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Home / Business / Activision Blizzard, Inc. (ATVI) Q4 2018 Earning Conference Call Transcript – The Motley Fool

Activision Blizzard, Inc. (ATVI) Q4 2018 Earning Conference Call Transcript – The Motley Fool

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Activision Blizzard, Inc. (NASDAQ: ATVI)
Q4 2018 Earnings Conference Call
Feb. 12, 2019, 4:30 p.m. ET


  • Prepared Remarks
  • Prepared Remarks:

    Operator ” src=”https://g.foolcdn.com/misc-assets/transcripts-logo.png”/>

    Please standby. Good day, and welcome to the Activision Blizzard Q4 201

    8 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chris Hickey, please go ahead sir.

    Chris Hickey – Senior Vice President of Investor Relations

    Good afternoon and thank you for joining us today for Activision Blizzard's fourth quarter 2018 conference call. With us are Bobby Kotick, CEO; Coddy Johnson, COO; and Dennis Durkin, company CFO and President of Emerging Businesses. And for Q&A, Rob Kostich, President of Activision; J. Allen Brack, President of Blizzard; Riccardo Zacconi, CEO of King; and Humam Sakhini, President of King, will also join us. I would like to remind everyone that this call we will make statements that are not historical facts. The forward-looking statements in this presentation are based on information available at the date of this presentation.

    And while we believe them to be true, they ultimately may prove to be incorrect. A number of factors could cause the company's actual future results and other circumstances to differ materially from those expressed in any forward-looking statements. These include the risk factors discussed in our SEC filings, including our 2017 annual reports on Form 10K and those on the slide for this showing. The company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today, February 12, 2019.

    We will present both GAAP and non-GAAP financial measures during this call. We provide non-GAAP financial measures, which include the impact of expenses related to stock-based compensation, the amortization of intangible assets and related to acquisitions, including legal fees, costs, expenses, and accruals. Expenses related to debt financing and refinancing, restructuring charges, the associated tax benefit of these excluded items, and the impact of certain significantly discrete tax-related items. These non-GAAP measures are not intended to be considered in isolation from, as a substitute for, or superior to our GAAP results. We recommend investors to consider all measures before making an investment decision.

    Please refer to our earnings release, which is posted on www.activisionblizzard.com for full GAAP to non-GAAP reconciliation and further explanation with respect to our non-GAAP Measures. There's also an earnings presentation, which you can access with the webcast and which will be posted to the website following the call. In addition, we will also be posting a financial overview highlighting both GAAP and non-GAAP results. And now, Bobby Kotick

    Bobby Kotick – Chief Executive Officer

    Thank you, Chris. And thank you all for joining us today. We once again achieved record results in 2018. We delivered record GAAP revenue and GAAP and non-GAAP EPS for both the fourth quarter and the year. For 2018, we generated record GAAP revenues across all three platforms, and both Activision and King achieved record segment financial results. While we had record performance in 2018, it didn't quite live up to our expectations. We didn't execute as well as we hoped to in 2018 and our current outlook for 2019 falls below what is possible in an industry filled with growth opportunities. We measure our success by growth in reach, engagement and player investment. And while we had record financial results in 2018, we did not achieve the reach engagement and player investment goals we set for ourselves [201650101] 2019 will require significant change to enable us to achieve our long-term goals and objectives. We're making changes to our development teams to create better content for our biggest franchises more quickly. Across our key franchises, we're adding development talent to ensure our teams deliver exactly what our fans have to expect from our games: a consistent flow of compelling content. We will also increase our focus on adjacent opportunities with proven potential like e-sports for over-watch league and call of duty. We're staffing up production on our incubation efforts faster and increasing our investment in live services, in our tools, in our Battlenet platform, and in new areas like our fast-growing e-sports and advertising efforts. But all with an intense focus on excellence so we never disappoint our players.

    Our pipeline is excellent and our development talent the very best in the world. But we need to focus our efforts so that our development and production resources are better aligned with our priorities. We're reducing or eliminating investment in games and initiatives that are living up to player expectations or our leadership teams may not live up to player expectations in the future. To drive improved execution and to fund development investment, we will have certain parts of the business complexity and duplication in our back-office functions, consolidate certain commercial operations, and revamp our consumer marketing capabilities to reflect our continued migration to a largely digital network .

    While this is not the shift in our strategy, achieving better execution requires change. Change that requires new leadership and organizational commitment to change. We operate in an industry with proven growth and real potential and we haven't grown at the rates that reflect the opportunities our industry affords. We have new business unit leadership committed to serving our players, our employees, and our shareholders. And I'm also very pleased to have Dennis Durkin back as CFO and overseeing our emerging businesses. His steady responsible stewardship of our capital and his relationships with his colleagues served us well during his five-year priority as CFO. As always, I want to thank our customers, our players, and our partners, but especially today, our employees and our shareholders for their commitment and their support. And now, Coddy

    Coddy Johnson – Chief Operating Officer

    Before we discuss the important steps, we are taking the foundation for future growth, let's first review our quarterly results. In Q4, we generated record GAAP revenues of $ 2.38 billion, including the net deferral or $ 454 million. Net bookings were also at $ 2.84 trillion. We generated Q4 GAAP EPS or $ 0.84 and Q4 non-GAAP EPS or $ 0.90. also, both Q4 company records including the net deferral of $ 0.39. While GAAP revenue, net bookings in both GAAP and non-GAAP EPS were company records. Our net bookings fall short of our outlook due to factors I will explain in our segment results. Activision Q4 segment revenues grew 6% year-over-year to $ 1.41 trillion. And operating income increased 14% year-over-year to $ 723 million with monthly active users increasing double digits quarter-over-quarter to 53 million.

