Activision Blizzard Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2021

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to the Activision Blizzard Second Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, I would now like to turn the conference over to Chris Hickey, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Good afternoon, and thank you

Speaker 2

for joining us today for Activision Blizzard's Q2 2021 conference call. With us are Bobby Kotick, CEO Daniel Allegre, President and COO and Armin Zuirza, CFO. And for Q and A, Rob Kostich, President of Activision Jen O'Neill, Co Lead of Blizzard Mikey Barra, Co Lead of Blizzard and Alan Adham, Executive Producer of Blizzard Incubation will also join us. Homan Satnini, President of King Stences apology. He is unable to join due to a family medical matter, but looks forward to connecting with investors next quarter.

Speaker 2

I would like to remind everyone that during this call, we will be making statements that are not historical facts. The forward looking statements in this presentation are based on information available to the company as of 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 future circumstances differ materially from those expressed in any forward looking statement. These include the impact of the COVID-nineteen pandemic, the risk factors discussed in our SEC filings, including our 2020 annual report on Form 10 ks and those on the slide that is showing.

Speaker 2

The company undertakes no obligation to release publicly Any revisions to any forward looking statements to reflect events or circumstances after today, August 3, 2021. We will present both GAAP and non GAAP financial measures during this call. We provide non GAAP financial measures, which exclude the impact of expenses related to stock based compensation, The amortization of intangible assets and expenses related to acquisitions, including legal fees, costs, expenses and accruals, Expenses related to debt financings and refinancings, restructuring and related charges, the associated tax benefits of these excluded items and significant discrete tax related items, including amounts related to changes in tax laws, amounts related to the potential or final resolution of tax positions and other unusual or unique tax related items and activities. These non GAAP measures are not intended to be considered in isolation from, As a substitute for or superior to our GAAP results, we encourage investors to consider all measures before making an investment decision. Please refer to our earnings release, which is posted on www.acquisitionbusiness.com for a full GAAP to non GAAP reconciliation and further explanation with respect to our non GAAP measures.

Speaker 2

There's also an earnings presentation, which you can access through the webcast and which will be posted to the website following the call. And now I'd like to introduce our CEO, Bobby Kotick.

Speaker 3

Thank you, Chris, and thank you all for joining us today. I want to start by making clear to everyone that there is no place at our company where discrimination, harassment or unequal treatment of any kind will be tolerated nowhere. We so appreciate the current and former employees who have come forward in past and recent days With courage and I want to reiterate the commitments we have made to you. Our work environment everywhere we operate will not permit discrimination, harassment or unequal treatment. We will be the company that sets the example for this in our industry.

Speaker 3

While we've taken many steps towards this objective already, today we are taking even more. Jennifer O'Neil and Mike Ibarra have been named the new co leads of Blizzard. Jen has been with the company for 18 years. She is the former head of our studio Vicarious Visions and most recently had production and development oversight for our Diablo and Overwatch franchises. Mike has been in our industry for over 20 years, including in leadership roles within Microsoft Xbox Division and at Blizzard as General Manager of Battle dot net.

Speaker 3

I'm also pleased to have Allen Adham here today. As most of you know, Alan is one of the founders of Blizzard. After a 12 year hiatus, Alan returned to Blizzard to lead our new product and new IP incubation efforts. Each of these individuals brings vast industry experience and tremendous integrity to their roles. They are the very best examples of leadership with character and accountability.

Speaker 3

I'm confident this team will ensure that Blizzard provides a welcoming, Comfortable and safe workplace that is essential to foster creativity and inspiration. In addition, We'll continue to investigate each and every claim and complaint that we receive. When we learn of shortcomings, we will take decisive action. And to strengthen our capabilities in this area, we'll be adding additional staff and resources. People will be held accountable for their actions.

Speaker 3

That commitment means that we will not just terminate employees where appropriate, but we'll also terminate any manager or leader, Because our work cannot be successful without diverse voices, views and talents, we made a commitment to consider diverse slate of Over the past several years, we've made significant changes to address company culture, reflect more diversity within our leadership teams and create environments conducive to reporting any type of misconduct. We've amplified internal programs that encourage employees to report violations. We've reinforced channels for employees to voice concerns in confidential and safe ways without any fear of retaliation. We're directing additional resources to our compliance and employee relations teams dedicated to investigating complaints. We pride ourselves on paying our employees competitively and fairly for equal or substantially similar work.

