The Gaming War is Over

By Chad Henage - June 14, 2012 | Tickers: ATVI, EA, GME | 0 Comments

• Email
• Print

When it comes to hard core video games, Activision Blizzard (NASDAQ: ATVI) seems to have already won the war. The company continues to crank out hit titles and update old favorites. With games like Call of Duty and World of Warcraft, you couldn't ask for two stronger video game franchises. Only Electronic Arts (NASDAQ: EA) could claim such stability in their Madden and NCAA franchises. The biggest difference is, Activision's titles have huge online communities that keep the titles fresh even after the main storyline has been exhausted. The question for investors is always what's next?

Activision just reported earnings, and this not only gives investors a chance to see how the company has fared in the last quarter, but also what to expect going forward. The lack of big game releases caused revenues to be down 22.25% and EPS to decline 53.85% year-over-year. Even in this slower part of the year, the company reports over 10 million paying subscribers to World of Warcraft, and the company has over 40 million monthly active users of the Call of Duty series. Now that we know the first quarter was slow, what about the remainder of the year?

The first quarter was transitional as the company moves from Call of Duty: Modern Warfare 3 to their next big releases -- Diablo 3, Call of Duty Black Ops 2, and World of Warcraft: Mists of Pandaria, among others. In addition, the company licensed World of Warcraft for another three years to NetEase for distribution in China. The company thinks its shares are a good value and repurchased 22 million shares for a total of $261 million in the first quarter. With cash and investments of $3.5 billion the company certainly has enough to fund further share buybacks.

The company announced that the recent Diablo 3 release sold, “over 3.5 million copies in just 24 hours". If this is any indication of the performance of future big releases, Activision has a big year in its future. Since Activision is a good proxy for the popularity of different systems, it's interesting what you find looking at per system sales.

Activision splits its revenues into five major categories, and of the five, only one showed increased revenues. This explains why Activision's results were down so much in the first quarter. That being said, the rate of decline in each category is telling:

What I see is of the three console platforms, not only was PS3 the strongest performer, but Wii suffered tremendously with results down 38%. It's not completely surprising that PC sales were up, as the Diablo III pre-sale started March 15. Both Amazon.com and GameStop (NYSE: GME) reported record sales of the game and record pre-orders. GameStop in particular noted it was one of the largest PC launches they had ever been a part of. I wouldn't read too much into online subscriptions since Diablo III signups would have occurred in the second quarter. What can investors expect the rest of the year?

The company's 2012 full year outlook is for $4.50 to $4.53 billion in revenues. With the average analyst estimate at $4.58 billion, this estimate seems a little light. When it comes to EPS, the company sees the number at $0.94 to $0.95 per share. This also comes in a little light considering the average analyst was looking for $0.98.

However, I would suggest taking Activision's estimates with a grain of salt. The company has beaten estimates in the last four quarters by an average of 102% per quarter. The company has a stable of games that can be updated and new storylines can be added. Their Call of Duty franchise is one of the most anticipated releases each year and continually sets sales records. World of Warcraft is the number one online game, and Diablo III seems like a huge hit itself. Activision keeps cranking out the hits, and while gamers are still fighting the battles, the company seems to have won the gaming war.

• Email
• Print
• Feedback