During the Activision Blizzard Q3 2020 investors call, Bobby Kotick announced Blizzard Entertainment is hard at work on multiple products in the Diablo franchise.
Diablo Immortal will soon enter external regional testing!
A full transcript of the Blizzard Entertainment portion will be available this afternoon. Follow @blizzplanetcom for the update.
Activision Blizzard Q3 2020 Investors Call Transcript
(work in progress)
Kotick: I hope all of you and your families are safe and healthy in the midst of the ongoing pandemic. This week, a few hundred of our employees were evacuated from their homes in Orange County because of fires. The resilience our employees around the world continue to show under very difficult circumstances is incredibly inspiring.
Our extraordinarily talented teams have been able to connect and entertain hundreds of millions of people around the world at a time when connection and joy is more important than ever. This led to better than expected Q3 results, and we’re again, raising our outlook for the full year. We now expect net bookings in 2020 to grow over 25% year-over-year with earnings per share, growing even faster.
Since refocusing our teams on our greatest opportunities, we’ve started to return to the execution excellence we’ve always been known for. We’ve significantly grown, the number of creative and commercial employees working on our key franchises. We have a clear strategy to continue expanding, reach, engagement and player investment across all of our biggest franchises. And we continue to increase investment to grow the communities anchored in our franchises.
We have a deep company-wide commitment to continue to deliver the highest quality content and live operations to our network of almost 400 million players.
And we’ve transitioned the business to a digital first model, enabling our players to consume our content in the most convenient value-focused manner. Our continued strong results reflect our focus on execution. Today, we’re in a position to deliver sustained and significant long-term expansion across our portfolio of fully-on franchises.
As we execute against our content pipeline, extend our key franchises to mobile, introduce new free-to-play experiences, and continue to optimize end-game operations, we are positioned to continue converting our growing engagement into consistent and long-term revenue and earnings growth.
We intend to achieve with all our franchises, as well as the potential new franchises, we are actively creating many of the successes we have had with Call of Duty. In World of Warcraft, for example, we’ve seen unprecedented engagement trends since the subscriber base doubled following the launch of World of Warcraft Classic last year. Pre-sales of the upcoming Shadowlands expansion are the highest we’ve seen at this stage ahead of any release.
Blizzard has the largest team ever working on ensuring Shadowlands meets all of our players’ highest expectations and to deliver more frequent major content launches across both the modern game and Classic in the years ahead.
Blizzard has also dedicated creative talent focused on delivering multiple mobile experience in the coming years. Our franchises are well-suited for global mobile, console and PC gaming audiences.
And we’re determined to deliver compelling mobile experiences for both existing fans of our franchises and the hundreds of millions of players around the world who haven’t yet played our games.
With our teams hard at work on multiple products in the Diablo franchise and major innovations for the Overwatch franchise, as well as the number of new potential franchises at Blizzard and King, the pipeline across our portfolio and the potential for revenue and earnings expansion has never been stronger.
I am so proud of our employees amidst continuing to work in the most challenging environment I’ve ever experienced in my three decades of leading the company. Our teams continue to perform with extraordinary commitment to our audiences around the world. Of course, ensuring that our employees and their families are safe and healthy remains my number one priority.
The majority of our teams continue to work successfully from home and they continue to show ingenuity and fortitude. As they overcome challenges in health care, family care and work. For the balance of this year, we’re raising our outlook and we believe we will continue connecting and engaging more players than ever before in 2021.
Thank you for your continued support. Daniel will now review the highlights of our operations for the past quarter with you.
Daniel: Even through the challenges of operating during the pandemic, Activision blizzard significantly exceeded its third quarter outlook with strong execution across our three strategic growth drivers, expanding audience, reach deepening engagement, and increasing player investment.
Our playerbase grew 23% year over year and total time spent in our games increased even more. We grew net bookings 46% year-over-year, driven by strong in-game performance with substantial operating margin expansion and earnings per share more than doubling year-over-year. We achieved these results through a laser-focus on execution, both in major content launches and live operations across PC, console and mobile.
And in our new approaches to engagement and business models, particularly the introduction of Call of Duty free-to-play experiences. Our continued investments and successful initiatives for our largest franchises position the business for ongoing strong results; and we expect reach engagement and player investment to remain structurally higher going forward.
We’re seeing a clear return on our increased investment in creative and commercial talent. And we intend to continue scaling our capabilities across our six key franchises: Call of Duty, Candy Crush, World of Warcraft, Hearthstone, Diablo, and Overwatch. We’re still early in unlocking the full potential of these wholly owned franchises and IP.
Now turning to our franchise and operational highlights across our business units.
Also in the third quarter, Activision continued to re-imagine the beloved IP with the successful launch of Tony Hawk’s Pro Skater 1 and 2. The game received fantastic reviews and became the fastest title in the series to reach 1 million units sold, highlighting the opportunity for our rich library of classic franchises.