    The primary driver for the Activision segment was Call of Duty, which generated more upfront sales than any other console franchise worldwide in 2018, the franchise has accomplished for nine of the last ten years. Black Ops 4 more than Black Ops 3 in its launch quarter with PC units more than tripling. And engagement was strong with average hours per player increasing versus Black Ops 3 as players into a blackout multi-player and zombies. We also saw full-screen downloads of over 40% of console selling-through versus approximately 30% for World War 2. However, sales of Black Ops 4 in the second half of the quarter were below our outlook , up to expected retail demand, lower than anticipated pricing, and other promotional activities that did not meet expectations.

    And although Black Ops 4 in game not bookings started off slower than expected following the introduction of the new one. -game system, we were encouraged by the response we saw when we introduced more content with the second season of events in late Q4. Turning to Destiny, the mutual agreement with Bungie to sell back the commercial rights to Destiny and eliminate our ongoing investment in the game did not have a material impact on Activision's segment operating income in the quarter. But will be capital and development resources for the future. We also continue to drive strong performance for the main intellectual property from our library following the successful launch of Spyro in Q4. And the ongoing contribution of Crash Bandicoot, which has sold and over 10 million units since its 2017 release.

    Again, highlights the enduring nature of our classic franchises. Overall, Activision delivered meaningful year-over-year growth for segment revenue and for operating income. And with the changes we are implementing in 2019, we expect to drive even stronger performance in the years to come. Blizzard was a more nuanced story in Q4. On the one hand, we grew Q4 segment revenues to $ 686 million in operating income to $ 241 million. And Blizzard had 35 million monthly active users in the quarter as Overwatch and Hearthstone saw sequential stability and World of Warcraft saw expected declines post the expansion released this summer. On the other hand, the relatively consistent monthly active user trends for Blizzard's communities were not matched by in-game net bookings, which continue to soften.

    In particular, overwatch and hearthstone both experienced sequential declines in just bookings from players making in -game purchases. Lastly, Blizzard results benefited from the continued success of our business in China and the extension of our partnership with NetEase. Building on our 11-year joint venture, the expanded agreement runs until January 2023 and reflects the substantial value and opportunity for Blizzard's content in China. While the majority of the economics from our renewed arrangement will be recognized over the next four years, Q4 did benefit from the agreement, which was contemplated in our outlook. Now I'll go into more detail in a minute. But increasing the flow and frequency of compiling in-game content and upfront releases to serve the needs of our players is the number one goal set by the new Blizzard leadership team going forward.

    Finally, King grew segment revenue and operating income year-over-year as it continued to recover from the network incident experienced in the second quarter. Q4 segment revenues grew 5% year-over-year to $ 543 million. and operating income increased 28% year-over-year to $ 207 million. King monthly active users of 268 million increased sequentially for the first time since we acquired the business in Q1 2016, driven by the successful launch of Candy Crush Friends in October. Candy Crush Friends is seeing a strong monetization and retention trends contributing incremental growth for the Candy Crush franchise, which overall grew net bookings and monthly active users both quarter-over-quarter and year-over-year.

    This encouraging performance sets the foundation for King to ramp its marketing support and drive further growth for Friends in 2019. Now importantly, our advertising initiative continues to gain momentum growing net bookings over 50% sequentially and again profitably, as the team continues to execute against a sizable opportunity. Now, taking a step back. And looking at our full-year results for 2018. We delivered record GAAP revenue, GAAP, and non-GAAP EPS in net bookings. We continue to make progress in mobile, advertising, and e-sports. However, in-game execution was inadequate for some of our franchises and we saw almost anticipated retail demand.

    As you hear from Dennis, our 2019 outlook is that we will not improve in-game monetization as quickly as we would like. And that it is a transition year where we have less major content to release than we should. So, we have worked with our new business unit leaders to undertake a comprehensive examination of our business and make the changes we need to improve our capital. We've determined that we need to refocus our best resources on our biggest opportunities, and to remove an unnecessary level of complexity and duplication that is built up in certain parts of the business. We have therefore developed a clear plan for this year to refocus and reinforce the foundation for growth.

