats on the strong results. Um, I was wondering if you could give us any more color on the puts and takes for the 2021 guidance. Is there anything to be aware of in terms of the phasing of that through the year, and then you also mentioned a step change in 2022. How should we think about sizing that?

Dennis: Yeah. Hey, Kunaal. It's done. It's Dennis here. Thanks for the question. As you can imagine, we do spend a lot of time putting together a full-year plan and our long-range plan as well; and we always try and be thoughtful and prudent in the numbers we put together and guide to; and this year it is no different on that front.

You did hear a lot about the strong momentum that we have, particularly in our biggest franchises. So it's always nice to start the year out strong, but each of our big three franchises really have great opportunities for growth this year; and that's really embedded in our guidance. In Call of Duty, you can see we've got obviously a full year of Warzone, and the premium integration; and as well as obviously the mobile opportunity in particular with China not being added this year; while World of Warcraft has tremendous momentum coming out of the late Shadowlands launch from last year.

Great engagement, as we've heard, on the Classic side -- which frankly will give us great momentum throughout the year -- which is kind of unusual in a non-expansion year for awhile; and then Humam and King and the Candy Crush team had a really great 2020 and the businesses really firing all cylinders, both on the in-app purchase side, the advertising side. So across our three biggest franchise, we have great momentum, and then we have a few other things up our sleeve in terms of remastered content that will unveil in due course, which should provide a further opportunity for us this year.

And as Daniel mentioned, and we sort of mentioned throughout our remarks, all of this incremental opportunity is digital -- which should allow us to continue to grow our margin as we did 10 weeks set record margins last year. So we should be able to build upon that. From a phasing point of view, our Q1 guide is obviously extremely strong and we expect that to continue into Q2.

Our Q2 will probably be roughly in the same range as Q1, and that's a little bit of tough comp versus last year when Warzone launched and some of the earliest shelter-at -home trends hit. But then you should see pretty natural phasing as you'd expect in the back half of the year.

And then, we'll have very strong momentum as you pivot, and we pivot to looking at 2022. It's obviously early and we still have work to do, but we have an incredible lineup planned across all platforms and it should be a great, great year for each of our business units with blizzard in particular, obviously driving significant financial growth.

I suggest obviously we try to model the business prudently, but when you think about the ramp up that we have with multiple bets in mobile, and the three franchises that we have operating at scale, and the opportunity to bring maybe a fourth and a fifth franchise to that, we can have a meaningful step change in our earnings power over the next couple of years.

So obviously we feel great about the trajectory for not only this year, but next year and beyond, and the opportunities are sizeable; and we're just very focused on execution, so we can realize that potential.

Operator: The next question will come from Colin Sebastian with Baird. Please go ahead.

Colin: Good afternoon and happy new year as well. Question is how should we think about the sustainability of the keen growth trajectory into the new year? And then in particular, can you discuss what levers are available to drive growth and both: reach and player investment?

Hamam: So look, 2020... It was a remarkable year for King. Earlier in the year we saw the highest daily game rounds across our network ever; and then we closed the year out in real strength. So in Q4, Candy Crush Saga posted at its highest revenue days; and we had the strongest quarter since 2014; and then across all of gains, our revenues grew 7% sequentially and 14% year-on-year. So we're really pleased with the momentum and trajectory as we enter into 2021. Now, let me talk a little bit about what drove that performance in Candy Crush. We accelerated the pace of content and feature delivery in 2020, and again, to echo everybody's thoughts... amazing execution from the teams under very difficult circumstances; but we've also invested in deeper product roadmaps in the Candy franchise, and so we had more structure around seasonal events and a lot more integrated player facing programming; and that seems to resonate quite well.

We saw the benefit of this as we saw more player investment trends. So the players in Candy Crush were up year-over-year in Q4. But broadly, we also started increasing frequency and high-impact event in live ops, in our other titles and the portfolio, and that led Farm Heroes and Bubble Witch to grow year-over-year for the second quarter and early in Q4; and so we like the momentum in that as well.

So as I look ahead in 2021 our life businesses got really good momentum and we want to continue to add to that. We think we have a good formula and we're going to continue to improve it. So we'll continue to bring a fresh slate of content and events to our players, and then we're going to compliment that with a big feature innovation -- including more collaborative and competitive social features, especially in Candy Crush; and we've seen that when we have that social connection in our games, it correlates with player engagement and player investment. So let me give you a quick example here.

We're creating more modes in the game so that it brings more players and teams together to experience the game at the same time. We're also finding ways to connect those players with each other in a large audience network that came in hand. Now if that's the momentum we're driving in the live games, what we have in 2021 is we're gearing up for a game launch later on this quarter. So we're hard at work bringing Crash Bandicoot: On the Run to our mobile audiences next month. We're super excited about working on this very iconic IP, and we've chosen the runner genre -- which is a very attractive category in mobile, because it comes with largest all volumes historically, and has the potential for mass switch.

So we'll bring this amazing mobile title to our Crash fans, but we equally are focused on broadening the franchises's audience in mobile. So when I put all those together, I feel pretty good about the momentum in 2021.

