For Activision Blizzard, the future is smartphones.
The game giant’s core rationale for snapping up King Digital Entertainment in a $5.9 billion pact was to dive into the fast-growing mobile game space.
Investors have questioned how much growth is ahead for King, best known for its wildly popular “Candy Crush” series of casual games. But Activision CEO Bobby Kotick believes that King, besides throwing off lots of cash, will serve as an engine for the company to launch new mobile-content franchises down the road.
Kotick, on a call with Wall Street analysts Tuesday, said Activision Blizzard has an intellectual-property portfolio stretching back 35 years that could be adapted for mobile gameplay.
“With mobile, we now have the opportunity… to take a lot of that content we’ve built over 35 years and leverage that against this new opportunity,” he said, but did not provide examples of titles that may be poised for new mobile incarnations. He cited King’s presence in 196 countries and 474 million monthly active users for the third quarter 2015.
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The deal plugs the huge app-gap in Activision Blizzard’s lineup, which mostly comprises console-based action games like “Call of Duty” and PC role-playing titles like “World of Warcraft.”
“We think now is the right time to enter mobile gaming in a meaningful way,” Kotick said. “There’s a lot of opportunity to distribute content to that half-a-billion players.” The mobile-gaming sector is “still very fragmented,” he added, and it’s projected to hit $36 billion in revenue this year while continuing to grow.
After an initial drop Tuesday, Activision’s stock soared to all-time highs as the company solidly beat third-quarter 2015 revenue and profit expectations and raised guidance for the full-year 2015.
Still, analysts said King’s biggest days may be behind it. For the first six months of 2015, King reported revenue of $1.06 billion, down 12% from the same period a year earlier, and profit of $283 million, a decline of 3% year over year. King had 340 million monthly unique users for the second quarter of 2015 (down from 350 million a year earlier).
“At first blush, we suspect investor debate on the deal to focus on King’s growth prospects,” UBS Securities’ Eric Sheridan wrote in an investor note. Other questions include whether King’s current financials will affect Activision’s current trading multiple and future buybacks.
Activision Blizzard said it expects the King acquisition to be accretive to 2016 adjusted revenues and earnings by approximately 30% while significantly boosting free cash flow. CFO Dennis Durkin noted those forecasts exclude any potential synergies that the companies may realize.
King, which has 1,600 employees worldwide, will operate as an independent unit under Activision Blizzard, led by King CEO Riccardo Zacconi. That’s how Activision has run the Blizzard Entertainment business, which it acquired in an $18.9 billion deal for Vivendi Games in 2008.
Other top King execs expected to remain with the company include chief creative officer Sebastian Knutsson and COO Stephane Kurgan. Ireland-based King has 12 studios in Europe, Asia and the U.S. Its four key game franchises are “Candy Crush,” “Farm Heroes,” “Pet Rescue” and “Bubble Witch.” On the call with analysts, Zacconi said King plans to launch three new games from existing franchises by end of 2015, with a brand-new title to launch in 2016.
Activision Blizzard expects the acquisition of King to be completed by the spring of 2016, pending approval by King shareholders and regulatory clearances.
For the quarter ended Sept. 30, Activision Blizzard reported revenue of $990 million, compared with $753 million a year earlier, including record sales via digital channels of $629 million. Earnings per diluted share were 17 cents, versus a loss of 3 cents for the third quarter of 2014.
Activision Blizzard raised estimates for full-year 2015 results, pegging revenue of
$4.53 billion (compared with $4.43 billion previously) and EPS of $1.07 (versus $1.06 previously).