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The Good, Bad, and Ugly of Activision Blizzard's 3rd Quarter

It's been a rough month for video game stocks, especially for Activision Blizzard (NASDAQ: ATVI), as the game maker's share price has slumped 34% since the beginning of October. The company's third-quarter earnings report presented a mix of positives and negatives that didn't sit well with market participants.

Let's take a look at the highlights and what management had to say.

World of Warcraft: Battle for Azeroth game art depicting a fantasy world with two characters wielding a bow and a sword in battle.
World of Warcraft: Battle for Azeroth game art depicting a fantasy world with two characters wielding a bow and a sword in battle.

IMAGE SOURCE: ACTIVISION BLIZZARD.

The good

Activision Blizzard exceeded its outlook in Q3 and we remain on track to deliver our previous upwardly revised outlook for the year and double-digit earnings-per-share growth year-over-year.

-- President and COO Coddy Johnson

It was a big quarter for the game maker, marked by releases across major franchises, including Destiny, World of Warcraft, and the hit mobile game Candy Crush. Candy Crush is performing well, with monthly active users growing year over year after the launch of Candy Crush Friends Saga during the quarter.

Also, the 14-year old World of Warcraft franchise got an expected jolt of adrenaline following the August launch of the Battle for Azeroth expansion. Blizzard reported that the release set an opening day sales record with more than 3.4 million units sold. Management said engagement "grew sharply" over the second quarter.

As for the October blockbuster release of Call of Duty: Black Ops 4, management noted that total active users are trending 16% higher than last year's version, and hours played are up more than 20% so far. The early signs show Black Ops 4 on pace to generate the most revenue of any Call of Duty in history -- a huge development given how popular this franchise is in the industry.

The bad

While the strong start for Black Ops 4 is providing a jump in active users for the Activision segment and should lead to strong in-game spending levels, other games are not holding their weight, as Johnson explained:

Now, not all our franchises are experiencing the momentum we see in Call of Duty and Candy Crush, and we have to improve the pace of innovation and the cadence of in-game content.

The latest Destiny 2: Forsaken expansion didn't live up to expectations. Although Destiny saw an increase in monthly active users year over year, Johnson said that the expansion "did not achieve our commercial expectations, and there is still work to do to fully re-engage the core Destiny fan base."

Johnson mentioned that Destiny's biggest problem is that previous players have not re-engaged with the new content. Once players are in the game, "there's really deep engagement that takes place." To address this problem, Activision Blizzard will be listening to player feedback and plans to deliver better content at a faster cadence heading into 2019.

The ugly

Monthly active users (MAUs) have been steadily declining for several quarters, as I have previously discussed. MAUs stood at 345 million at the end of the third quarter, down from 384 million at the end of the prior-year quarter. The company attributes these player losses primarily to less engaged players leaving King's mobile games, although Candy Crush (King's flagship title) has been a standout.

The Activision segment (Call of Duty, Destiny, and other titles) experienced a decline in MAUs year over year, as well. But with Black Ops 4 performing well, this segment should get a boost in active users for the fourth quarter.

What's most troubling is the decline in active users for the Blizzard segment (World of Warcraft, Overwatch, Hearthstone, and other titles), in which MAUs have declined by 5 million year over year to 37 million at the end of the third quarter. The company highlighted Overwatch and Hearthstone as major culprits in year-over-year losses in active users.

Even though management noted that Overwatch's active users were stable over the sequential second quarter, the year-over-year loss in the franchise is disappointing and shows that not even the interest in Overwatch League has been able to prevent players from leaving the game compared to the comparable quarter.

The industry is crowded with lots of new games

Financially, Activision Blizzard delivered a quarter that met expectations, but the continued decline in MAUs in segments that include important franchises stands out as a major negative.

It's worth noting that these player losses are happening at a time when "battle royale" shooters, such as Epic Games' Fortnite, have become ingrained in pop culture. Aside from the success of annual releases of existing franchises like Call of Duty, Activision hasn't released a wholly new franchise since Overwatch in 2016.

The gaming industry is booming, and more games are being released than ever before. It's clear that at least for the time being, some players are trying out these new games at Activision's expense.

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John Ballard owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.

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