Speaker 3

We regularly review our compensation to ensure that we remain equitable in our approach. We take a variety of proactive steps to ensure the Pay is driven by non discriminatory factors such as performance, role and expertise. And we conduct extensive antidiscrimination trainings including for all employees involved in the compensation process. Our workplace initiatives are crucial to our continued success and our leadership in this effort is my priority. Our workplace safety also remains a priority and as we consider our return to work initiatives, we remain focused on providing Very best healthcare for our employees and their families.

Speaker 3

You have my unwavering commitment that we will continue to focus on serving our players and delivering the sustainable growth that you've come to expect. And we will take all necessary actions to foster a culture that is supportive and welcoming for all of our employees, and we expect to be the very best example for other companies to emulate. Daniel will now review the highlights of our operations for the past quarter with you.

Speaker 4

Thank you, Bobby. I'd like to underscore the points that Bobby made regarding the company's commitment to ensuring the very best work environment. The leadership team and I will do our utmost to make sure that we're always improving and building the kind of inclusive workplace that is essential to enable creativity and professional growth for all employees. There will be no tolerance at our company for harassment for unequal treatment of any kind. Our continued strong performance is because of the efforts of our incredibly talented people and we will make certain the workplace facilitates the best possible performance through constant improvement to our culture an unwavering conviction for our value.

Speaker 4

Now turning to the 2nd quarter. We exceeded our prior outlook benefiting from strong execution by our creative and commercial team in delivering compelling experiences and in game content to our deeply engaged community. Over the last 2 years, we have increased investment in our biggest opportunity, creating new ways for our communities to engage and investing in our franchises across platforms. This strategy has significantly expanded the financial scale of our even as countries continue to reopen from lockdown due to the pandemic. Looking forward, we continue to transform our franchise portfolio Through faster delivery of compelling premium content, more robust in game operations, expanding to mobile and accelerating new engagement models, including free to play and advertising.

Speaker 4

Now I'll discuss our Q2 franchise and operational highlights across our business unit. Starting with Activision, where 127,000,000 monthly active users engaged in our content in the Q2. Our commitment to delivering innovative, engaging experiences to our expanded Call of Duty ecosystem continued to deliver strong results. The franchise sustained reach, engagement and player investment well above levels seen prior to our introduction of free to play experiences across console, PC and mobile. Across the Call of Duty ecosystem, 2nd quarter MAUs were consistent versus the year ago quarter and over 3 times higher in Q2 of 2019.

Speaker 4

Hours played in the franchise in the Q2 were higher than for all of 2019. We continue to see robust engagement even as regions continue to reopen. On console and PC, MALs and time spent across Black Ops Cold War, Modern Warfare and Warzone saw higher retention from Q1 to Q2 in our experiences in years leading up to the launch of Warzone. Conversion from Warzone again drove strong premium sales in Q2 and multiples of the level typically seen in 2nd quarters prior to last year. In game player investment remained strong with console and PC in game netbooking similar to that theme in the Q1.

Speaker 4

While lower year over year against the quarter that benefited from the launch of Warzone and likely more people at home, In game net bookings in the quarter were approximately 4 times the level of Q2 2019. Our teams remain hard at work on the next new premium Call of Duty release planned for the Q4. From a study that our fans know and love to an incredible amount of content in development, including an extensive live off schedule, We believe this release will be incredibly well received. In addition to launching a great seamless experience for both current and next gen console players, We are focused on continuing to integrate Warzone and engage our direct relationship with our player base through even deeper content integrations between the premium and free experiences and substantial innovations coming within Warzone itself. Our teams cannot wait to unveil what they have been working on.

Speaker 4

Call of Duty Mobile net bookings grew double digit year over year and sequentially driven by strong execution in seasonal content in the West and the recent launch of the game in China. Our team continues to enhance the game, building on learnings from player data and leveraging over 15 years of Call of Duty content to deliver increasingly compelling content and driving greater player investment over time. As we build on this momentum, we recently added New social gameplay to the title and have new modes, maps and seasonal events planned for the second half of the year. Call of Duty Mobile is on track to exceed $1,000,000,000 in consumer spending for the year. And as we continue to optimize the title, we're also investing in mobile capabilities with a singular goal to create the best mobile experiences for our community.

Speaker 4

We have established a new internal mobile studio and are aggressively adding mobile resources across several teams, including DNOX and Activision Shanghai. Together these teams are leading the development of an unannounced new mobile title within the Call of Duty universe that we expect will help take the franchise to new heights. Turning to Blizzard, we couldn't be more excited about the leadership changes. Jen and Mike are outstanding leaders We look forward to the impact they will have on the culture, accountability and fostering the very best work environment. The launch of Burning Crusade Classic in June marked the start of what is intended to be a very significant 18 month period for content releases.