    This refocus includes initiatives developed by our new business unit leaders, each of which has demonstrated the ability to combine creative excellence with a commercial focus on profitable growth. First, we are investing more in development for our biggest internally owned franchises across upfront releases, in-game content, mobile, and geographic expansion. Second, we are the prioritizing initiatives that are not meeting our expectations and reducing certain non-development and administrative costs across our business. Third, we are integrating our global and regional sales and go-to-market partnerships and sponsorships capabilities across the business, enabling us to better leverage talent, expertise, and scale on behalf of our business units. Our restructuring plan has investment in less productive, non-strategic areas of our business, and will result in a net headcount reduction of approximately 8% while also driving a significant increase in investment, focus, and capabilities around our biggest franchises.

    We are confident that over time this plan will enable our teams to accelerate the delivery of high-quality content to our communities. Specifically, as reallocate resources, and their new talent, we are planning for the number of developers working on Call of Duty, Candy, Overwatch, Warcraft, Hearthstone, and Diablo to increase in aggregate by approximately 20% over the course of the coming year. For Call of Duty, Activision management expects additional resources to deliver more frequent content updates and events for the franchise and accelerate its expansion across platforms and geographies. We also build on our experience with the Overwatch League to launch a professional, city-based Call of Duty league that operates franchise engagement and represents a sizable incremental economic opportunity.

    We are also increasing coordination across our Call of Duty studios with unified development leadership and more unified tools and technology to create a more consistent user experience and leverage our development scale and expertise. For Candy, King management will increase its focus on growing reach and monetization with in-game content, features, and events with a substantial increase in Candy development resources. The advertising business will continue to add engineering and direct sales resources to support our plan for strong revenue and operating income growth in 2019 and beyond. The Overwatch team is also growing as it focuses on delivering a significant content pipeline in the coming years. And the Overwatch league remains a key strategic focus where we will grow the number of resources involved in an expanded product and year-on-year revenue growth.

    World of Warcraft is an example of a franchise where Blizzard has already established a Regular cadence of major content and in-game operations. Additionally, Blizzard is investing in other Warcraft games working on more ways for the community to engage with its enduring and beloved franchise. For Hearthstone, additional development resources will help release content that is both broader and deeper and to optimize the game to deliver an even better mobile experience for its global audience. And Diablo's development headcount will grow substantially as the teams work on several projects under way for the franchise as well as the global launch of Diablo Immortal.

    Overall, Blizzard's management is reinforcing its pipeline with more resources than ever before to support planned mobile titles, several PC and console releases, and WoW's continued cadence of content. Finally, as a company, we will continue to invest in breakthrough new ideas and incubation with focused resources and some of our best creative talent. With 2019 set to be a quieter year for upfront launches, now is the right time to implement this plan. Work is already under way across the company as we speak. We expect to have completed the North American components of our plan by the end of Q1 with implementation of the international components by end of year. And we have already started to increase developer resources on our biggest franchises and will be aggressively hiring talent in the coming quarters.

    As we look forward to the coming years, we plan for all of our major franchises to be operating at scale and capitalizing on opportunities that include robust ongoing live operations and regular content launches both large and small, strong mobile experiences available for all of their communities to enjoy, new engagement and monetization models, including where appropriate e-sports and advertising. And underpinning all of our franchises will be our deep relationships with growing and vibrant communities which are increasingly direct and digital. In short, we are focusing on the entire company to return to the franchise focus that has fueled our long-term success and to better leverage the scale of our business for future growth.

    Dennis Durkin Chief Financial Officer and President of Emerging Businesses

    Thanks, Coddy. Before I discuss the 2019 in Q1 outlook, I just wanted to take a moment to say how excited I am to be back and to return to a more day-to-day operational position than the CFO as well as the leader of our emerging businesses . We have a tremendous team, and although we have a lot of work in front of us, I see a stronger pipeline and more opportunities for long-term growth than ever before. As Bobby and Coddy mentioned, 2019 will be a transition year for us if we implement change to enable our teams to create better content for our biggest franchises more quickly. Given limited frontline releases, the organizational work under way, and the current competitive environment, we are planning for this year to be down year-over-year.

    I'll first go through the segment including slate to provide some context for the outlook. Starting with Activision. The main driver for this segment will be the Call of Duty franchise. Heading into 2019, we have momentum to build on the launch of Black Ops 4 with the franchise yet again number one globally in upfront sales in 2018. We will continue to optimize in-game content this year to drive ongoing engagement and player investment. And in Q4, we will have another major launch for the franchise that will appeal broadly to both existing and new fans with what I can only describe now as a great step forward in the franchise that is also rooted in some of the franchise's most important history We have high expectations for the game, but for modeling purposes, we are conservatively planning on upfront Q4 sales to be lower than Black Ops 4. We will also bring Call of Duty mobile with our partner Tencent. Although you would expect, we take a conservative approach in assuming no material operating income from this initiative this year. Outside of Call of Duty, we will release Sekiro in Q1 and our strategy of reimaging classic franchises will continue with Crash Team Racing on multiple platforms later this year. We will not generate material revenue from Destiny in 2019 following the sale of publishing rights to Bungie. Excluding Destiny in both years, our outlook is roughly flat for net bookings for the rest of the Activision segment in 2019.