Operator: The next question will come from Alexia Quadrani with JP Morgan. Please, go ahead.

Alexia: Thank you. My questions back on King, if you can maybe discuss your outlook for advertising for 2021, but more specifically, what impact do you expect from the IDFA changes?

Humam: So look, the ad business is entering 2021 with incredible momentum, particularly in our direct sales part of the business, which grew more than 80% last year. So I'll touch on some of the specific initiatives that drove that performance because I really believe that those are also the levers that we move the business forward in 2021 and beyond.

What we saw is that the team executed really well in deepening our product, offering around the plant. What we call the platform brand safe proposition. It allows us to specifically focus our offerings on large-scale brands. All this was in the context of building a product that was very compatible with the player experience; and so we think that's working really well. It worked in 2018 and we continue forward in 2021. And alongside of that, we grew the direct sales team; and growing the sales team allowed us to broaden our coverage to reach new brands; and then we started seeing those two things come together and really gave us a great result.

So as one example, we worked with Sky in the United Kingdom to design alongside of them and execute an ad campaign that leveraged that rewarded video product that we have; and it's created a really engaging gamified ad experience that really drove results for that kind of advertisers. So the campaign that I'm referring to drove an eight point uplift in ad recall, and a six point uplift in Paris association to the Sky brand messaging.

So we continue to drive that forward and as you lead it too, we're also preparing for the IDFA changes in the industry with initiatives underway. Kind of just specifically addressing that. I think our current momentum and the direct sales momentum that we have gives us confidence in the growth trajectory of our ad business overall, even with taking IDFA; and in context. So this year, what I see in ahead of us is further product innovations that are already underway and further ramping up of the direct sales resources and both of which should enable us to reach more brands and provide more experiences; and more broadly, we think that there is expansion even beyond there.

So as I look at more titles available to repeat what we did with Candy Crush and our other King paddles, we have other launches across the company that we can look into integrating that experience and broaden the overall network. So all of these opportunities ahead of us and the scale of the player network gives us a really good kind of momentum; and we feel pretty good about where the business is headed. Thank you.

Operator: The next question will come from Mike Ng with Goldman Sachs. Please, go ahead.

Mike: I was just wondering if you could talk a little bit more about your long-term content plans for World of Warcraft, and just also talk a little bit about the philosophy around managing content for Classic and Modern; and could you just share a little bit more about your expectations for a wild growth in 2021?

Operator: The next question will come from Brian Nowack with Morgan Stanley. Please, go ahead.

Matt: Hi everyone. It's Matt on for Brian. Thanks for taking the question. Can you just provide a quick update on Call of Duty: Mobile and how we should think about growth vectors to the game in its second year now, and any early thoughts on the launch in China? Thanks.

Rob: Thanks for the question. I'd say overall, we see a ton of opportunity ahead on, on mobile. I think it's really important for us to step back and look at the fact that Call of Duty: Mobile in the West has only been live for about... actually a little less than a year and a half; and in that time period, and that we share this data, but we quickly scaled over 300 million download; and Daniel had also mentioned, in the fourth quarter we delivered our best quarter yet; and obviously, a clear sign that our teams focus on gameplay and new seasonal content, and just driving engagement overall is driving strong results for us. But this is certainly just a point in time; and when you step back and look at the biggest games in the West, they continue to scale at the 3-year mark and well beyond in many cases. So we believe we have a lot of headroom and regions around the world to grow this business; and the beauty of Call of Duty: Mobile that allows us to reach new players and markets where a console and PC may not be as well developed; and we've seen tens of millions of new players and regions like Latin America, India, and beyond. Well, we're seeing potential for a lot more upside; and looking ahead, for this global community, of course, now we're going to take our end game seasons and content and events to another level for our community.

I also see a lot of opportunity for us at the local market level to drive local initiatives, to make Call of Duty, even more relevant in those local markets; and now I want to go back and mention one other thing, which I think I mentioned on a previous call, which is it's really important to note that all of this right now is a creative to our overall franchise success.

When we look at registered players who play both on mobile and on console or PC, these players show significantly higher engagement in player investment than other groups. And so, again, it's just proof that I think the ecosystem is working really, really well together. Now you also asked about the recent release in China by Tencent -- and it is early, right?

But the game is off to a great start. We've seen tens of millions of downloads in the first month, a lot of good reception early on, and we do think this is going to be a meaningful contributor to our overall mobile results as we move forward. And as I stepped back, I'm just really excited about our ability to now grow our brand further on a global basis by being in such a massive, massive market.

So the way I'd sum it up is that it's been a great start on mobile, but it's just that. It's a great start. Mobile is a critical long-term growth driver for Activision, and we're definitely taking a long-term view of the platform and the opportunity. We're hiring aggressively to make sure we're well positioned to create the best possible mobile experiences for our community; and I think importantly, as we project even further out, making sure we have the ability to expand to mobile, the very best of what's working in the quality of the ecosystem, which I think presents yet another layer of opportunity for us in the years ahead. Thanks for the question. All right. Thank you everyone.