Speaker 4

MAUs were $26,000,000 In the Warcraft franchise, World of Warcraft net bookings again grew double digits year over year in the second quarter, driven by the well received launch of Burning Crusade Classic in June. Subscriber numbers and hours played were up following the release, again showing the importance of Classic in enabling more ways for players to engage in Wow. The strength in Classic added to ongoing deep engagement in the modern game following the Q4 Shadowlands launch and launch of its first major content update in June. And as a result, Wow! Remains on track for much stronger engagement this year than is typical outside of a modern expansion year.

Speaker 4

Elsewhere in the Warcraft universe, Hearthstone's latest expansion, Forged in the Barrens, delivered expansion over expansion net bookings growth for a second consecutive release. And with the latest expansion, United in StormWind launched today and Mercenary, a new mode in the popular role playing genre plans For the coming months, we expect Hearthstone's financial performance to strengthen in the second half of the year. Blizzard continues to make progress in its work on ambitious new Warcraft mobile experiences that can attract entirely new players to the franchise as well as offering new ways for existing fans to engage. 2 Warcraft Mobile experiences are in varying stages of internal testing, with the team looking forward to sharing more about these titles. Now turning to Diablo, we have added hundreds of developers to the over the last 3 years, and we continue to grow our teams as we prepare to launch 3 unique and complementary experiences across platform.

Speaker 4

Diablo II: Resurrected will launch on PC and console on September 23. Anticipation for this remaster The quintessential action role playing game is high and we can't wait for the community to experience the quality of the title. On mobile, Diablo Immortal continues to progress well through testing, receiving excellent feedback for its gameplay. We see substantial potential for this release, both in its own right as a long running authentic Diablo experience and to broaden the franchise's reach ahead of Diablo IV. Recent testing revealed some exciting additional opportunities the team is going to pursue to make the title even more engaging for a wider audience.

Speaker 4

While that means the game is now planned for release in the first half of twenty twenty two, We believe these efforts will set the title up for an even greater contribution next year and beyond. And most importantly, Blizzard continues to make strong progress on Diablo 4. The game is shaping up incredibly well and the team is allocating substantial resources to creating Exciting content to drive engagement over multiple years. The expanded Overwatch team is similarly making strong progress on Overwatch 2, with development passing an important internal milestone in recent weeks. After a great response to the recent community update, The team is looking forward to reviewing more of the game in the coming months as they approach the later stages of production.

Speaker 4

At King, the team continues to execute extremely well, again delivering double digit net bookings growth against a tough year ago comparable. NOWs were $255,000,000 King continued to drive growth through its work to optimize lot of operations, in game economies End user acquisition for its titles, particularly Candy Crush and Farm Heroes, its 2 largest franchise. The business saw ongoing year over year growth in franchise payers and investment for payers in the 2nd quarter, with Candy Crush once again the highest grossing game franchise in the United States app stores. Building on successful initiatives to broaden its payer base over the last 2 years, The Candy Crush team has been accelerating the delivery of compelling seasonal content that delights our players and drive in game investment. In the Q2, King reached a monthly cadence for seasonal content within Candy Crush Saga, its biggest title.

Speaker 4

These seasonal events not only sustain strong engagement among existing players, but also drive reengagement of lapsed players as well as attracting new players The Kandi team is planning an innovative slate of seasonal events and live operations for the second half of the year, including tie ins with brands that value the association with our premium network, positioning the franchise for ongoing momentum in its in game business. King's advertising business is also delivering. Q2 advertising revenue grew sequentially and doubled year over year. King's ongoing initiatives to enhance the ad platform, work with more demand partners and reach more categories of advertisers drove year over year growth in both volume and pricing with broad based strength across geographies. In summary, Q2 was another strong quarter.

Speaker 4

We are taking actions to address stakeholder concerns and the adverse consequences to our business. If we experience prolonged periods of adverse publicity, significantly reduced productivity or other negative consequences related to this matter, Our business likely would be adversely impacted. We are carefully monitoring all aspects of our business for any such impacts. From a pipeline perspective, we have strong lineup planned for the second half of the year. And as we look to 2022, Our current plans contemplate compelling new experiences across Call of Duty, Wow and Candy alongside several major new titles across PC, console and mobile from Blizzard with the aim to deliver significant expansion in the reach and engagement of our portfolio.

Speaker 4

Above all, as we go forward, I want to reemphasize that the safety and well-being of our employees is of utmost priority. Our teams are the source of all creativity and magic in our game. Now, I will hand over to Armin, who will provide a detailed review of our financial results. Armand?