    Turning to Blizzard, we expect materially lower financial performance this year. 2018 benefited from the release of World of Warcraft: Battle for Azeroth while we are not planning a major frontline release for blizzard in 2019. And Blizzard exited 2018 with softness for its in-game revenues that will take time to stabilize in return to growth. Blizzard's financial this year, looking further ahead, Blizzard's pipeline or PC, console, and mobile content will be more than ever, and we expect a significant addition of development resources to accelerate the pace of delivery over time. Finally, King is entering 2019 with momentum as it continues to recover from the network incidents it experienced in Q2. The business will continue to face the first few months of the year until the anniversary of this disruption. Nonetheless, we expect segment revenue to grow modestly year-over-year driven by the growth of the Candy franchise and the continued ramp of our advertising business. Bringing all this together to the total company level, our outlook does not incorporate bookings declining 13% year-over-year.

    The Blizzard segment represents the majority of this year-over-year change given its 2019 release slate and in-game performance. The lower net bookings from Destiny is also a factor. The lower net bookings performance is translated into lower segment operating income and our outlook in high-teens year-over-year decline. Again, the Blizzard segment operates the majority of this change. Activision segment operating income is also expected to be lower due to the following factors. First, we are planning to invest more in Call of Duty this year, including to support platform and geographic expansion. And second, we will not generate meaningful operating income from Destiny this year.

    Although, I would note that this is consistent with our planning assumptions where we have continued publishing the game. King segment operating income is planned to be roughly flat as we invest in Candy marketing to build on the encouraging start for Candy friends. Lastly, I would note that we are planning for a higher tax rate this year while our 2018 GAAP rate includes one-time benefits from US tax reform and our IRS settlement, both our GAAP and non-GAAP 2019 rates incorporate the full impact of new international tax commission. With that context, I'll detail the financial guidance for 2019 and Q1. On a GAAP basis for 2019, we expect revenues of $ 6.3 billion, including GAAP deferrals or $ 275 million. We expect net bookings of $ 6.3 billion.

    Product costs, game operations, and distribution expenses of 24%. Operating expenses including software amortization of 56% and a GAAP only charge of approximately $ 150 million related to the restructuring plan. We expect non-GAAP and non-GAAP interest rate zero, a GAAP tax rate of 24%, GAAP and non-GAAP share count of $ 775 million, and EPS or $ 1.18. For 2019 on a non-GAAP basis, we expect product costs, game operations, and distribution expenses of 24%. And operating expenses including software amortization of 46%. We expect a non-GAAP tax rate of 20% and non-GAAP EPS or $ 1.85 which includes GAAP deferrals or $ 0.25. For Q1, on a GAAP basis, we expect revenues of $ 1.72 billion, which includes the recognition of GAAP deferrals or $ 540 million.

    We expect net bookings of $ 1.18 billion. Product costs, game operations, and distribution expenses of 20%. Operating expenses including software amortization of 57%, and we expect approximately $ 100 million of the GAAP-only restructuring charge to be booked in Q1. We expect non GAAP and non-GAAP interest expense of zero, a GAAP tax rate of 24%, GAAP and non-GAAP share count of $ 772 million, and EPS or $ 0.39. And for Q1 on a non-GAAP basis, we expect product costs, game operations, and distribution expenses of 20%. And operating expenses, including software amortization or 43%. We expect a non-GAAP tax rate of $ 0.22 and non-GAAP EPS of $ 0.63 which includes the recognition of GAAP deferrals of $ 0.43. Turning to capital allocation, I wanted to spend a moment to quickly review our historical track record just as context.

    As most of you know, we always have a disciplined and balanced approach to capital allocation. We view a strong balance sheet as a strategic asset and while our focus in recent years has been on paying down debt with over $ 4 billion repaid in the last five years, we have also returned almost $ 11 billion to our shareholders over the last decade with around $ 2 billion in dividends and $ 9 billion in share repurchases. With this balanced approach in mind, our board has the following: a 9% increase in our dividend to $ 0.37 per share payable in May, and also a new, two-year $ 1.5 trillion share repurchase authorization. Before I conclude, I wanted to summarize the company's position heading to 2019. We continue to have tremendous potential in front of us.

    Our combination of leading owned franchises, a direct digital connection to our consumers, best in class developer talent, and geographic platform and business model diversity, creates a powerful foundation for longer-term growth. We must, and will, relentlessly focus on the world-class execution, business excellence, and quality content delivery that has been the backbone of our company and business for many years. Our plan to increase our focus on our core franchises is consistent with that approach and I am confident that executing against our plan will position us to deliver strong results and shareholder value over the long term. Looking ahead, I look forward to updating you on our results as we make progress throughout this year. Now, I welcome our business leaders, Riccardo, Humam, Rob, and Jay, as they join us for the Q&A portion of the call. Operator

    Questions and Answers:


    Thank you. If you would like to ask a question, please signal by pressing * 1 on your telephone keypad. If you are using a speakerphone, please make sure your function is turned off to allow your signal to reach our equipment. Again, press * 1 to ask a question. We'll go first to Colin Sebastian with Robert W. Baird

    Colin Sebastian – Robert W. Baird – Analyst

    Great. Thanks for taking my question and welcome back, Dennis. I appreciate the comments on the restructuring and hoping you can provide a little more color on the reallocation of resources and in particular discuss how and when we can expect that effort to translate to a return to growth.

