Sony, Ubisoft, Activision & Take-Two Earnings Recap: It’s a Numbers Game

As you likely read recently at my post of this quarter’s earnings calendar across gaming, tech and media, this week was an especially busy one for these industries.

In addition to the likes of Twitter and Disney, we saw gaming giants share updates on their recent financial results. Today I’ll both summarize and analyze Sony, Ubisoft, Activision and Take-Two reports and highlight the most important parts driving each business. Plus, chat some about predictions and where these companies are going in the near future.

I hope to.. hm, earn your confidence as we work through these because it should be a good one!

Sony Corp: Tuesday, February 4th.

Japanese media and gaming conglomerate Sony Corp reported a number of updates across its myriad of businesses for 3rd quarter of fiscal 2019, including its Gaming & Network Services (G&NS) business which houses its PlayStation brand and continues to be its main revenue source.

Notably, Sony announced that its PlayStation 4 hardware has now passed 108.9 million consoles shipped globally after moving 6.1 million during the holiday quarter. As expected later in the console cycle, this quarterly figure is down from 8.1 million last year. Still, the company reiterated its current forecast of 13.5 million consoles for the full year, implying we’ll see another 1.4 million come the end of March.

In terms of software within G&NS, PlayStation 4 game sales totaled 81.1 million copies in the quarter compared to 87.2 million in Q3 of 2018. 49% of these full game sales are now digital, when last year it was 37%. After its Q1 report hit 53% digital back in June, Sony is certainly on track to see at least 40% digital share this fiscal year which would be the first year ever it’s crossed this threshold.

Switching over to the services side, its PlayStation Plus subscription service, which offers online multiplayer access, hit 38.8 million registered users versus the 36.3 million player base last year. This increased subscription audience drove Network Services to be the only sub-segment within G&NS growing this quarter on dollar sales.

Speaking of dollars, Sony overall generated $22.4 billion in sales and operating revenue which is up 3% since last year on strength in its financial services and imaging businesses. Operating income however experienced a decline of 20%, to $2.73 billion. Within G&NS, sales dipped 20% to $3.3 billion with operating profit down 27% to just under $490 million due to lower hardware and external software sales. That PlayStation Plus user increase did help to offset this.

You’ll see in the chart above that even aggregating over the last 12 month period, during which sales were approximately $18.8 billion for its gaming business, the decline is tangible. It’s more pronounced than I even expected leading into the formal reveal of its PlayStation 5, due this holiday season. Partially due to the major success of titles like Red Dead Redemption 2 and Marvel’s Spider-Man driving sales during last year’s comparable time frame.

Sony’s higher network services revenue shows the growing importance of ecosystem and subscriptions to keep an audience engaged especially late in the cycle, helping to smooth out performance plus offset weakness in hardware and full game sales.

Within the PlayStation business, Sony realigned its segment reporting which I’ve presented above. Both digital software and add-on content and hardware sales experienced double-digit declines, though network services gained nearly 10%. Sony’s higher network services revenue shows the growing importance of ecosystem and subscriptions to keep an audience engaged especially late in the cycle, helping to smooth out performance plus offset weakness in hardware and full game sales.

Looking forward, the firm actually boosted its overall guidance slightly for sales and operating profit for the full year, though lowered these projections within its PlayStation unit, which means it expects a lower contribution than before. My personal take is that this quarter’s result is a bit lower than I anticipated, though certainly fits with where the major manufacturer and software producer is at ahead of its next console release in the back half of this year.

It’s going to be lackluster for a few more quarters leading into PlayStation 5, and I’m intrigued to see how its network services and subscriptions perform in the interim.

Ubisoft Entertainment SA: Thursday, February 6th.

Yesterday’s third quarter sales announcement from French video game publisher Ubisoft was lighter on the details than its competitors. But there’s still plenty to discuss (and speculate, of course)!

From the numbers side, sales for the nine months ending December dipped 16% to $1.23 billion which is on pace to come in well below the firm’s initial expectations due to softer sales of games like Tom Clancy’s Ghost Recon Breakpoint and Tom Clancy’s The Division 2 in particular. Ubisoft did point out that Just Dance 2020 is.. this is an easy one, performing well. Digital equates to nearly 80% of total sales, a figure which includes both digital game downloads and in-game purchases.

Because of somewhat weaker results for new titles, back catalog sales are propping up its recent numbers. Revenue of these older titles hit nearly 69% of business compared to 62% in the same period last year. Assassin’s Creed Odyssey from 2018 saw a major rise in unit sell-through plus engagement compared to its predecessor Assassin’s Creed Origins. 2015’s Tom Clancy’s Rainbow Six Siege is still showing excellent momentum years after launch, boasting 55 million registered players and record active users for a December month.

