Thursday, February 14, 2019

After Its Best Quarter And Year Ever, Activision Lays Off 8% Of Workforce

In an ideal world, the talk after Tuesday's Activision Blizzard investors call would center around video games. The fact that the company announced it would refocus on key games would highlight the news. Fans of Call of Duty, Overwatch, Hearthstone, World of Warcraft, Candy Crush, and Diablo would rejoice and Activision announced it would increase the headcounts working on those titles by a combined 20%. Others would cry as beloved games like Heroes of the Storm seem destined for maintenance mode, if not worse. The fact that, except for the next Call of Duty coming out in the final quarter of 2019, the company has no major releases scheduled just means gamers have to go someplace else for new games until the next WoW expansion comes out in 2020.

But we don't live in an ideal world. The headlines instead proclaim the greed of Activision Blizzard. Of course, whoever came up with the script for the call needs to be slapped upside the head. So does Activision Blizzard CEO Bobby Kotic for not calling for revisions. When he leads off with the fact that the company set records for revenue in both Q4 2018 and for 2018 as a whole, then points out those figures didn't meet expectations, that was a bad sign.

What gets investors excited doesn't necessarily translate to glee in gamers. Refocusing efforts on existing money-making games leaves those wishing for new games or a revival of old franchises disappointed. But in the coverage of the call I watched on YouTube, I didn't see many, if any, point out the expected drop in revenue for 2019 of 13%. That's right, with Bungie taking the Destiny franchise in the recent divorce and no WoW expansion expected until 2020, revenue is going down. Something fairly expected by gamers is a "WTF?! OMG!!! Activision is DYING!!!!!" moment for investors.

So what did Activision Blizzard do? First, it announced a 9% increase in the dividend payout this year for those who own stock at a certain date in May. Next, the company announced it was going to conduct a buyback of ATVI stock; $1.5 billion worth over the next 2 years. And finally, as expected, the company is conducting an 8% reduction in its workforce, starting in the U.S.

A point I have not heard mentioned is the stock buyback. If Activision Blizzard can spend $750 million a year on buying back stock, why can't it afford to keep the 750-800 people it is tossing out into the streets? According to a statistic frequently thrown out when guessing development spending on games like Star Citizen, one employee costs approximately $100,000. So while the company is saving $75-$80 million in employee costs, it is spending 10 times that amount on a stock buyback?

I'm rather old and can remember the series of events with investor lawsuits and the passage of laws that incentivize corporations to maximinze short-term profits, even if the results lower profits in the long run. The days a publicly-held company could try to ride out a bad year, knowing sales would improve the following year are pretty much over.  If a company's leadership doesn't do everything in its power to maintain stockholder value, expect an incoming lawsuit. Raising dividends? Check. Billion dollar stock buyback? Check. Employee layoffs? Check. And then people wonder why gamers hate investor types.

At this point, I'd tell everyone to hate the game, not the players. Except, I need to address one more issue. The hiring of Dennis Durkin as the new chief financial officer at the beginning of January. To gamers, the optics of a suit making $15 million while Activision Blizzard lays of 750-800 people is bad.  To me, the fact that Durkin's bonuses are related to meeting operating income and earnings per share targets is worse. What's an easy way to move toward those targets? Why, lay off 750-800 people. Of course, that's good news to investors.

Admittedly, I am not Activision Blizzard's target audience. The only game in their portfolio that even interests me is World of Warcraft, and in the state that game is in, I have better things to install and use up space on my hard drive. Also, a multi-billion dollar, publicly owned corporation is going to play to the investors. Cutting headcount before a known 13% drop in revenues is just a smart business play. But seriously Mr. Kotic, what happened to making good games? Don't you have confidence in your staff anymore?

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