    Coddy Johnson – Chief Operating Officer

    Sure, thanks, Colin. This is Coddy. I'll take that one. I guess stepping back as we shared during the call, our plan is focused on delivering growth in reach, engagement and player investment. And there's really big three areas of it. One is refocusing on our own franchises where we feel like we have the highest opportunity for growth. We have the right amount of development resources to deliver great content within those franchises to our player communities. And then where appropriate, benefiting from company scale and removing duplication and inefficiency.

    And so, to do this with the new leadership teams, there are three specific and important changes when we head to 2019 that we plan to deliver. The first is investing in the development of our main franchises. As I mentioned, 20% increase to drive the content and cadence and pace. Second is reducing and eliminating initiatives that are not meeting our expectations and also areas where we can find duplication and remove it. And then third, integrating our global and regional sales in go-to-market and partnerships and sponsorships so we can leverage scale.

    We know we have a global and fan player base that is looking for content on a regular cadence to come more quickly and come across multiple platforms. And we think we have set up each of our operating divisions to be able to deliver on that. We also think we have better set up the company to be able to deliver on that if we leverage those areas where scale can really help to bring our content and our franchises out to the world. As for timing, and as we see those effects, we are only guiding to 2019 today. But what I can say is that we are confident in the growth opportunity ahead of us. Our increased focus, our investment, leaning into our big franchises, it's a sign that we are headed to a place where growth – given the right resources, and given the right plan – can be realized.


    We will now take a question from Evan Wingren with KeyBanc Capital Markets

    Evan Wingren – KeyBanc Capital Markets

    Just wondering if you could give us a bit more commentary on the components of your guidance for fiscal '19. How you see your franchises performing and looking at the seasonality of the year unfolding?

    Dennis Durkin Chief Financial Officer and President of Emerging Businesses

    Thanks, Evan. It's Dennis here. Happy to provide some color on that. I guess first kinda helicoptering up a little bit. There are a few things to think about as it relates to our outlook. I think the first point is obviously the one relative to our release slate, which is diminishing this year or down this year. And it does, obviously, impact our outlook. In addition, the in-game softness that we saw exiting '18 causes us to enter the year at a slightly lower trajectory than last year. And although we have a plan to turn around, it's going to take some time and so we don't actually assume a full recovery or that in 2019.

    And then, we are pretty conservative in terms of how we plan for some of the new things in our pipeline, like our mobile games. Obviously, shoot for breakout hits, but it's very hard, obviously, prudently plan for those in your outlook. So, we're obviously more conservative on that. And then the last piece I would say is relative to our tax rate. You heard a few of the comments about it being up because of some of our international considerations this year. So those are the main considerations I guess just relative to the overall outlook. As it relates to seasonality, given the limited number of products launches this year, Q4 will again be a very important quarter.

    Again, we've tried to take a prudent approach relative to that assuming that Call of Duty units are down year-over-year in our outlook. I would say that the team that's building this new game for us in Activision is building what they believe is the best Call of Duty we've ever built. So that team is certainly targeting growth even though we haven't put it in our outlook in that fashion. So, I guess just stepping back, our approach relative to guidance, and my approach to guidance is really for this year is really consistent with how we've set guidance in the past. A careful approach to guidance I think is always appropriate, but particularly this year given the changes in the industry and the amount of work we need to accomplish this year. Thanks for the question, Evan.


    We'll now take a question from Ray Stochel with Consumer Edge Research.

    Ray Stochel — Consumer Edge Research — Analyst

    Great. Thanks so much for taking my question. This is for Rob. Can you quickly tell us about how you are thinking about leading Activision? And then give us an update on the Call of Duty Black Ops 4 launch and how that game is trending so far? Thanks.

    Rob Kostich — President

    Thanks for the question, Ray. So, I've been at Activision for about 15 years now. And I've touched just nearly every part of the business. What I really look forward to is taking all of those experiences and applying it in this broader capacity. At a high level, I'm really focused on two things right now. It's our players and our people. Very simply, I'm very committed to our players in overdelivering on their expectations. That is just something we must do. Now behind it all is our people, they're world-class, they are our foundation, and we wanna continue to invest in them and to create an environment for them to do their best work.

    Now if I step back from an Activision perspective and look at the business, we do have a lot of opportunities right in front of us in mobile and PC expansion, in geographic expansion — especially in Asia. And e-sports, as was mentioned on the call already. And of course, in business models that continue to arise in our industry and create opportunity for us. And as a division, we have specific initiatives against each of these in progress that we're excited about. Now, in terms of Black Ops 4. As Coddy mentioned, it delivered better unit sell-through than Black Ops 3 in its launch quarter. So, what we have is a really strong foundation of players right now. And our biggest objective is driving ongoing engagement with our community.