Unfortunately, Ubisoft doesn’t share much in the way of profitability metrics outside of annual reporting. I’d imagine it’s facing a similar trend in declines, perhaps even more pronounced because of rising costs associated with developing games that it delayed a few months back. It did reiterate its full-year sales targets for both this fiscal year ending March and the following one, showing early confidence in its adjusted release schedule.

At a personal level, I’m extremely excited for Ubisoft’s robust lineup after the type of year it’s had with core franchises. At an analyst level, I’ll remain intently skeptical all targets will be met until we hear exactly how these games will roll-out.

Speaking of its development pipeline, we’ve arrived at the best part of Ubisoft’s press release and conference call. The rest of this fiscal year through March is light. No major releases. Looking forward, CEO Yves Guillemot highlights the internal organizational restructuring in an attempt to strengthen its most important titles, which means the firm reiterated its plan to release five new triple-A titles between October 2020 and March 2021. Now we’re getting somewhere.

I spoke with Ubisoft Investor Relations briefly over email to confirm that three of these flagship games are targeted for the October to December window while the remaining two are slated in January to March. Three of these five have been formally announced: Watch Dogs Legion, Gods & Monsters and Rainbow Six Quarantine.

The worst kept secret in the industry is that a Norse-themed Assassin’s Creed game is on the way this Fall, so let’s mark that down as the fourth. My ongoing assumption for the final one is a new mainline Far Cry, thereby crushing the hopes of Splinter Cell fans everywhere yet again. Kotaku’s Jason Schreier claims that these are both true, so we essentially have an unofficial confirmation of its full fiscal year lineup.

It’s an ambitious schedule, especially for this upcoming holiday quarter during the launch of consoles from Microsoft and Sony. Ubisoft is usually one of the most dedicated supporters of a new generation, capitalizing on the updated tech and fervent early adopters. It sounds like this time it’s no different, although I wouldn’t be surprised if only two projects end up releasing before December and the remainder sometime during the first half of calendar year 2021. Having three titles jam-packed into the holiday quarter risks cannibalization, especially given how most of these games feature some sort of open world or action elements.

Now these aren’t the only pending games from the publisher. Guillemot points out it does have more intimate ones, as he describes them as “very innovative titles that have a particular focus on social interaction.” Main example being Roller Champions. I’d imagine there’s also a mobile game from internal studio Social Point or perhaps a new UbiArt style project made by a smaller team.

At a personal level, I’m extremely excited for Ubisoft’s robust lineup after the type of year it’s had with core franchises. At an analyst level, I’ll remain intently skeptical all targets will be met until we hear exactly how these games will roll-out.

Activision Blizzard: Thursday, February 6th.

Out of those reporting this week, domestic publisher Activision Blizzard was the only one with a fiscal year ending in December. Thus it shared both fourth quarter and annual metrics.

Twice the fun!

For the quarter, results exceeded internal expectations with net revenues of $1.99 billion though were down compared to the $2.38 billion generated last year. Operating income totaled $454 million, off from the $694 million in fourth quarter 2018. Nearly $1.29 billion of sales, equating to 65% of the total, were from subscriptions, licensing and micro-transactions rather than retail product sales or full game downloads. That’s the model for these major software makers going forward, after all.

Across the full year, Activision Blizzard generated almost $6.49 billion. Which is down a billion bucks since 2018. 76% digital share in 2019, essentially flat compared to the 77% in prior year. Operating profit reached $1.61 billion, down from the near $1.99 billion. Which means that while results beat the firm’s estimates, the trend is certainly down for the company overall.

What really caught my eye when looking at what’s driving these figures is the distribution of sales for the full year across its Activision, Blizzard and King businesses. Historically, Activision is top dog. That fits the narrative this year, as its split is 36% of total sales and 41% of profit. However, mobile subsidiary King is now in second place, which means the overall firm is now benefiting more from its casual phone offerings like Candy Crush than traditional games made by its storied Blizzard studios.

It’s clear that flagship franchise Call of Duty from Activision is as strong as ever. Call of Duty: Modern Warfare unit sales and engagement stats are up strongly compared to last year’s Call of Duty: Black Ops 4. Around half of Modern Warfare console sales are now digital, helping it become the best-selling game in the States during 2019 as I wrote about recently. Then there’s Call of Duty Mobile, which now has over 150 million downloads after one of the biggest launches in history.

On the Blizzard side, dollar sales ended the year at $1.72 billion which is down 25%. Monthly active users dipped 3 million since this time in 2018, now at 32 million. It’s a mixed bag for this division, where growth for Overwatch and World of Warcraft driven by a resurgence of interest for its Classic version couldn’t offset declines in Hearthstone and Diablo. It’s been an intriguing time for Blizzard in recent years, with a focus on continued support of older franchises rather than new releases. There’s Overwatch 2 in the pipeline, with no launch window. And I’m still skeptical of how fans will react to it. Then there’s Diablo IV, which I have to believe is a long ways out. This trend is likely to continue for the short to medium term.

Mobile subsidiary King is now in second place, which means [Activision Blizzard] is now benefiting more from its casual phone offerings like Candy Crush than traditional games made by its historic Blizzard studios.

Tying in with this is the last major item: its forecast for next year plus its mention of new titles. Activision Blizzard expects to generate $6.45 billion in revenue during 2020, slightly below this year’s figure. Guidance for earnings is also down 5%. Factored into this forward-looking guidance is.. surprise! A new Call of Duty project set to release in the last quarter of 2020.

Thing is, I’m not sure what else will drive its performance. Blizzard is set to focus again on continuing games like WoW, then a test phase for phone game Diablo Immortal in the middle of 2020. King reportedly has multiple new mobile games in development. On its conference call, Chief Financial Officer Dennis Durkin alluded to these not having material impact on guidance.

So, what will? Well, friends, we’ve reached the highlight. Activision Blizzard is sitting on a goldmine of legacy properties that it hasn’t leveraged as well as competitors. To that end, the company expects to “tap into our portfolio of beloved IP to bring several remastered and re-imagined experiences to our players in 2020, which we will announce closer to launch” according to Durkin.

In recent years, the company’s seen success with collections like Crash Bandicoot N. Sane Trilogy and Spyro Reignited Trilogy, the former being a major commercial win at 10 million units shipped. This type of quote shows that executives at least acknowledge the value of such brands. The issue becomes that fans of these franchises desire new games yet the quote is ambiguous. Will it continue to be more of the same or might we see new projects within these nostalgic series? Apparently we should hear sooner than later.

Take-Two Interactive: Thursday, February 6th.

Finally this brings us to the last one up. Another stateside developer/publisher in Take-Two Interactive, owner of historic labels Rockstar Games and 2K Games plus the Private Division publishing arm and mobile subsidiary Social Point. Take-Two reported its third quarter of fiscal 2020 results via the usual press release, then went in-depth on its conference call highlighting sales results of all its major franchises. (My favorite part.)

The way I’ll tackle Take-Two is talking broadly about its quarterly figures then drill into its owned businesses. Net revenue overall reached $930 million, down from $1.25 billion. Mostly because of the comparison to the massive launch of Red Dead Redemption 2 this time last year. Operating profit hit $177 million, down from $303 million in 2018 Q3.

Of its total sales, 37% is now from recurring spending; a metric which grew 15% this quarter and represents virtual currency, add-on content and in-game items. This drove the digital share to 75% of full revenue for the quarter. The company also reported that around 41% of its business originated from catalog sales, mainly those within the Grand Theft Auto and Red Dead Redemption franchises plus mobile titles from Social Point.

2K Games, which the company estimates will be around 55% of its business this fiscal, benefited from ongoing sales of NBA 2K20 as it now totals 8 million units shipped to date since its September release. Roughly on part with its predecessor. This quarter’s slate included the launch of Sid Meier’s Civilization VI on console, Borderlands 3 and NBA 2K20 for Stadia (neither of which I imagine contributed materially) and WWE 2K20.

Borderlands 3 continues its better-than-expected start since release a few months back, now totaling 8 million units sold-in. This is after moving 5 million copies within a five day span near launch. Take-Two notes that while it expects lifetime sales to achieve a record within the franchise, it’s factoring lower sales for Gearbox Software’s latest into its annual forecast.

On the flip side, WWE 2K20 saw a lackluster launch that drastically under-performed the firm’s internal estimates on both the critical and commercial sides. Developer Visual Concepts is working to rebound, though I think this year’s iteration is down for the count.

Still, the cash cow for Rockstar continues to be Grand Theft Auto V. A game which apparently isn’t yet in the homes of every single person who owns a gaming console because its lifetime copies shipped hit a whopping 120 million in the holiday quarter.

One of the most consistent and frankly notorious teams in the business is Rockstar Games, which will account for 35% of Take-Two’s annual net bookings. Its main release this past quarter was Red Dead Redemption 2 on PC around the year anniversary of its console version, which drove lifetime unit sales for the game to over 29 million. This is up from 26.5 million copies as of September, proving the impact of the new platform plus the ongoing adoption of Red Dead Online for which CEO Strauss Zelnick said engagement tripled year-on-year.

