Earnings wrap-up: The gaming industry buckles down for a year of uncertainty

Earnings wrap-up: The gaming industry buckles down for a year of uncertainty

In the past month of earnings calls, gaming and esports companies projected confidence in their long-term prospects, despite potential short-term challenges. Falling incomes and changing consumer habits across the industry were frequent topics of discussion.

In declaring their earnings, executives from major gaming and esports companies underscored their preparedness for the coming recession and their confidence in the gaming industry’s ability to weather it. Here are some of the potential hurdles facing gaming and esports in 2023 – and some of the opportunities space leaders hope to use to overcome them.

The key numbers :

  • After a two-year boom fueled by a pandemic, the gaming industry returned to Earth in 2022. Last year, the global gaming market generated $184.4 billion in revenue, down 4.3 % year over year, according to Newzoo. Global Gaming Market Report 2022.
  • This decline was reflected in the numbers reported by many major gaming companies in the last quarter. Nintendo Net Profits fell 5.8%; Ubisoft reduced its full-year revenue target after disappointing sales in 2022; and Electronic Arts reported a Net income down 7.1%among other examples.
  • However, not all numbers coming from the gaming industry are grim. Activision Blizzard has announced that its revenue increased by 8% – despite an overall decline in the company’s adjusted earnings.

Microsoft’s acquisition of Activision Blizzard is in jeopardy

Regulators in the UNITED STATES, United Kingdom And Europe all expressed concerns about the legality of Microsoft’s planned acquisition of Activision Blizzard, which the major tech company announced on January 18, 2022. With the deal pending, Activision Blizzard declined to hold a conference call on the results or publish an earnings presentation providing detailed information on its financial performance in the fourth quarter of 2022.

While the acquisition deal appears to be in jeopardy, Activision Blizzard remains confident that it will be able to find a way forward with Microsoft and the relevant regulators – at least, according to the game developer’s official message. around its fourth quarter 2022 results: “Both parties continue to engage with regulators to review the transaction and are working to close it during Microsoft’s fiscal year ending June 30, 2023.”

Gaming industry executives are watching the Microsoft-Activision Blizzard deal with great interest because if it fails, its failure could have significant implications for other M&A deals in gaming and gaming. sports. As gaming companies come under increased pressure from investors and the recession deepens, M&A activity is expected to accelerate across all facets of the industry.

Sony figures reflect changing business models

Sony’s Q3 2022 earnings call was the definition of a mixed bag. On the one hand, the company appreciated its biggest quarter for sales since the release of the PlayStation 5 in November 2020. On the other hand, Sony’s income before income taxes actually decreased by 63 billion yen year-on-year. These lopsided numbers show how Sony’s reliance on hardware sales could come to bite the Japanese tech giant as players. consumer habits continue to evolve.

These days, as free games and live services continue to increase their market share, a games business based on selling high-end gaming hardware or console games is starting to feel increasingly outdated. Executives at Sony and beyond have taken notice and are beginning to highlight their efforts to take advantage of these new business models.

“We are focusing our R&D allocation on more of our largest IP addresses – and on the types of live games,” Ubisoft Chief Financial Officer Frederick Duguet said during the Q3 2022 earnings call. his company on February 16. “And that is why we expect that, behind this strong growth in the years to come, behind a very rich range, we will find an operating margin of around 20% in the medium term.

Nintendo has officially joined the IP adaptation party

Despite an announced 20% drop in console sales, Nintendo is confident in its future – and the Japanese gaming giant isn’t afraid to show it, announcing a 10% salary increase for its developers during its February 7 earnings call.

It’s understandable that Nintendo feels good about the future. After all, the company has unlocked a whole new revenue stream over the past two years: adapting intellectual property.

“By creating opportunities for consumers to encounter Nintendo topics in areas outside of the dedicated video game platform, we aim to maintain the overall momentum of our business,” said Nintendo President Shuntaro Furukawa. , during the company’s earnings call on Feb. 7.

After spending years avoiding adapting its wildly popular IP addresses, such as “Super Mario Bros.” and “The Legend of Zelda,” Nintendo went all-in in 2022, launching a division dedicated to cinema and television in July. As the April 7 release of “The Super Mario Bros. Movie” approaches, Nintendo is taking a closer look at the IP adaptation with branded tie-ins such as the new Super Nintendo World at Universal Studios Hollywood.

“Gaming companies are sitting on an enormous amount of valuable intellectual property,” said Tejas Dessai, research analyst at Global X ETFs. “At the same time, we are seeing a massive democratization of the Hollywood business model, with Netflix and plenty of buyers for good IP.”

Netflix is ​​leaning more into games

Indeed, as gaming has become a major pillar of popular culture, Netflix has taken notice and taken action. In addition to licensing popular gaming IPs such as “League of Legends” for original content, Netflix has started serve games directly in streaming platform in 2022. While Netflix executives focused primarily on other areas of the business during the company’s January 19 earnings call, the growing role of the company as a gaming platform has been mentioned several times, which clearly shows that games are always a priority. for Netflix executives such as COO and CPO Gregory Peters.

“There aren’t a lot of pivots that move away from a traditional legacy business model that we need to find,” Peters said on the call. “We’re planting seeds, in terms of games and things like that, that if we execute well and are excited about the progress we’re seeing so far, that will represent the future potential for us in terms of more profit opportunities.”

Esports is in trouble

Of course, this recap wouldn’t be complete without acknowledging the dangerous waters the esports industry currently finds itself in. Esports organizations have always been dependent on brand partnerships for the bulk of their revenue – but as the economic situation deteriorates, big brands are starting to get out of space, forcing esports companies to forge alternative paths to profitability. So far, few have done it successfully.

Although the next earnings call for FaZe Clan, the largest and most important publicly traded esports organization, won’t be until Feb. 27, even a cursory glance at the company’s financials shows how difficult the situation – and the entire esports industry – finds itself. After seeing an all-time high share price of $20 following its July 2022 SPAC merger, FaZe Clan stock is currently trading at less than a dollar and appears to be at risk of radiation due to Nasdaq rules requiring listings to trade for at least $1 per share.

Despite these warning signs, some investors are still optimistic about the long-term viability of the esports industry.

“We believe esports is still towards the end of its early adoption phase, where business models, various adoption models, are being actively tested,” said Dessai of Global X ETFs. “In this environment, any industry tends to be more volatile – but what’s really important to us is audience expansion, and almost 500 million people have benefited from some sort of event. of esports-related entertainment in 2022.”