    Now, the good news is we have our best in-game content coming still. Our next event on February 19th will be what we believe is our biggest and best in-game event. And it's gonna have significant updates across all modes. And we're looking forward to see how that lands and resonates with the community. And then if I look even further ahead to what Dennis mentioned, it's worth mentioning again. This fall's launch I think is gonna resonate very powerfully with our community. It is an amazing game, it's gonna feature an entirely new campaign. A huge and expansive multi-player world, and of course, some fun co-op gameplay. But from day one, what gets me really excited is every time we've shown this title internally, it's just created a ton of buzz. Now, I wish I could tell you a lot more right now. But unfortunately, you're gonna have to wait. But I think it's gonna be really worth it. We can't wait to share with the world. So, thanks for the question, Ray.

    Bobby Kotick — Chief Executive Officer

    And I would just add, Ray — it's Bobby — that when you look over the last decade of Call of Duty content, I think that Rob is underselling what the internal enthusiasm is. I haven't seen this much enthusiasm that I can remember almost ever. So, we're excited about the fall release of Call of Duty content.


    Our next question will come from Brian Nowak with Morgan Stanley.

    Brian Nowak — Morgan Stanley — Analyst

    Thanks for taking my question. One for probably Jay. I guess the question, Jay, is what is the new management team doing just to make sure that Blizzard is back on track to executing as one of the top studios of as it should be? Thanks.

    J Allen BrackPresident of Blizzard

    Thanks for the question. I think one of the things that I feel like it's important for us to talk about is we're a bit of a new leadership team and as we've come together, it's clear that we believe a lot in our future and that we have a lot to prove from both a game and kind of a content delivery standpoint. I think we have a huge amount of opportunity. We have fantastic IPs, we have lots of games that we want to create, and we have a very passionate community that is hungry for all of the things that we can kinda produce. So, we have two big goals going forward. The first one is of course to make excellent video games. The second is to find ways to deliver more content to our player communities.

    To meet these goals, we need to work to increase the amount of content that we're delivering. Right now, we have the largest line up of PC, console, and mobile games that we've ever had. And we're working to meaningfully increase the development capacity and the development headcount. That investment and development talent has really required us to make some difficult trade-offs. As Coddy mentioned, we're gonna reduce our non-development positions in our offices around the world. Specifically, looking at our SGNA and non-core business units. This was a very, very difficult decision.

    I'd say a top five career difficult kinda moment for me, personally. But we're committed to doing everything that we can to help get us into a good position going forward. We really want to serve our players and we have to serve our communities in the best possible way and be a great creative organization. As difficult as kind of all this is, I think we're happy about the things that we're working on. We're working very hard to kinda live up to our mission and we really look forward to the community and you all, seeing the results of this increased development work over time.

    Bobby Kotick — Chief Executive Officer

    And I'll just say it's really terrific for the company to have Jay's leadership. He's humble about his experiences. When you think about World of Warcraft and Hearthstone and the Warcraft franchise, it's been one of the most successfully led franchises in all of video games and we couldn't be happier to have Jay in the role that he's in.


    We'll now take a question from Alexia Quadrani with JP Morgan.

    Alexia Quadrani — JP Morgan — Analyst

    Thank you very much. I guess my question is, given one of your competitors' decision to launch a free-to-play Battle Royale game, are you rethinking the modernization model for any of your own games? Maybe including Overwatch?

    Coddy Johnson — Chief Operating Officer

    Sure. This is Coddy. Thanks for the question. I guess maybe a couple of key points. First, stepping back. One of the things that sometimes gets lost in the discussion around economic models is the player and game experience itself. Our North Star is to deliver compelling and engaging gameplay, full stop. Without that, there are no economics. The second point is that the economic model has to work with the franchise and the community and the gameplay. They need to work to reinforce each other. And we feel like we're in a pretty unique position, honestly, across the industry. And that we have multiple business models running at scale across our franchises today.

    We have free-to-play games, microtransaction-based games, games with an upfront charge or with a subscription. And we also now have advertising, which is growing as well. And we think that provides a range of options for our product and development teams to look across and pair the best economic model with the best gameplay experience. One thing we know though is that we need to be able to move more quickly. And we need to be able to rapidly evolve with the demands of our players in the market. And that's why, as I mentioned, we are investing significant development resources in our core franchises to be able to move more quickly on behalf of our players and to be able to take advantage of new business models.

    And on the free-to-play part of your question in particular, obviously, the most proven platform is mobile. So, as we increasingly bring Activision and Blizzard IP to the mobile space, you will see us deploy more free-to-play models. Embedded in your question there was also the fact that we see competitors now on PC and console going free-to-play. And I just emphasized again that we believe our investment and resources coupled with our strong IP leaves us in a really good position to take advantage of evolving business models in our industry.

