Activision Blizzard, Inc

Good afternoon and welcome to the Activision Blizzard first quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Chris Hickey, Senior Vice President, Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us today for Activision Blizzard's first quarter 2021 conference call. With us are Bobby Kotick, CEO, Daniel Allegro, President and COO, Armin Zirza, CFO, and Dennis Durkin. And for Q&A, Rob Kostich, President of Activision, Jay Allen Brack, President of Blizzard Entertainment, And Herman Saknini, 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 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 to differ materially from those expressed in any forward-looking statements. These include the impact of the COVID-19 pandemic, the risk factors discussed in our SEC filings, including our 2020 Annual Report on Form 10-K, and those on the slide that is shown. The company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today, May 4, 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.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. And now I'd like to introduce our CEO, Bobby Kotick.

Thank you, Chris, and thank you all for joining us today. For more than a year now, amid very challenging conditions, the teams at Activision Blizzard have played an important role in supporting and serving our community of 400 million players in 190 countries. Our teams have kept players connected using our platform to comfort, inspire, and draw people together. Their hard work and dedication enabled us to deliver significantly better than expected first quarter results. First quarter net bookings increased year over year by 36% to $2.1 billion. Non-GAAP operating income grew 38%, and non-GAAP earnings per share increased by 29%. Year-over-year performance was driven by our three largest franchises, Call of Duty, Warcraft, and Candy Crush, with each delivering strong double-digit growth in net bookings. This overperformance was well ahead of our expectations and confirms that our multi-year franchise strategy and continued execution is delivering value to our shareholders. With momentum continuing across our business, we're raising our financial outlook for the year. In the last 20 years, we've delivered 21% compound rates of return as compared to the S&P 500, which delivered 8% compounded rates of return. $1,000 invested in Activision in 2001 would be worth over $45,000 today as compared to $4,900 in the S&P 500. This performance is possible because of our deep library of franchises. We own some of the most enduring and popular global entertainment franchises supported by the very best creative teams in our industry. Our strategy centers around our long-held view that wholly owned entertainment franchises offer the opportunity for limitless innovation. We continue to increase investment in creative and commercial resources for our franchises and potential new franchises to deliver new, compelling experiences for players and superior financial returns for our shareholders. With free-to-play entry points across mobile, PC, and console, Call of Duty experienced an increase of over 100 million players in a little over a year. Call of Duty is the template we're applying to our proven franchises as well as our new potential franchises, as we attempt to grow our audiences to a billion players. Our increase in live operations is reflected in last quarter's results and our forward outlook as we've seen our business shift from a seasonal focus with a holiday emphasis to an always-on business model with far less seasonality. This quarter also marked the five-year anniversary of our acquisition of King and the Candy Crush franchise. With the Candy Crush team delivering more year-round content to over 200 million monthly players, King's business is delivering excellent results. Segment revenue grew over 20% year-over-year to reach a new record in the first quarter. It's especially noteworthy that of the top 10 mobile franchises worldwide, at the time we announced the acquisition of King, no other game has grown in-app revenues over the period or matched candies compound growth rate. King's advertising business continues to deliver spectacular results too, with revenue growing 70% year over year in the first quarter. As we look ahead, demand for our content has never been stronger. We continue to ramp our investment in creative and development talent, especially with increased competition from Chinese companies and platform providers. And this will allow us to better serve our players. From the start of 2020 through the end of next year, we intend to hire more than 2,000 developers. We plan to triple the size of certain franchise teams compared to those team sizes in 2019. And we have aggressive hiring plans around the world, including new studios or major expansion in Poland, China, Australia, and Canada. And as our shareholders expect, we remain laser focused on finding and retaining the best talent in the industry and always aligning performance and reward. From the extensive shareholder outreach we conducted this past year, reaching well over 60% of our shareholders, we are pleased that our company-wide pay for performance compensation philosophy and ESG initiatives are aligned with the expectations of our shareholders. This quarter, we'll release our first DSG report highlighting our commitment to the environment, human capital management, social good, the very best governance practices, and their direct connection to the creation of shareholder value. While the report is new, our commitment to these practices and shareholder value creation is not. In particular, we've long appreciated that the creation of broadly appealing games requires diverse views, diverse voices, and diverse skills, and an environment that fosters inclusion. And importantly, our ESG report will include our commitments to help ensure that our scale serves our players, our employees, our communities, and especially our shareholders, and that those commitments are embedded into and across our business. Also in the service of our shareholders, I'm pleased to introduce Armen Zurza as our new chief financial officer. Armen's deep experience as a global finance and operations executive and his contributions as chief operating officer of Blizzard and chief commercial officer of the company make him especially well-suited to serve as our next CFO. In his six years with the company, Armen has been a central figure in the company's continued growth and record financial results. He has the commitment to profitable growth and operational excellence that our shareholders have always recognized us for. And Armin comes to the role with an incredible team assembled by Dennis and Thomas over the last decade. Dennis has been a key contributor in some of the most value-creating moments of our history, including the buyback of control from Vivendi in 2013 and our expansion into mobile through the acquisition of King. Dennis's contributions have meaningfully shaped our culture, leaving the company in a much stronger position than when he joined 10 years ago. Dennis, on behalf of Brian, Thomas, and our board of directors, I thank you for your friendship, your partnership, and your leadership.