Speaker 1

Thanks, Daniel. I want to reiterate that our priority is ensuring a workplace that provides opportunity for all in the most welcoming and inclusive way possible. Today, I'll review our Q2 results as well as our outlook for the Q3 and full year 2021. Our 2nd quarter results were ahead of our prior outlook, driven by both operational outperformance and some non operating items. For the first half, we delivered double digit year over year growth in net bookings and solid growth in operating income in the

Speaker 3

year.

Speaker 1

We achieved new records for each, even as we continue to increase investment in the business and our development team to support our strong pipeline. As Regions reopen, our business continues to operate at significantly greater scale than that seen prior to our successful growth initiatives across our largest branches. Now let me turn to our consolidated financial results. Unless otherwise indicated, I'll be referencing non GAAP figures. Please refer to our earnings release for full GAAP to non GAAP reconciliation.

Speaker 1

For the quarter, we generated Q2 GAAP revenues of $2,301,000,000 above our May guidance. This includes the net recognition of deferrals of $375,000,000 Net bookings of $1,920,000,000 We are $71,000,000 above our main outlook, and we generated quarter 2 GAAP EPS of 1.12 And for the non GAAP EPS of $1.20 which was $0.29 above our guidance. These figures include the net recognition of the 12th of $0.29 Quarter two EPS included a $0.07 benefit from a gain on an investment, most of which was unrealized. We also experienced a lower than anticipated tax rate in the quarter due to the timing of overseas tax reform, although our full year tax rate assumption is unchanged. Now turning to cash flow and the balance sheet.

Speaker 1

Quarter 2 operating cash flow was $388,000,000 lower year over year reflecting operating results, local capital timing and the timing of cash taxes. During the quarter, we paid some annual dividend of $0.47 per share, 15% higher year over year for a total of $365,000,000 Our cash and investments at the end of June We're approximately $9,600,000,000 and we ended the quarter with a net cash position of approximately $6,000,000,000 Now let me turn to our segment results. Activision delivered another strong quarter, contributing to record 1st half segment revenue and operating income. Quarter 2 revenue was $789,000,000 As expected, Call of Duty revenue on PCN console was lower year over year against last year's quarter 2 that benefited from the March 2020 launches of Warzone And Modern Water 2 Remaster as well as the introduction of Telstra Phone mandate. However, Core IQD Mobile grew strongly year over year.

Speaker 1

Quarter 2 segment operating income was $363,000,000 with an operating margin of 46%. Blizzard revenue was $433,000,000 with double digit year over year growth in World of Warcraft, offset by product timing for Hearthstone and lower over fleet revenues as explained in prior quarters. Operating income was $141,000,000 with an operating margin of 33%, reflecting investment into product development against a rich content pipeline as well as sales and marketing around the launch of earnings per sales at quarter end. King revenue grew 15% year over year to 6 $135,000,000 This is another new record, driven by double digit in game revenue growth for Candy Crush and Farm Heroes. Advertising revenue doubled year over year, and trailing 4 quarter advertising revenue is now above $300,000,000 for the first time.

Speaker 1

King operating margin was also strong at 39%, delivering record operating income at $248,000,000 Across our segment, strong execution in live operations and in game content drove in game net bookings The combined $1,320,000,000 broadly consistent with the level of the prior 4 quarter. At almost 70% of total net bookings this quarter, the in game business represents a recurring base of profitability for the company with a significant opportunity for further growth in both existing and new franchise experiences. Finally, the 2nd quarter saw strong double digit year over year growth in mobile net bookings, which exceeded a $3,000,000,000 annualized run rate for the first time this quarter. The mobile platform delivered more than 40% Netbooking is a key strategic priority for us as we extend each of our key franchises to mobile in the coming years. Now let me turn to our outlook for the Q3 and the full year.

Speaker 1

With regard to our slate, Our expanded teams are focused on delivering epic in game and upfront content. In the Q3, Activision's 5th seasonal content For Call of Duty BlackRock Cold War and Warzone launches later this month, and the team will continue to release significant new features, events and seasons for Public Utilities Mobile. Today, Blizzard released Hearthstone's latest expansion, United in Storm Diablo II: Resurrection, we launched on December 23. And King will support Candy Crush and other games across its portfolio with numerous seasonal events, features and innovative life operations. In the Q4, in addition to ongoing life ops And in game content across the portfolio, we're looking forward to Activision launching new core CD premium content In the second half, we will also continue to refine and test new mobile content in our pipeline, including for both Warcraft and Diablo.

