Call of Duty is Activision’s Big Bet after Disappointing Earnings

Activision Blizzard appears to be struggling these days, as revenue and earnings fell compared to the same quarter last year.

Let’s take a look at the headline numbers, and see what those metrics can tell us about Activision stock today and in the future. Management commentary on some of the details may help us understand the struggles facing the company.

Revenues and Earnings Get Clocked

In the second quarter, Activision revenues were actually down about 15 percent, to $1.4 billion, as compared with $1.64 billion last year.

Net income came in at $0.53 per share, or $774 million, down from $0.62, or $902 million, for the same quarter last year.

Operating cash flow was strong at $154 million, bringing the total for the trailing twelve-month period to a very impressive $1.86 billion.

So what exactly do these numbers mean for Activision?

Activision Relies Mostly On Candy Crush

The first thing we have to look at is net bookings. The company defines this as net amount of products and services sold digitally or sold-in physically in the period.

Those bookings fell by almost 12 percent, to $1.21 billion, compared with $1.38 billion for the same quarter of 2018. As this point, most bookings are digital (about 80 percent), coming in at $1.01 billion, down from $1.20 billion last year.

The good news is that Activision management is kind enough to break out just how many monthly active users it has for each of its major games.

In total, Activision had 327 million Monthly Active Users in the quarter.

King, a subsidiary of Activision that is known for its” Candy Crush” franchise, and the lion’s share of monthly active users, with 258 million.

Call of Duty: Black Ops 4” had 37 million, which saw a 50 percent increase in hours played and grew year-over-year versus “Call of Duty: WWII”.

The Blizzard division had 32 million Monthly Active Users. The growth was seen in Hearthstone, thanks to the “Rise of Shadows” expansion and “The Dalaran Heistsingle”-player Adventure.

“Overwatch” remains stable, and World of Warcraft subscribers saw an increase.

As we can see, Activision needs a lot more diversification considering it’s King subsidiary represents almost 70 percent of its active users. Although Activision wasn’t specific about how much growth there was in the candy crush franchise, it did say total time spent “grew strongly year-over-year.”

The franchise is a blockbuster, and pulled in $800 million of in-game bookings in the just the quarter alone. It remains the top-grossing franchise in the U.S. mobile app stores, as it has been for the last two years.

Activision Is In Danger of Becoming Too Relaxed

Activision is thus in a weird position. It has a blockbuster franchise and several other very successful games. However, despite increased user engagement, revenues and net income are declining — due in no small part to Fortnite.

The danger is that Activision management can afford to skate along with this situation for quite some time. That’s because it has almost $4.6 billion of cash in the bank offset by only $2.7 billion in long-term debt.

Both operating and free cash flow remain robust.

In a way, Activision kind of resembles Apple. While Apple continues to make money, generate plenty of cash, and has a CEO that is doing just fine as a game manager, the company doesn’t seem to be innovating. Therefore it isn’t really growing, but with all the money that it makes each year, it almost doesn’t need to.

Activision can’t coast on the candy crush franchise forever. Gamers can be very fickle, and things could turn around on a dime.

I don’t think you want to be paying 18 times earnings for company that is seeing net income declines and appears to lack a real vision at the moment.

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