    The last thing I'd say, and it's just worth mentioning, is that the success we see with titles like Call of Duty, or even recent competitive launches, shows that a really well built, well-polished triple-A experience for players can come still with an upfront charge and it can be a great player experience and a great business model. So, looking ahead, we'll continue to evaluate all of our games across our franchises and use the models that we think best, both for the player experience and for our business.


    Our next question will come from Mike Hickey with Benchmark Company.

    Mike Hickey — Benchmark Company — Analyst

    Hey, guys. Thanks for taking my questions. Just focusing on your key segment. It's hopeful, you could provide some more color on the Candy Friends launch. I guess, how it went from your perspective. And how it's performing now, would be very helpful, thank you.

    Humam SakhiniPresident of King

    Hey, Mike. It's Humam here. Thanks for the question. So, Candy Crush Friends launched in October. It's been a great addition to the franchise. The game has really got a lot of great new game modes and mechanics and we really think it's our most polished title ever. And it's brought a lot of the franchise characters to life like never before. What I would say is that after many years of the teams operating the Candy franchise at scale, they've really poured all of their learnings into that Candy Friends experience.

    And what we're seeing is that's paid off. It's really showing some strong retention. And the games per player monetization metrics are well ahead of where this franchise's other titles were at a similar point post-launch. And again, it really reiterates and demonstrates how kind of the years of experience operating Candy were funneled into the Candy Friends title. So, we're off to a great start. And we have more plans in 2019. The way I think about it is we're still in launch mode with Candy Friends and this is the year where we make marketing investments to support the title.

    While we're doing that, the teams have some really strong plans to drive engagement and monetization trends with some proven features in the pipeline to continue to delight the players. So overall, very pleased with the momentum. And I expect that the game will really help drive the Candy Crush franchise growth in 2019.


    We'll take our next question from Tim O'Shea with Jefferies.

    Tim O'Shea — Jefferies — Analyst

    Yes, thank you for taking my question. So, with Overwatch League Season 2 launching soon, just thought it'd make sense for an update on that franchise. It's been over two years since the game launched and we talked on prior calls and again on this call about the lower revenue levels. I'm wondering what the strategy to address this issue and does Blizzard have the development capacity to deliver sufficient levels of new content into this franchise? Thank you.

    J Allen BrackPresident of Blizzard

    Thanks for the question, this is Jay. I think it's important to mention the job the team has done with Overwatch. We feel really strong about the overall IP, the universe, the characters, and the story potential. Along with the global appeal for the game. And we've really built Overwatch League around that with early good results. Delivery of more content at Overwatch is something that's really important and something that we're focused on. The team is delivering new heroes and new maps and new experiences. And as you mentioned, the game revenue has declined recently. I think the community engagement with the game remains strong.

    There are a lot of new ideas for the Overwatch franchise. We feel the Overwatch — you know, it's just a small part of what we can imagine for the overall franchise. And the team has a very clear plan. In order to deliver on that, we're gonna increase the size of the Overwatch team meaningfully. But keep in mind that that's gonna — we're gonna need to balance the existing live content with new products and different kinda support for Overwatch League. I'm really confident that the community will be very excited when we kinda release the things that we're working on.

    Regarding Overwatch League specifically; we saw a great community response and lots of early success. That took a lot of focus but overall, we think it's the right decision. It's been the right decision for the game and for the franchise. We're about the kick off the second season and that's gonna start on February 14th. That'll introduce eight new city teams, it will introduce home and away matches for some teams for the very first time, and the first match that's actually gonna kick off is going to be a repeat of the grand finals between London and Philadelphia. So overwatchleague.com is where you can see that.


    We'll take our next question from Brandon Ross with BTIG.

    Brandon Ross — BTIG –Analyst

    Hi, thanks for taking the question. I was just hoping you could provide a little more color on your rationale for parting ways with Bungie and the Destiny franchise? And kinda what happened with that game? Thanks.

    Coddy Johnson — Chief Operating Officer

    Sure, thanks, Brandon. This is Coddy. I guess, let me say first that we're confident that this was the right decision for both parties. Bungie gets to focus on the IP that they created, and we get to focus on our biggest opportunities on our biggest franchises with our best resources. Our decision was reaching a mutual agreement with Bungie to sell back the commercial rights and for us at least, it was rooted really in our strategy overall. First, as you know, we didn't own the underlying Destiny IP. And we do for all our other major franchises, which we think is not just a differentiator for us in the industry but also controlling the underlying IP gives us the chance to move in with new experiences and new engagement models, which also come with new revenue streams.

    And of course, structurally higher economics when you own the IP. And that leads to probably the second factor in our decision process, which is Destiny is highly critically acclaimed, high-quality content, but it was not meeting our financial expectations. As we went through at the end of the year, our financial planning for 2019, it indicated that Destiny would and to have been a material contributor in operating income to our business. And third, we had internal resources supplementing Bungie's work. And that means they're tying up one of our scarcest resources, which is developer talent. Which now under the arrangement we've reached will be freed up after a short transition period.