Speaker 1

Consistent with our prior outlook, we don't include material revenue from the mobile titles in our guidance for the current year. Now before I discuss the specifics of our outlook, let me provide some context. We are taking substantial To address the concerns of employees and other key stakeholders, while there are risks that our business could be adversely impacted, as Daniel discussed, Currently, our business performance is strong. In the Q3, we expect ongoing robust performance of Core Beauty, Kandi and World Warcry to be complemented by the launch of the other 2 Resurrective. While we are taking a prudent approach to our outlook, We do expect year over year net bookings growth in the Q3.

Speaker 1

We will increase investment in the quarter in our product fleet, compliance, employee relations And sales and marketing to help unlock the full potential of our franchisees heading into 2022. As we move into the 4th quarter, While we continue to invest in the business, we expect lower costs and growth in earnings year over year. Finally, as mentioned, We experienced an investment gain in the Q2, which we are passing through in our outlook based on a valuation at the end of July. Bringing this all together, we are once again raising our outlook for net bookings, revenue and EPS for the year. Now let me get into some specifics.

Speaker 1

For quarter 3 on a GAAP basis, we expect revenues of $1,970,000,000 including the net recognition of the 12th of $120,000,000 We expect net bookings of $1,850,000,000 We expect a GAAP operating margin of 35%, A tax rate of 22%, GAAP and non GAAP share count of $785,000,000 and EPS of 64%. For quarter 3 on a non GAAP basis, we expect a tax rate of 20% and non GAAP EPS of 0.75 dollars including the net recognition of the $1,000,000 of Tencent. Now turning to the fiscal year. On a GAAP basis for 2021, we expect Revenues of $8,520,000,000 including net debt of $135,000,000 We now expect next bookings of $8,650,000,000 We expect the GAAP operating margin of 37%, a GAAP tax rate of 21%, GAAP and non GAAP share count of $785,000,000 and GAAP EPS of $3.08 For 2021, on a non GAAP basis, we expect A tax rate of 20% and non GAAP EPS of $3.54 including net deferrals of 0.22 In closing, our business continued to perform well in the Q2, delivering strong results. We will continue investing in our creative team and positioning our franchises for even greater reach and engagement In the future, with our current plan continuing to support growth in our financial performance in 2022.

Speaker 1

Look, as Bobby and Deborah made it clear, we understand that our people are our greatest asset. These are the people responsible for our continued strong performance. We couldn't be more committed to ensuring an inclusive work environment For all our employees as well as the long term sustainable growth, we'll be working with our team to improve our company together to become the most inspiring An inclusive entertainment company possible. Now I'll ask Rob, Jen, Mike and Alan to join Bobby, Daniel and myself to answer your questions. Operator?

Operator

Our first question comes from Matthew Cost with Morgan Stanley. Please go ahead.

Speaker 4

Hi, everyone. Thanks for taking the question. So I mean, We've seen a lot of headlines about the lawsuit and employee concerns. Can you talk more about what you've been doing and will do to address those issues? And then just secondly, Can you expand on any expected impact to productivity as you work through the situation?

Speaker 4

And do you expect any impact on the pipeline? Thanks. I'll take this question and thank you for the thoughtful question. This is Daniel. As you heard from Bobby, Our employees are truly our greatest asset and we remain absolutely focused as a leadership team on providing a diverse and a safe environment for our teams and have taken a number of actions thus far.

Speaker 4

For instance, we've engaged if they have experienced any issues whatsoever. We will also be adding staff to our compliance and employee relations teams that investigate employee concerns. This is to ensure that we are always considering Also diverse candidates for all open positions. As a Hispanic leader myself, I know how important having a diverse workforce can be All aspects of our business and this is critical. We will be evaluating and training also our people managers to make sure they are complying with their processes We're handling employee concerns as well as taking the right actions.

Speaker 4

And we are proactively engaging with our employees to hear and respond to their feedback. For several years now, we have been focused on ensuring more diversity throughout the company, especially in our leadership roles and have dramatically increased the number of women and minorities in both the C suite and in our business unit. And our compensation practice is that women and men are paid equitably for equal work. As you heard, We have appointed Jen O'Neill and Mike Ybarra as the new co leads at Blizzard. And I am so glad that an original Blizzard founder, Allen Adam, We returned to the company a few years ago, continues to lead our game incubation projects.

Speaker 4

We have a great leadership bench at Blizzard and are excited about the new direction the company will take. Also, we are committed to an equitable and safe work environment And that's what's important. As we evolve our company, you should expect further announcements from us going forward. Now to answer your question on productivity and pipeline, as you heard today, the pipeline is progressing well. Particular, some of the content in the pipeline has been in development for many years and it is approaching the final stages of production.

