Activision Blizzard Inc

LSE:0H8X

Earnings Call Transcript 2018-Q4

[Operator]

Good day and welcome to the Activision Blizzard Q4 2018 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, Investor Relations]

Good afternoon and thank you for joining us for today’s Activision Blizzard’s fourth quarter 2018 conference call. With us are: Bobby Kotick, CEO; Coddy Johnson, COO; and Dennis Durkin, company’s 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 Sakhnini, President of King will also join us.

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 for 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 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 report on Form 10-K, and those on the slides that is 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 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 charges, the associated tax benefit of these excluded items, and the impact of certain significant 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 encourage investors to consider all measures before making an investment decision. Please refer to our earnings release, which is posted on www.activisionblizzard.com, for a 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 I’d like to introduce our CEO, 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 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 didn't achieve the reach engagement and player investment goals we set for ourselves. 2019 will require significant change to enable us to achieve our long-term goals and objectives. We're making changes to enable 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 can deliver exactly what our fans have come to expect from our games, a consistent flow of compelling content.

We'll also increase our focus on adjacent opportunities with demonstrated potential like esports for Overwatch League and Call of Duty. We're stepping up production on our incubation efforts faster and increasing our investment in live services, in our tools, in our Battle.net platform and in new areas like our fast-growing esports 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 refocus 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 weren't living up to player expectations, or our leadership teams have determined may not live up to player expectations in the future. To drive improved execution and to fund development investment, we will in certain parts of the business reduce 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 isn't a 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 strong relationships with his colleagues served us well during his five-year prior tenure 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]

Thanks, Bobby. Before we discuss the important steps we are taking to reinforce 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 of $454 million. Net bookings were also a record at $2.84 billion. We generated Q4 GAAP EPS of $0.84 and Q4 non-GAAP EPS of $0.90 also both Q4 company records including a net deferral of $0.39. While GAAP revenue net bookings and both GAAP and non-GAAP EPS were company records, our net bookings fell short of our outlook, due to factors I'll explain in our segment results.

Activision Q4 segment revenues grew 6% year-over-year to $1.41 billion 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, a feat the franchise has accomplished for 9 of the last 10 years.

Black Ops 4 sold through more units 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 enjoyed Blackout, Multiplayer and Zombies. We also saw a significant shift to digital this the year, with full game downloads representing over 40% of console sell-through versus approximately 30% for World War II. However, sales of Black Ops 4 in the second half of the quarter were below our outlook, due to weaker-than-expected retail demand, lower-than-anticipated pricing and other promotional activities that didn't meet expectations. Although Black Ops 4 in-game net bookings started off slower than expected following the introduction of the new in-game system, we were encouraged by the response we saw when we introduced more compelling content with the second season 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 free up capital and development resources for the future. We also continued to drive strong performance for the beloved intellectual property from our library, following the successful launch of Spyro in Q4. And the ongoing contribution of Crash Bandicoot, which has sold in 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 and 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 release 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 net 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 the frequency of compelling 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 grew 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 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 continued to gain momentum, growing net bookings over 50% sequentially and again profitably, as the team continues to execute against this 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 and net bookings. We continue to make encouraging progress in mobile, advertising and esports. However, in-game execution was inadequate for some of our franchises and we saw weaker than anticipated retail demand.

As you will hear from Dennis, our 2019 outlook assumes 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 new 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 to determine the changes we need to make to improve execution and capitalize on the substantial long-term growth opportunities for our company. 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 whom has demonstrated the ability to combine creative excellence with the 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 deprioritizing initiatives that are not meeting our expectations and reducing certain non-development and administrative-related 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 sheds investment and 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're confident that over time this plan will enable our teams to accelerate the delivery of high-quality content to our communities.

Specifically as we reallocate resources and hire 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 intend to build on our experience with the Overwatch League to launch a professional city-based Call of Duty league that drives 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 plans 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 to drive 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 this enduring and beloved franchise. For Hearthstone, additional development resources will help to 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 underway 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 underway across the company as we speak. We expect to have completed 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 we'll 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 the communities to enjoy, new engagement and monetization models including where appropriate esports and advertising. And underpinning all our franchises will be our deep relationships with growing and vibrant communities which are increasingly direct and digital. In short, we are refocusing 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.

I'll now turn the call over to Dennis to provide our outlook for 2019. Dennis?

[Dennis Durkin]

Thanks, Coddy. Before I discuss the 2019 and 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 as 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 as we implement change to enable our teams to create better content for our biggest franchises more quickly. Given limited frontline releases, the organizational work underway and the current competitive environment, we're planning for this year to be down year-over-year.

I'll first go through the segments including slate to provide some context for the outlook starting with Activision. The main driver for the segment will be the Call of Duty franchise. Heading into 2019, we have momentum to build on given 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 unit sales to be lower than Black Ops 4.

We will also bring Call of Duty to mobile with our partner Tencent. Although, as 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 reimagining 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, whereas 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 and return to growth. While these factors will weigh on Blizzard's financials this year, looking further ahead, Blizzard's pipeline of PC, console and mobile content is richer 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 tougher comps in the first few months of the year until it crosses the anniversary of this disruption. Nonetheless, we expect segment revenue to grow modestly year-over-year driven by growth for the Candy franchise and the continued ramp of our advertising business. Bringing all this together to the total company level, our outlook incorporates net bookings declining 13% year-over-year. The Blizzard segment represents the majority of the 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 translates into lower segment operating income and our outlook assumes a high teens year-over-year decline. Again, the Blizzard segment drives 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 the 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 do 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.

Finally, I would note that we are planning for a higher tax rate this year. While our 2018 GAAP tax rate included one-time benefits from U.S. tax reform and our IRS settlement, both our GAAP and non-GAAP 2019 rates incorporate the full impact of new international tax provisions. With that context, I'll detail the financial guidance for 2019 and Q1. On a GAAP basis for 2019, we expect revenues of $6.03 billion, including GAAP deferrals of $275 million. We expect net bookings of $6.3 billion; product cost, game operations and distribution expenses of 24%; operating expenses including software amortization of 56%; and a GAAP-only charge of approximately $150 million relating to the restructuring plan Coddy outlined. We expect GAAP and non-GAAP net interest expense of 0, a GAAP tax rate of 24%, GAAP and non-GAAP share count of 775 million and EPS of $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 of $1.85, which includes GAAP deferrals of $0.25.

For Q1 on a GAAP basis, we expect revenues of $1.72 billion, which includes the recognition of GAAP deferrals of $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 GAAP and non-GAAP net interest expense of zero, a GAAP tax rate of 24% GAAP and non-GAAP share count of $772 million and EPS of $0.39. And for Q1 on a non-GAAP basis, we expect product cost, game operations and distribution expenses of 20% and operating expenses including software amortization of 43%. We expect the non-GAAP tax rate of 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 quickly review our historical track record just as context. As most of you know, we have always taken 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've 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 authorized the following; a 9% increase in our dividend to $0.37 per share payable in May; and also a new two-year $1.5 billion share repurchase authorization.

Before I conclude, I wanted to summarize the company's position heading into 2019. We continue to have a 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'm 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 J as they join us for the Q&A portion of the call. Operator?

[Operator]

Thank you. [Operator Instructions] We'll go first to Colin Sebastian with Robert W. Baird.

[Colin Sebastian, Robert W. Baird]

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? Thanks.

[Coddy Johnson, Chief Operating Officer]

Sure. Thanks, Colin. This is Coddy. I'll take that one. I guess stepping back to what 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. Two, is making sure we have the right amount of development resources to then go 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's three specific and important changes as we head into 2019 that we plan to deliver. The first is investing in development on our main franchises, as I mentioned a 20% increase to drive the content in 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 and go to market and partnerships and sponsorships so we can leverage scale. We know we have a global fan player base that is looking for content on a regular cadence, to come more quickly and to come across multiple platforms and we think we have set-up each of our operating divisions to be able to deliver on that. But we also think we better set up the company to be able to deliver on that as we leverage those areas, where scale can really help to bring our content and our franchises out to the world.

Now as for timing, and as we see those effects we're 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 is a sign that we are headed towards a place where growth given the right resources, given the right plan can be realized.

[Colin Sebastian, Robert W. Baird]

Thanks.

[Chris Hickey, Senior Vice President, Investor Relations]

Operator, can we have the next question please.

[Operator]

We'll now take a question from Evan Wingren with KeyBanc Capital Markets.

[Evan Wingren, KeyBanc Capital Markets]

Yeah. Just wondering if you could provide us a bit more commentary on the components of your guidance for fiscal 2019, how you see your franchises performing and how you see the seasonality of the year unfolding?

[Dennis Durkin]

Yeah. Thanks, Evan. It's Dennis here. Happy to provide some color on that, I guess first just kind of 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, but it does obviously impact our outlook. In addition, the in-game softness that we saw exiting 2018 caused us to enter the year at a slightly lower trajectory than last year. And although, we have a plan to turn that around it's going to take some time. So we don't actually assume a full recovery of that in 2019. And then, we also are pretty conservative in terms of how we plan for some of the newer things in our pipeline like our mobile games. We do obviously shoot for breakout hits, but it's very hard to obviously prudently plan for those in your outlook. So we're obviously more conservative on that.

And then the last piece, I would just say is relative to our tax rate. You heard a few of the comments about it being up, because some of our international considerations this year. So those are the main considerations, I guess just relatively to the overall outlook.

As it relates to seasonality, given the limited number of product 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 is building this new game for us in Activision is building what they believe is the best Call of Duty we've ever built. And 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 set guidance in the past. And 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. So thanks for the question Evan.

[Christ Hickey]

Operator, can we have the next question please.