    Late last year when we were exploring all of our options on Destiny in November after the earnings release, we learned that Bungie was willing to acquire our rights and we engaged in discussions with them. And ultimately, we wound up consummating the deal in late December. And it was a mutual, amicable agreement. Now I just emphasize, I really do think for both parties this is the right path forward and it allows us to go implement the plan that we talked about today.


    We'll take our next question from Matthew Thornton with SunTrust.

    Matthew Thornton — SunTrust — Analyst

    Hey, good afternoon, everybody. Thanks for taking the question. Maybe if you could just update us on just timing around some of the mobile initiatives at both Blizzard and Activision? Including China as well as rest of world. Any update, color there would be helpful.

    Coddy Johnson — Chief Operating Officer

    Thanks, Matt, for the question. This is Coddy again. As you heard in our prepared remarks, mobile is a top priority for us and we think it's one of our largest opportunities, particularly with our global IT, which we think is really well positioned to bring to the mobile platform. We see this every day with King where you have a franchise at scale globally. But we also see it with other great franchise IP like Hearthstone, where bringing that game to mobile brought in tens of millions of new players that are engaging in an ongoing and deep way with us. The thing to note is mobile game teams, while smaller than PC or console, they still require time to prototype and to test. And particularly for us and our franchises where we have high community expectations. When we bring them to market, we want to do it right.

    That said, part of the announcements today and the work that we're doing and that we highlighted, is to make sure that we're adding the right resources and enough resources to accelerate our mobile pipeline. Given the size of the overall opportunity, it's not just internal. We are working with external partners. We have multiple projects under way across the portfolio in various stages of development. And as you know, we've announced two, Call of Duty mobile and also Diablo Immortal. You asked sort of about both in status. They're both hard at work. We have no additional announcements to make at this time but in both cases, we're looking to make sure that the IP is really well represented. For Diablo, it's an authentic and immersive deep experience that we think getting it there has large global potential and so it matters to get it right. And we'll share more about our titles and release dates as that comes to fruition.


    And we'll take our last question from Kunaal Malde.

    Kunaal Malde — Atlantic Equities — Analyst

    Thank you. You mentioned that King advertising net bookings grew more than 50% sequentially. It'd be great if you could provide us with some more color and your expectations in 2019?

    Humam SakhiniPresident of King

    I was just going to say, Bobby, that I'm gonna step back and just think about the business in a few phases. First, we decided that we really needed an ad product that worked and is differentiated. So, we went and invested in the right teams to drive that and I think it's paid off. We have a pretty good differentiated native ad product that is working quite well with player satisfaction on the inside and increasing on monetization. And in 2017 and what you saw in 2018 was we scaled the business by lighting up more of our inventory and adding more impressions in our network. And that was a key driver as we started scaling the business. And we hit some important financial milestones in the year in 2018.

    First, profitability in Q1, and then growth in every quarter after that. And I think the ad business is gonna start to be meaningfully contributing to the King overall. So, we expect it to cross the 100 million booking threshold this year. And as I look ahead, I think on the next phase about where the ad business is heading, is about continued scaling. So, we will continue to scale more and in fact, the ad network at King and we have more work to do there to enable it in more of our games and we're continuing to educate our demand partners on kinda the power of our ad product and there's really good momentum there. And I think kind of after that, we will think about even more ways to deploy the ad product. It could be in new mobile experiences or e-sports. I think the team has a ton of learnings and potentials that could be applied in there.

    Bobby Kotick — Chief Executive Officer

    Yeah, and I would just add; I think it's an excellent team. The ad product is excellent. They've started to make real inroads in getting people to better understand what the opportunities for advertisers is and I think that I'll just echo Humam's sentiment that there's a lot of momentum in that business.

    Chris Hickey — Senior Vice President of Investor Relations

    And that I think concludes our call today. I just wanted to on behalf of our team here thank you all for your time and engagement today. And we look forward to seeing many of you on the road or up to our next earnings call. So, thanks very much.


    And this concludes today's call. Thank you for your participation. You may now disconnect.

    Duration: 53 minutes

    Call participants:

    Chris Hickey — Senior Vice President of Investor Relations

    Bobby Kotick — Chief Executive Officer

    Coddy Johnson — Chief Operating Officer

    Dennis DurkinChief Financial Officer and President of Emerging Businesses

    Colin Sebastian — Robert W. Baird — Analyst

    Evan Wingren — KeyBanc Capital Markets

    Ray Stochel — Consumer Edge Research — Analyst

    Rob Kostich — President

    Brian Nowak — Morgan Stanley — Analyst

    J Allen BrackPresident of Blizzard

    Alexia Quadrani — JP Morgan — Analyst

    Mike Hickey — Benchmark Company — Analys t

    Humam SakhiniPresident of King

    Tim O'Shea — Jefferies — Analyst

    Brandon Ross — BTIG –Analyst

    Matthew Thornton — SunTrust — Analyst

    Kunaal Malde — Atlantic Equities — Analyst

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