Speaker 4

We're monitoring the impact of recent events obviously as we discussed today. But based on what we see currently, we have a strong lineup planned for the second half of the year. And as we look into 2022, we're currently planning for several new titles across PC, console and mobile from Blizzard alongside more great experiences from Call of Duty, Kandi and Warcraft. Thanks for the question.

Speaker 2

Thanks, Matt. Operator, can we have the next question, please?

Operator

The next question is from Mike Hickey with The Benchmark Company. Please go ahead.

Speaker 4

Hey, Bobby and team. Nice quarter, guys and guide. Curious what you're seeing on the global reopening or recovery. What sort of player engagement trends that you're seeing and how you're thinking about or how you shaped your guidance around key performance regions that are reopening? Thank you.

Speaker 1

Thanks, Mike. This is Amin. Generally speaking, what we see are different trends across our franchises and games. And Trends can vary across platform, gameplay types and numerous other factors. More specifically, when we look at Some of our largest franchises, we actually saw minimal variations in engagement and play investment as countries And even though we did see some variations, they were small relative to the structural growth We have seen on the business in the last year or 2.

Speaker 1

Look, what's really key is that when we look at the data, we see that product And other initiatives are the bigger determinants of reach and engagement. So we do believe that Much of the expansion we have seen in our largest franchises is due to strong product initiatives, More frequent live operation and new engagement model, all of which we have started to successfully implement. Examples of that include the introduction of free to play experiences on mobile and on Call of Duty, The launch of Classic on World of Warcraft and more frequent compelling content on Candy. And as a result, We are operating at much greater scale and continue to have momentum as evidenced by our quarter 2 results as well as trends into July. Now as it relates to guidance, we are always thoughtful and careful in our approach.

Speaker 1

We assume lockdown tailwinds continue to moderate in the Q3. And of course, we are monitoring any impact of recent trends as discussed. But as you've heard, we still expect year over year growth in net bookings as these initiatives continue to deliver results and We start to generate the return from our many years of work to reinvigorate the algorithm. Finally, Looking forward, we see a long term trend of more people gaming than ever before across genres, Platforms, business models and geographies. And as you know, we already operate successfully today across many of these growth vectors.

Speaker 1

So we are very well positioned to continue to grow in this macro environment. Next, we believe growth is largely in our own hands And our talented employees and teams. Thanks again for your question, Mike.

Speaker 2

Operator, can we have the next question, please?

Operator

And the next question is from Andrew Urquowitz with Jefferies. Please go ahead.

Speaker 5

Thank you. This question, I guess, is really focused on what's happening at Blizzard. It's great to hear kind of the color around the policies and procedures and creating work Safe workplaces and whatnot. However, I'm sure morale is low. And so I'm just curious how Mike and Jen plan to Kind of rekindle the pride that Blizzard has been known for and kind of just rebuild that morale, but also kind of at the same time, You kind of listen to everyone's stories and experiences and make the necessary changes.

Speaker 5

How does that not affect production going forward? Thank you.

Speaker 6

Thanks for the question, Andrew. This is Jen. First off, there's nothing more important to me than our people. And I know Mike Ybarra, who is partnering with Lead Blizzard feels exactly the same. Since I joined the studio at the beginning of the year, I've had the privilege of working Closer with the Diablo and Overwatch teams.

Speaker 6

I'm seeing great progress on Overwatch 2 and the multiple games in the Diablo universe. I am constantly inspired by our talented teams, their creative vision, their commitment to putting gameplay first. Our people are passionate about our games. They understand our players. And in many cases, they have come from the player communities themselves and naturally are driven to serve them.

Speaker 6

And as Bobby and Daniel have mentioned, we are expanding these Teams, we're doubling down on our development recruiting as we expand the scope and vision of our franchises. When we come together, we make some of the best games in the industry and we're now seeing that energy applied to our culture, which is equally important. There's a lot of work ahead of us, but the passion and productivity are already here. And when our people feel safe and supported, The rest is going to take care of itself.

Speaker 7

Andrew, this is Alan. I'm going to weigh in here too. The passion that our developers have for innovation and creativity is what makes Blizzard great. It's why we've been able to make so many great games For 30 years now, and this has always been the vision since the very beginning. I'm excited about our future, About the things we're creating together, about building a new culture and renewing that spirit, we're tight lipped about it, but our new game pipeline has been in development I'm looking forward to our teams launching their already announced new games in the not too distant future and in due course

Speaker 2

Question, please.

Operator

And the next question is from Matthew Thornton with Truist Securities. Please go ahead.

