This Stock's Discount Ends With its Earnings Report
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If you've met a college football fan, you're familiar with the fervor with which they support their team. That excitement can quickly turn sour during a quarter where key plays don't land some impressive points on the scoreboard, though -- and if your team wins? Bandwagon fans, everywhere!
Fellow investors and I are rooting for great numbers from Activision Blizzard (NASDAQ: ATVI). Let's recap the coaches’ strategy for this third quarter, considering the period from June 30th to September 30th, to see about a victory – but also to consider why others may crowd the bandwagon as ATVI finishes out the last quarter in this 2012 game.
Determination With the Game Plan
Like all good coaches at a press conference, the executives made their game strategy clear for each quarter. There was explicit mention of focusing on the original 2012 plan:
- “First, we expect growth from Blizzard, driven by the expected launch of at least two titles this year, namely Diablo 3 and Mists of Pandaria.”
- “Second, Activision Publishing is focused on this year’s new Call of Duty title, Black Ops 2, on growing online engagement and monetization, and [to continue] to expand and scale the Skylanders franchise.”
- “Finally, we plan to continue expanding operating margins through revenue management productivity improvement initiatives, across multiple areas of operating expenses.”
Nigh-hysterical fans made Skylanders a huge success during the first quarter, followed by Diablo 3 as the clutch play for the second. Skylanders: Giants and Black Ops 2 are setting themselves up as game closers for 2012.
World of Warcraft: Mists of Pandaria was to be a late, star player this quarter. Read on to see how that went.
The Third Quarter, Play by Play
Mists of Pandaria launched Tuesday, September 25th, and reported 2.7 million copies sold with over 10 million subscriptions during its first week. Stat numbers can sound impressive, but the copies sold are less than its last expansions’ performance. My regular readers also know that 1.5 million of those subscriptions are from a Diablo 3 promotion, taking us further from past 12-million records.
Condemning a company on such a launch would be like betting a football game on a single play. As a Motley Fool reader, you understand what short-sellers don’t: this star player wasn’t ATVI’s sole play.
First, expectations for the third quarter were set at $690M (GAAP), more than 30% lower than Q2’s results. That sets up the field for the rest of the business to continue as expected, with a slew of cross-platform, mobile and console titles. Finally, the third focus in 2012’s strategy comes into play: ATVI has never been hesitant to cut costs in its operating margins, even if that means shutting down studios as they did in June.
Signs of Victory, Your Move
Though the team had a bad play, you might now see why the quarter will land in the better-than-expected range. For comparison, recent tech disappointments like Zynga (NASDAQ: ZNGA) and Facebook (NASDAQ: FB) can show how ATVI shines.
- Lasting, proven management. Unlike Zynga’s rotating board, ATVI’s executives have a years-long past that is tied to the company itself or with unrelated, business-driven companies like Procter & Gamble.
- Multiple platforms with partners, not dependencies. Zynga and Facebook are tied together by a single platform, forming a symbiotic relationship with conflicting interests. ATVI partners itself with studios to develop for particular platforms as it sees most beneficial, with Blizzard Entertainment having a decent grasp on the desktop gaming platform. It is in the interest of unrelated companies like Nintendo, Sony, and Microsoft to bolster their console platforms, with their failures impacting one or few of ATVI’s plays.
- A plethora of clear, long-term projects. While Facebook figures out exactly how it will best make its money and Zynga fumbles with the saturation of its own games, ATVI is already acting on the opportunities below for its most successful franchises.
That’s right: the low expectations for Q3 make all the more sense when you look at the positioning that hasn’t scored points yet, like Call of Duty’s expansion into China, announced in July. Skylanders: Giants has already launched and will help the score for Q4 – what other game company will have heavy retail presence this Christmas? Call of Duty: Black Ops 2 follows with its launch in November, even ready for Nintendo’s new Wii-U console.
Blizzard may not go down as a play of the year with Mists of Pandaria this quarter, but it sets up a very cheap calm before the storm. If next week’s results are disappointing, we see that a few missed plays during the quarter won't necessarily lose the game.
And what if it turns out our team has consistent, better-than-expected momentum toward the end zone? Accept my sympathies on dealing with the price tag set by bandwagon fans after that conference call.
dfavela owns shares of Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.