Still, the cash cow for Rockstar continues to be Grand Theft Auto V. A game which apparently isn’t yet in the homes of every single person who owns a gaming console because its lifetime copies shipped hit a whopping 120 million in the holiday quarter. That’s 5 million more than the prior quarter. No one at Take-Two or really anywhere in their wildest dreams could have predicted this sort of longevity.

A part of this crazy momentum is the ongoing success of Grand Theft Auto Online, which somehow achieved a record audience size in December and in the quarter overall. Recurring spending from consumers on GTAO jumped 54% this quarter after a new expansion in the Summer. Take-Two expects this online mode to have a record fiscal year in terms of recurring consumer spend. Keep in mind: The base game released in 2013, and its online mode really picked up steam the following year. Honestly doesn’t seem to be stopping anytime soon.

Moving to Private Division, its major release during Q3 was The Outer Worlds which debuted on Xbox Game Pass in addition to its console and PC platforms. Obsidian Entertainment’s recent space role-playing title, which earned a Top 5 spot on my 2019 Games of the Year list, has now sold-in 2 million copies since October. And that doesn’t even include downloads from Xbox Game Pass, nor its Nintendo Switch release which is set for sometime before March 2021 (I’d imagine even sooner).

Another quick note is that Kerbal Space Program, the first game in a franchise now run by Private Division, is approaching a new sales milestone itself by reaching nearly 4 million copies shipped. The company reiterated that its sequel is due in fiscal 2021 as well.

Switching over to the broader company’s outlook for the full year, it adjusted the numbers slightly though I wouldn’t say it’s a substantial impact. Basically it tightened the range in which its revenue expectations, then slightly lowered its profit guidance. As you’ll see above, net revenue should be up however net bookings will contract. I’m not as concerned as other industry commentators, as I think this quarter and year look a whole lot worse than they really are because of just how ridiculously well Red Dead Redemption 2 did.

I’d even argue Take-Two’s upcoming lineup is just as intriguing as Ubisoft’s, even if we don’t know as much about its major projects. Speaking on its development pipeline, Zelnick called it the “largest and most diverse in our history, including releases from our largest franchises, new IP and a broad mix of gameplay experiences.”

Sure, that’s a bit of corporate speak. It’s still somewhat indicative of where one of the industry’s premier software players is going. Shorter-term, this implies to me new annual releases in the NBA 2K and even WWE 2K franchises, new platforms for existing titles plus ongoing content for the online modes in its main games.

Medium to long term is where it gets exciting. First and foremost, the filing announcing the departure of former Rockstar Games co-founder and vice president Dan Houser said the team is working on both “current and future projects.” Where does Rockstar goes with its upcoming slate now that its model has changed to fostering player retention via online modes rather than solely single-player experiences? Will there be a Grand Theft Auto VI? The answer is yes, we just don’t know what form it will take with this different ideology. I’m more curious about what games Rockstar might have that aren’t Grand Theft Auto.

Then there’s (my beloved) BioShock. Take-Two announced a new studio called Cloud Chamber this past quarter, which is currently developing the next iteration in the series. Within this earnings release, the company reiterated that it will be in the works for “several years.” While it isn’t factored into the immediate forecast, I’m ecstatic to hear how it progresses.

Executives even fielded questions on other teams such as Hangar 13, known for Mafia 3, then the newly-formed 2K Silicon Valley led by industry veteran Michael Condrey. Sounds like these are in fact actively working on projects, we just can’t hear about them yet.

I’d say Take-Two’s current position is summarized by President Karl Slatoff as he echoes his CEO’s sentiment: Its pipeline consists of “new IP and existing franchises, free-to-play games, different business models, casual games, core games, mid-core games” about which they will share more in upcoming months.

While I don’t expect Take-Two to have a major presence during this year’s set of console launches outside of sports titles, we’ll undoubtedly see it capitalize on the new tech in the mid-term. And who knows, maybe Rockstar will surprise us?

Well then. That’s a pretty darn comprehensive look at the week that was in games industry financial reporting if I say so. Spiced up with my takes (as varying in quality they might be).

Reflected across all four is the trend of ongoing digital and services attempting to offset the contraction in hardware resulting from next generation beginning this holiday season, plus development plans that will ramp up at various points in the future. Ubisoft seems to be the most immediately impacted with its recent delays, while Activision and Take-Two lean on recurring sales from their biggest budget franchises to soften the blow while we await new tech from hardware manufacturers and emerging platforms alike.

If you made it this far: You rock! Thanks for reading.

Note: All comparisons are year-over-year unless noted. Currency conversions are to U.S. dollar as of February 7, 2020 for the sake of comparison.

Sources: Company Investor Relations & Media Sites, Getty Images, Kotaku, The NPD Group.

-Dom

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