Speaker 5

Hey, good afternoon, everybody. Maybe this one's for Rob. When we think about Call of Duty, I guess, how are you About this year's release just in terms of the title itself across multiplayer as well as campaign, but also the cadence and breadth Content to follow. And then just finally, the competitive backdrop, given that it's a little bit of a busier year for kind of AAA releases in the genre. Just love to get your thoughts there.

Speaker 8

Thanks. Hey, Matt. Yes, it's Rob. Thanks for the question. And before I get to it, I just do want to I'm throwing some of the overarching comments, which I think are important as it relates to Activision Publishing as well.

Speaker 8

Obviously, there's no place for Any harassment or discrimination whatsoever of any kind in society, in this industry or in this company. And so making sure we have a safe, Inclusive and equitable environment for all of our employees is really the only way we can begin to live up to the values we aspire to And it's the only way we can become the company we aspire to be. So that is, 1st and foremost on our minds and our focus at the moment. Now turning back to answer your question directly, we do feel really good about what Sledgehammer Games is leading for release in the Q4 of this year. The studio itself has never been bigger or stronger now with its teams in Foster City and Melbourne and also now in Toronto.

Speaker 8

And across all modes of play, across multiplayer, across campaign and across co op, development is coming along really well and we're going to be sharing those details With the community very soon. Content wise, it's a really robust game at launch, across all the modes. And the good news for us right now is we've gotten farther ahead on our LiveOps planning for supporting the community post launch And the community should also expect that support to be very, very significant. We've learned a lot over the last couple of years and that's all in our plans as we go forward. We also have really exciting new plans in Warzone, which Raven is leading.

Speaker 8

Now together with our premium release, We've had some really fun and what I consider the most significant update planned for the community across both Warzone and Premium as we head into the fall. Now I do want to mention just a huge thanks to all of our amazing studios who have come together in amazing ways to drive the franchise for this year and for this fall and for beyond. They're doing incredible work together as a team and also as independent studios. And finally, touching on your question on competition, I think competition is really out there each and every year for us and I think we consider it a good thing for the industry and for our players. And to us, it's not a zero sum game at all.

Speaker 8

We believe compelling new offerings have the potential to only grow the industry as we move forward. So our focus is really the same as it's been each and every year and that's making sure we provide the most fun, The most incredible and the most innovative experiences we can to our community as we go forward. And when we look at the breadth, depth and quality of content And our teams are delivering in Q4 across all our offerings. We do like our position a lot, but thanks for the question, Matt.

Speaker 2

Yes. Thanks, Matt. Operator, can we have the next question, please?

Operator

The next question is from Tyler Parker with KeyBanc Capital Markets. Please go ahead. Great.

Speaker 4

Thanks for the question, Guy. So touching on King real quick, we saw 15% segment revenue growth and a doubling of the ad revenues in the quarter. So clearly still performing well here. I just would love to hear how the changes to Apple's ecosystem affected business in the recent months, both from User acquisition perspective and an ad perspective and I guess how you expect that trend going forward? Thanks.

Speaker 4

Thanks, Tyler. And this is Daniel. I'll take that on behalf of Hooman. As you saw from our results, The IDFA changes really haven't had much of an impact on our business and actually even less of an impact than we expected. So firstly, on the advertising side, we're still early in building this business and we're just seeing great results as We grow both the supply and the demand.

Speaker 4

On the supply side, we've been introducing innovative New products and have started letting players watch more ads if they wish to, growing our ad inventory in a way that's really consistent with our focus Really not impacting the player experience and that's worked out really well. On the demand side, we're working with more demand partners and more categories of advertisers driving more volume and price competition and this really has been very impactful. We're also working hard to maximize the consent rates following the IDFA changes and have seen much better than expected results there. So as we said last quarter, we really still see a long runway for growth in ad. Now secondly, in terms of user acquisition, Again, if you look at the results, you can see the ongoing strength in the business.

Speaker 4

Most of our installs each quarter are organic As we benefit from just the incredible awareness that our brands have globally, particularly a game like candy And our increasingly frequent live events are also just great vehicles for driving organic installs as well. And we have direct relationships with many of our most valuable players and that allows us to reengage them if they lapse and to really have a direct connection with them. Now in terms of paid acquisition, we saw plenty of ways to bring players into the network And the great growth we're seeing in player investment Really actually enables us to invest in even more ROI positive marketing, while still delivering strong profits for each quarter. So again, more than comfortable in King's ability to delivering sustained growth and in game business even after these changes And the results, I think, bear fruit to what I just said. Thanks for your question, Tyler.

Speaker 2

Thanks, Tyler. Operator, can we have the next question, please?