EDITOR: This might hint at Diablo II: Resurrected.
Now turning to Blizzard, MAU (Monthly Active Users) were 30 million in Q3. Well, the Warcraft MAUs were stable year-over-year — having structurally increased last Q3 — following the launch of World of Warcraft Classic.
Anticipation continues to build for the Shadowlands expansion ahead of its November 23rd launch. Franchise engagement is at its highest level for this stage ahead of an expansion in a decade with pre-sales well ahead of any prior expansion.
The team is determined to build on this momentum, incorporating the community’s feedback from testing to ensure that the expansion delights and engages players over a sustained period. The response has been extremely positive so far. Particularly around the new character customization options and the new player experience — which not only streamlines how players enter the game, but allows current players to seamlessly level up new characters in previous expansions.
And Blizzard will follow Shadowlands with more content for the franchise than ever before into the next year and beyond.
Hours played in Hearthstone grew year-over-year in the third quarter with the Battlegrounds mode, seeing sustained strong engagement since it’s released last November.
Battlegrounds engagement illustrates the significant potential for new modes within the franchise and the team continues to execute against an innovative pipeline with regard to this opportunity.
November, we’ll see the broad release of Duels — a new player versus player mode, which is already seeing strong interest in early access since it’s reveal last week, alongside a new in-game progression system in the latest expansion: Madness at the Darkmoon Faire — all aimed at providing a rich and rewarding experience that drives growth across existing lapsed and new players.
Overwatch continues to have a large and dedicated community with an average 10 million monthly players in the quarter, more than four years since launch.
Millions more have engaged with the 2020 season of the Overwatch League with the grand finals being the most watched event in the league’s history.
And finally, amongst multiple Blizzard mobile titles under development, Diablo Immortal saw a hugely enthusiastic response in internal testing in the third quarter and will soon enter external regional testing.
The title has already been met with incredible fan reception with pre-registration is off to a very strong start. Around 10 million people have already registered their interest in the game. In summary execution against our franchise strategy has driven another quarter of strong year over year growth across the business.
Dennis will now share the detailed results of our third quarter and specifics of our raised outlook.
Dennis: Today, I will review our Q3 2020 results as well as our outlook for the fourth quarter. Net bookings in the third quarter, grew 46% year over year to $1.77 billion with digital net bookings going 65% year-over-year and representing over 90% of the total.
Blizzard revenue was $411 million growing 4% year-over-year driven by another strong quarter of growth for World of Warcraft. Operating income was $133 million increasing 80% year-over-year with an operating margin of 32% — 14 points higher year-over-year.
Total segment operating profit of $726 million grew 147% year-over-year. This was despite and approximately $50 million headwind because we adjusted e-Sports franchise terms and made investments to support our team owners and ecosystems amidst a challenging environment for live events during the pandemic.
Blizzard will release Hearthstone’s Madness at the Darkmoon Faire expansion and the World of Warcraft: Shadowlands expansion.
Before I discuss the specifics of our outlook, I’ll provide some context. We are ending the holiday season with strong momentum across World of Warcraft and our three largest franchises, which bodes well for the future. And we are launching major new content for World of Warcraft into highly engaged communities.
But at the same time, in the short term, we wish to remain proven in our assumptions regarding the consumer spending environment, the console transition and the pace of player migration from deeply engaging existing content.
Successful execution against our plans would position our segments to build on the aggregate performance reflected in our revised 2020 outlook. So in closing, our business has seen the structural change this year, and we continue to experience strong momentum heading into the holiday season. And next year we see substantial opportunity ahead for our franchises across geographies platforms and business models.
And we’ll continue to focus on business improvements and operating efficiencies and the service of investing more in development to further expand our communities and franchises. We remain confident that executing against our plan will position us to deliver strong results. And shareholder value over the long-term.
Matthew Thorton from Truist Securities — There’s a lot going on right now in terms of platforms, not only next-gen consoles launching, but new entrance in the streaming space in particular. Just wondering if you can update us on your latest views on some more to supporting more platforms over time and also your strategy with respect to subscriptions. Color there would be helpful.
Daniel: We love to see the platform innovation, be it in next-gen consoles or streaming, or the increased power of mobile devices, which really enables new and unique ways for us to deliver experiences and content to our communities with more well-capitalized companies coming into the space and really investing to extend the reach of gaming — if anything, this is just going to accelerate the growth in an already growing industry. So it’s actually great for everybody.
These platforms really need great content to thrive, and for us as a leading content owner, that fully owns our franchise and our IP, we’re really well-positioned to take advantage of this expansion and platforms, and also the associated economics.
We’re also excited just for the next-generation of consoles and the potential they offer to really bring even more compelling experiences to our players. And you’re already seeing us supporting the new hardware with the launch of Black Ops: Cold War on day one, as Rob was mentioning. Ultimately, for us, our priority is to build the best player experiences where our players want to be and really where they can connect with other members of the community.
It’s just so powerful. That said, though, our development resources just are finite. So we really have to focus on where the biggest opportunities are. For example, we need to make sure that we’re enabling our franchises on the billions of mobile devices that are available right now. That’s by far our biggest opportunity, and we’re investing meaningfully to capitalize on this and to take all our franchises to mobile over time. That’s really important for us.
Now regarding your question on subscriptions, we’re also very fortunate in that we have exposure to every gaming business model at scale. We operate the largest subscription franchise in the industry — in World of Warcraft.
So we feel we have a good experience here; and we already have deep digital relationships with our players, including through Battle.net — which gives us just a lot of potential in this area. We already offer multiple ways for players to access our most current and premium content, and this will really continue to evolve as our business needs change.
Our current business models offer tremendous value to our communities. As you can see from our results, it’s also driving great financial results for our shareholders. Good. On all lanes.
Michael J. Hickey from the Benchmark Company — Congrats on another solid quarter. A few questions for Jay. If you’re up for it here. Curious if you could update us on World of Warcraft subscriber playerbase. Expectations for Shadowlands and your view of the go trajectory for the franchise heading into 2021.
Jay: We’re really excited for players. To get their hands on the Shadowlands. And we’ve announced that that the release date is November 23rd. That is the exact 16th year anniversary for the launch of the original World of Warcraft.
We made the delay earlier to Shadowlands to make sure that the quality of the game is really going to match our expectations and that the game was going to be great; and the community feedback that we received on that decision was overwhelmingly positive; and so, we’re keeping the quality of the game as a top concern.
It’s helped drive a lot of excitement for WoW, both in the form of really strong player engagement and as well as expansion pre-sales. So players are already enjoying the content that were released with the Shadowlands pre-patch. But I want to talk about a feature that I’m personally really passionate about, which is the new player experience.
So the goal for this system was to really streamline learning how to play World of Warcraft (for newcomers) and also give people who have multiple characters, a way to level up in previous expansions.
Today, the way we look at the WoW ecosystem is that we operate two distinct game modes, both with very engaged playerbases; and that gives us the opportunity to deliver a lot of content into the WoW community — really, more than ever before.
All under a single unified subscription. We’ve talked before about our plans to expand the size of the development teams; and we intend to follow with Shadowlands with even more content across both the modern game and in Classic.
But if we step back, we think of Warcraft as a huge franchise and WoW is only a part of it. We’re always exploring how to express Warcraft with new experiences; and we see a lot of opportunity for growth in 2021 and beyond.
Mario Lu from Barclays Capital — You made a number of significant changes as an organization in the past couple of years — with the company itself, and changes in improvements in late 2018 to doubling-down on franchises like Call of Duty by extending into new platforms, introducing new features like cross-platform play. With the new-gen consoles coming out in a couple of weeks, how do you envision the business evolving in the next 5 to 10 years, and how does Activision Blizzard as a company benefits from those trends? And then just, really quickly, Dennis… you mentioned that the successful execution in 2021 relied on to build on the 2021 outlook. Just wanted to clarify, does that mean potential year-on-year growth in terms of either the top or bottom line next year? Or am I just reading too much into it?
Kotick: I will take on that longer-term outlook. So I think when you look at this year and particularly the multiple touch points of opportunity that we’re realizing on franchises, like Call of Duty, those same opportunities exist for us on all of our franchises, as well as the new potential franchises that we have in development.
And this is my now 31st year of doing this. I don’t recall a time where I’ve seen more opportunity for growth and margin expansion in all the time that I’ve been doing this. The challenge for us is going to be:
- prioritizing opportunity, and then
- making sure that we have the right talent aligned with those opportunities.
But when I look at the success that we’re experiencing now, and I think about the opportunities we have over the next few years, including next year. We have more momentum going into the next few years than I can remember in a long time; and a lot of the changes that we’ve made over the last few years are really starting to pay dividends.
So from a long-term perspective, I think more platforms, more opportunities to deliver interactive entertainment experiences, increasing engagement that we’re seeing from our gains becoming increasingly social, the shift to more frequent delivery of content. The flexibility that we have in player investment models.
I haven’t seen as much opportunity ever, and so the challenge for us is going to be to make sure we prioritize them effectively and have the right people in place to take advantage of them. But if you’re asking about long-term outlook, I don’t think it’s ever been better.
Dennis: And then just turning to the second part of your question… I think what you heard sprinkled through Jay and each of the major franchises, is that there’s a lot of opportunity for growth. Building on Bobby’s comment, both in the near-term and in the long-term, and I think you heard that right.
In terms of the specific comment in my section regarding our segment operating results in being able to grow off of that base, that guidance base, which we’ve given for 2021… so we feel like we have a real opportunity to do that with great execution. So we’ve got great momentum in our biggest franchise, and we think that’ll bode well as we head into 2021 and beyond.