[Operator]

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

[Ray Stochel, Consumer Edge Research]

Great. Thanks so much for taking my question. This is for Rob. Can you quickly tell us about how you're 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 of Activision]

Hey. 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. And what I really look forward to is taking all 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 and overdelivering on their expectations. That is just something we must do. Now behind it all it is our people. They're world-class. They are our foundation and we want to 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, in PC expansion, in geographic expansion, especially in Asia, in eSports, which 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 19 will be what we believe is our biggest and best in-game event and it's going to 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 am looking further ahead to what Dennis mentioned, it's worth mentioning again, this fall's launch I think is going to resonate very powerfully with our community. It is an amazing game. It's going to feature an entirely new campaign, a huge and expansive multiplayer world and of course some fun co-op gameplay. But from day one, we’re going to be really excited, 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 going to have to wait, but I think it's going to be really worth it. We can't wait to share it with the world. So thanks for the question Ray.

[Bobby Kotick, Chief Executive Officer]

And I would just add, Ray, its 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.

[Ray Stochel, Consumer Edge Research]

Great. Thanks again for taking my question.

[Chris Hickey, Senior Vice President, Investor Relations]

Thanks. Operator?

[Operator]

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

[Brian Nowak, Morgan Stanley]

Thanks for taking my question. One for probably J. I guess, the question, J., 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 as it should be. Thanks.

[J. Allen Brack, President of Blizzard]

Yeah. 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 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 the 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 produce. So we have two big goals going forward. The first one is, of course, make excellent videogames. 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 lineup 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 in development talent is -- has really required us to make some difficult trade-offs. We're going to -- as Coddy mentioned, we're going to reduce our non-development positions in our offices around the world, specifically looking at our SG&A and non-core business units. This was a very, very difficult decision, I'd say it’s a top five career difficult 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 want 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 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]

Can I just say, it's really terrific for the company to have J'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 J in the role that he's in.

[Brian Nowak, Morgan Stanley]

Great. Thanks.

[Operator]

We’ll now take your question from Alexia Quadrani with JPMorgan.

[Alexia Quadrani, JPMorgan]

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 monetization model for any of your game 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 on economic models is the player and game experience itself. Our North Star is to deliver a 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, micro transaction-based games, games with an upfront charge or with a subscription. 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. 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 that 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 AAA 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 our games across our franchises and use the models that we think best both for the player experience and for our business.

[Alexia Quadrani, JPMorgan]

Thank you very much.

[Operator]

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

[Mike Hickey, The Benchmark Company]

Hey guys. Thanks for taking my questions. Just focusing on your key segment, I'm hopeful you can provide more color on your Candy Friends launch, I guess, how – it went from your perspective and how it's performing now would be really helpful. Thank you.

[Humam Sakhnini, President 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 that after many years of the teams operating the Candy franchise at scale they’ve really put all 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 game’s per player monetization metrics are well ahead of where the 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 a year where we make marketing investments to support the title. And 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.

[Mike Hickey, The Benchmark Company]

Thank you.

[Operator]

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

[Tim O’Shea]

Yes. Thank you for taking my question. So with Overwatch League season two launching soon, I just thought it made sense for an update on that franchise. It's been over two years since the game launched and we've talked on prior calls and again on this call about the lower revenue levels. So 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 Brack, President of Blizzard]

Thanks for the question. This is J. 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 really built Overwatch League around that with early good results. Delivery of more content in 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 like, the Overwatch that you know is 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 going to increase the size of the Overwatch team meaningfully. But keep in mind that that's going to – we need to balance the existing live content with new products and different kind of support for Overwatch League. I'm really confident that the community will be very excited when we kind of 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 out of focus. But overall, we think it's the right decision. It's been the right decision for the game and the franchise. We're about to kick off the second season and that's going to start on February 14. That will 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 going to 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.

[Chris Hickey, Senior Vice President, Investor Relations]

Operator, can we have the next question, please?

[Operator]

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

[Brandon Ross, BTIG]

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 kind of 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 they created and we get to focus on our biggest opportunities on our biggest franchises with our best resources. Our decision was reach the 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 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 leaves to probably the second factor in our decision process, which is Destiny, it 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 not 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 time, which now under the arrangement we have reached, will be freed up after short transition period. So late last year when we're exploring all our options on Destiny, in November after earnings release we learned that Bungie was willing to acquire our rights and we engage discussions with them and ultimately wound up consummating the deal in late December, and it was a mutual amicable agreement. And 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.

[Brandon Ross, BTIG]

Thank you.

[Chris Hickey, Senior Vice President, Investor Relations]

Operator, can we have the next question please.

[Operator]

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

[Matthew Thornton, SunTrust]

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 or color there will be helpful. Thanks, everyone.

[Coddy Johnson, Chief Operating Officer]

Sure. 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 IP, 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 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 team is a lot 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 our opportunities it's not just internal. We are working with external partners. We have multiple projects underway across the portfolio in various stages of development. And as you know we've announced to Call of Duty mobile and also Diablo Immortal.

And you asked 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.

[Chris Hickey, Senior Vice President, Investor Relations]

Operator, we have time for one last question please.

[Operator]

And will take our last question from Kunaal Malde.

[Kunaal Malde, Atlantic Equities]

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

[Bobby Kotick, Chief Executive Officer]

Go ahead, Humam.

[Humam Sakhnini, President of King]

I was just going to say, Bobby, that I mean, let’s 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 going to 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 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 kind of 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 esports. I think the team has a ton of learnings and potential that's 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 opportunity 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, 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.

[Operator]

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