Operator

The next question is from Kunal Malde with Atlantic Equities. Please go ahead.

Speaker 9

Hi, thanks for taking the question. So it sounds like Call of Duty Mobile has good momentum. Could you expand on your comments about its performance and the plans for further growth? And related Is there anything you can say on the recent China headlines and the potential for restrictions in that market?

Speaker 8

Thanks, Kunal. It's Rob. I think I should probably break this up in 2 parts. Let me address the first part of your question on Cog Mobile specifically, and then maybe I'll invite Armin Or someone else to chime in on a more macro view on China and any potential restrictions there. On mobile for us, We see 3 key opportunities kind of going forward and I'd say those could be bucketed as geographic, operational and strategic and let me touch on each of those.

Speaker 8

On the geographic front for Quality Mobile, we're seeing obviously great success in the U. S. And through Europe, and we're also continuing to optimize across those regions. But we're seeing also great growth in emerging markets such as Latin America, India and Southeast Asia and where we're focusing execution And investment for local players and so that's something we think can still scale and help grow the business overall. On the operational side, Call of Duty Mobile is already a great game and we see opportunity to make it even better.

Speaker 8

Our mobile team is continuing to do an incredible job of Constantly improving the experience and adding content to players in the West and the team just keeps getting better and better, which is a testament to their passion and commitment to the mobile community. And China is just another example there where the title itself is off to a strong start, It still has a lot of opportunity in front of it to be tailored and optimized for the local audience, and the team is also very focused on that as well. And then lastly is strategic, as we think about long term, where we see compelling more compelling growth on the platform. And overall, I'd say, we believe there's an opportunity to better connect mobile to the overall Call of Duty ecosystem And we're aggressively hiring talent to help on this journey for us. We've created our own internal mobile studio and are driving a major recruiting effort across Beenox and Activision Shanghai to support as well.

Speaker 8

And together, I think as Daniel already mentioned on the call, These teams are leading an unannounced new mobile project in the Call of Duty franchise, which we're very excited about. So as I think about the business, as we start to approach The 2 year anniversary of the launch in the West. We think there's a lot of both near term and long term opportunities on the platform for us and to grow the audience and engage the audience on a broad basis. Armin, do you want to comment on the China piece?

Speaker 1

Yes. Thanks, Rob. Kunal, thanks for the question again. With respect to your question on China, As you know, the rules and regulations in the country do change over time. And we have been working with our partners for many years now in this Changing environment.

Speaker 1

So what we're doing currently is working with them and our local team on the ground to That's at this latest situation. Now from a business perspective, China was less than 5% of our net bookings for us last year. And as you know, we have a long history of adapting and responding to changes in the regulatory environment there. And of course, we aim to continue to do so going forward. So thanks again for your question.

Speaker 2

Thanks, Kamal. Operator, we'll take one last question, please.

Operator

And that question is from Mario Lu with Barclays. Please go ahead.

Speaker 10

Great. Thanks for taking the question.

Speaker 2

So I just wanted to follow-up on

Speaker 10

the question earlier On mobile advertising, a number of mobile gaming companies now have both a mobile gaming studio and an ad network all under the same umbrella. So curious to hear your thoughts of the strategy and if it's something that King can potentially implement going forward? Thanks.

Speaker 4

Thanks, Mario. This is Daniel again. Look, the good news is we're actually already vertically integrated And we have our own in house ads business that supports in game advertising across our mobile games, across all of Activision Blizzard and King. The ads team have organically built our own advertising technology platform And this is really made to enable both the demand and the supply management, which also leverages third party technology wherever it may make sense. This approach has actually served us really well and has enabled us to differentiate versus others in the industry through a much higher quality player experience both in terms of ad formats and then also how seamlessly ads are integrated into our games.

Speaker 4

And the other thing is just the opportunity to be involved in such a premium experience for the player has actually been very well received by our brand advertisers. We have both advertisers and players who are benefiting from the experience. And I'd say that this goes Beyond just King, as we launch more mobile experiences, as Alan talked about earlier and across the company, We're continuing to invest in our technology platform and that's just to make sure that we have the capabilities to power ad monetization and cross promotional activities across our mobile titles. So I feel we're in a great position. Having built these capabilities internally and of course longer term, we have a great deal of optionality in terms of where we can take the platform.

Speaker 4

And that's why we continue to invest in this area, which is critical to our business. Thanks for your question.

Speaker 1

Thanks all again for joining us today and your interest and participation. We look All forward to catching up with you in the coming weeks. Thanks.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Activision Blizzard Q2 2021
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