Activision Blizzard (NASDAQ:ATVI) continued to outperform a largely suppressed gaming market with revenues for the second quarter in line with the prior year’s figure despite a continuing industry wide decline in sales and loss of World of Warcraft subscribers. The company beat its own guidance for GAAP and non-GAAP revenues, helped by increased contribution from digital revenue streams. Digital revenues accounted for 37% of Activision’s GAAP net revenues and 63% of its Non-GAAP revenues.
Strong performances from Call of Duty: Black Ops II and the company’s innovative new franchise, Skylanders, helped results with both games taking the top two spots on the list of best selling games in North America and Europe for the first six months of 2013. The gaming industry is going through a slow phase as gamers, developers and publishers eagerly await the launch of Microsoft (NASDAQ:MSFT) and Sony next-gen consoles later this year. We believe Activision is in a prime position to capitalize from increased sales expected after the launch of the new consoles.
Last week, Activision announced that it will buy back 429 million company shares from Vivendi for $5.83 billion.  As a result, Activision will become an independent company. The company revised its GAAP outlook for 2013, with revenue guidance upgraded from $4.22 billion to $4.31 billion. Activision now expects EPS of $0.77 for the year, compared to its earlier guidance of $0.73 per share.
End Of The World (of Warcraft)?
Since its launch in 2004, World of Warcraft has been a cash cow for Activision accounting for close to $1 billion in annual revenues. The game was once world’s biggest massively multiplayer online role-playing game (MMORPG) franchise, reaching a peak of nearly 12 million in 2010. However, since then the online gaming landscape has changed considerably. Several free-to-play online MMORPGs like Aion: Ascension, Vindictus and Allods Online have entered the fray. As a result, WoW has been bleeding subscribers reaching a total of 8.3 million at the end of the March quarter and just 7.7 million by the end of June.
Although it is still the biggest subscription based MMORPG, the fee-based model means that it will keep losing out to other free-to-play competitors in the future. We remain conservative in our forecast for WoW and expect the company to retain at least 5 million subscribers by the end of the decade. New expansion packs like Mists of Pandaria, which sold 2.7 million copies on the first day of its release last year will help maintain subscriber interest.
New Franchises Take Over
Skylanders Giants was the best selling console and hand held game in North America and Europe for the first six months of 2013. Games in the Skylanders franchise require gamers to purchase physical models of the franchise’s characters that have to be placed on the “The Portal of Power” for the user to access the character. The franchise has generated $1.5 billion in retail sales since its launch in October 2011.
Activision will look to milk Skylanders’ popularity in the coming years with periodic new editions of the game. The company plans to launch the next edition, Skylanders SWAP Force, in October. SWAP force received positive reviews at the recent Electronic Entertainment Expo (E3)  and the company claims that retailers have committed over 25% more space to the game than prior editions.
Another positive for Activision is the continued success of the Call of Duty franchise. Annual editions of the franchise have made the top ten best selling games across the globe for the last five years.  Call of Duty: Black Ops II was the highest selling game worldwide last year and has maintained momentum this year. According to our analysis, Activision had 17% of the global video game market share in terms of units sold in 2012, with 11% from Call of Duty, which sold more than 20 million copies.
Black Ops II also accounted for 16% of the Xbox 360 and PS3 games sold worldwide last year, helping Activision beat the industry wide decline in sales caused by console fatigue. In the U.S., Black Ops II accounted for 14% of the Xbox games sold and 18% of the Playstation 3 games, establishing itself as the premier first person shooter (FPS).
The last FPS to beat Call of Duty on the game charts was Halo 3, back in 2007. Acitivision has worked in collaboration with Bungie, the developers of Halo 3 to come up with a new game, Destiny, which it revealed to rave reviews at the E3, receiving over 50 awards, including 20 Best of Show Accolades. The game is expected to launch in 2014, and we will keep a close eye on its performance to see if it lives up to its billing.
Diablo III was another success story for Activision on the PC platform last year, with over 12 million copies sold worldwide. The company plans to launch Xbox and Playstation versions of the game in September. With three established franchises in Skylanders, Call of Duty and Diablo and a strong pipeline, we believe Activision is well positioned for the console transition later this year.Notes: