Activision Blizzard Inc.'s shares plummeted as much as 17% on Nov. 3 after the game publisher confirmed two of its major title releases would be delayed due to leadership changes amid ongoing allegations of sexual discrimination and harassment within the company.
On the company's Nov. 2 third-quarter earnings conference call, Activision COO Daniel Alegre said Overwatch 2, the sequel to 2016's massively popular shooter game, and Diablo IV, the next installment in the company's long-running franchise, will launch later than previously planned.
"It's become apparent that some of the Blizzard content planned for next year will benefit from more development time to reach its full potential," Alegre said. "These decisions will push out the financial uplift that we had expected to see next year, but we are confident that this is the right course of action for our people, our players, and the long-term success of our franchise."
A spokesperson at Blizzard Entertainment, the developer of the delayed titles, told S&P Global Market Intelligence that the company is not sharing estimated release dates at this time.
During the earnings call, Blizzard lead Mike Ybarra attributed the delays to a "change of leadership" within the games' respective development teams. Diablo IV's director left in August, while Overwatch 2's executive producer resigned in September.
"We looked at what was left in the final phases of production with fresh eyes, and we saw that allowing the teams more time would enable both great experiences at launch and also help ensure that everything will be in place to engage the communities for many years to come," Ybarra said.
Ybarra was appointed co-head of Blizzard along with Jen Oneal in August following the departure of J. Allen Brack, the former president who left after the company was sued by the California Department of Fair Employment and Housing, or DFEH, over allegations of sexual discrimination and unlawful pay practices. Oneal is also stepping down from her position to focus on bringing more diversity to the gaming industry.
Activision was sued by the U.S. Equal Employment Opportunity Commission in September over harassment and discrimination allegations. The company agreed to set up an $18 million fund to settle the case, but the DFEH objected that the settlement is too low and includes provisions that would harm the victims involved in the case. The settlement is subject to court approval.
The U.S. Securities and Exchange Commission is investigating the company over its handling of the allegations and has subpoenaed several current and former employees, including CEO Bobby Kotick.
In response to the outcry, Kotick said in an Oct. 28 letter that he asked Activision's board to reduce his salary to the lowest amount allowed under California law and that he would also forgo any bonuses and equity grants. The company has also implemented a new zero-tolerance anti-harassment policy and decided to end arbitration of sexual harassment and discrimination claims. Moreover, Activision committed to increasing pay transparency and to increasing the percentage of women and non-binary people in its workforce by 50%.
Morgan Stanley analyst Brian Nowak downgraded Activision's stock to "equal weight" from "overweight" and reduced his price target to $65 to $120.
"We were wrong about Activision's ability to execute and deliver its Overwatch 2 and Diablo IV pipeline in the middle of a period of high internal turmoil related to harassment challenges, multiple management changes (including the newly announced departure of Jen Oneal only three months into the role of co-head of Blizzard), and work from home," Nowak wrote in his research note.
Nowak said he did not cut the stock to "underweight" because the company still has strong franchises and the games are still going to be released at some point. He now expects Overwatch 2 to debut in 2023 and Diablo IV to launch in 2024.
Wedbush analyst Michael Pachter cut his price target on Activision's stock to $98 from $125 but reiterated his "outperform" rating.
"While the fundamentals of the business remain strong, with positive Call of Duty, Candy Crush, and Diablo franchise momentum expected to continue, we believe that the company's ongoing lawsuit, recent departures of key executives, and lingering concerns around future delays are likely to continue to affect shares in the short-run," Pachter wrote in an analyst note.
However, Pachter is still optimistic that Activision can grow revenues in 2022 with the release of its new mobile title Diablo Immortal, a new expansion pack for World of Warcraft and continuing growth of the company's King mobile games division.
Activision Blizzard is launching the next installment of its flagship shooter title, Call of Duty: Vanguard, on Nov. 5. The company also has a host of other titles in its development pipeline, including mobile installments of Warcraft.
In an emailed statement to Market Intelligence, an Activision spokesperson said the company is unable to comment on any future titles beyond the ones that were specifically named during the Nov. 2 earnings call.
Activision reported total net revenues of $2.07 billion, up from $1.95 billion a year ago, and net income of $639 million, or 82 cents per share, up from $604 million, or 78 cents per share, in the prior year. The S&P Capital IQ GAAP EPS estimate for the quarter was 68 cents.
Net bookings — a key metric for gaming companies that encompasses the amount of products and services sold digitally and physically — came to $1.88 billion, up from $1.77 billion a year ago.
While third-quarter numbers were ahead of expectations, the company's outlook for the fourth quarter and full year 2021 came below expectations.
Activision expects fourth-quarter net revenues of $2.02 billion, GAAP EPS of 54 cents and net bookings of $2.78 billion. The S&P Capital IQ estimates for fourth-quarter net bookings and EPS are $2.86 billion and 70 cents, respectively.
For full year 2021, the company expects net revenues of $8.66 billion, GAAP EPS of $3.27 and net bookings of $8.65 billion. The full-year S&P Capital IQ estimates for net bookings and EPS are $8.75 billion and $3.40, respectively.
Activision's publicly listed rivals, Electronic Arts Inc. and Take-Two Interactive Software Inc., are scheduled to report their September quarter results Nov. 3.