Activision’s Q2 Earnings: Digital Content Help Core Franchises Outperform In Their Segment

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ATVI: Activision Blizzard logo
ATVI
Activision Blizzard

The American game developer, Activision Blizzard (NASDAQ: ATVI), delivered better-than-expected results in its second quarter earnings report released on August 5, as the company beat its EPS guidance by $0.04. [1] The company managed to generate $658 million in non-GAAP revenues, up 8% year-over-year (y-o-y). On a non-GAAP basis, digital domain accounted for 73% of the company’s net revenues, which drove the overall non-GAAP operating margin to 17%. The company’s adjusted EBITDA margins stood at 20% and its non-GAAP tax rate was 29%.

Our $22 price estimate for Activision Blizzard’s stock is in line with the current market price.

See our complete analysis of Activision’s stock here

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According to the research group NPD, new video game software sales were lagging behind hardware sales till April, but it gained momentum in May. Gamers spent $274 million on new video games at retail in May, up 57% over the same period last year. [2]

However, the company’s strong revenues were driven by its strong core franchises. Activision’s World of Warcraft showed signs of revival as the company introduced another expansion pack for the franchise. Diablo III and Hearthstone also provided an incremental boost to the company’s revenues. The company’s core franchises: Call of Duty and Skylanders played a major role in the company’s top line growth in the second quarter. Looking at the June NPD report, the gaming giant might be anticipating software sales to gain momentum in the coming months following strong hardware sales in the June-ended quarter. ((June NPD report))

Digital Domain: The Key Segment

With the changing gaming landscape, the gaming developers such as Activision Blizzard and Electronic Arts (NASDAQ:EA) are focusing more on digital expansion to adapt to this new era of gaming. The advent of smartphones and tablets has provided gamers an easy access to games, eventually leading to the rise of casual gaming. The company’s famous franchises such as Diablo III, World of Warcraft, Starcraft and Hearthstone are generating revenues through their expansion packs and digital online content. The company manages some of the most highly engaged online communities of the above mentioned titles. Moreover, the company’s Call of Duty is the highest grossing FPS title of all times and the leader in this category by a wide margin.

  • Call Of Duty Dominates FPS Genre

Call of Duty (COD) is one of the best western interactive franchises with over $9 billion of life-to-date revenues and is the leader in first-person shooter (FPS) genre with nearly 50% of total shooter game sales worldwide. In 2013, the company launched Call of Duty: Ghost, which became the #1 best selling game on next generation consoles – Microsoft (NASDAQ:MSFT) Xbox One and Sony PlayStation 4.

During the second quarter, Call of Duty: Ghosts managed to stay among the top 10 selling titles worldwide, according to NPD reports. It gained #8 spot in June and is still popular among the core gamers, due to its digital content sales. COD has one of the largest online communities due to its constantly updated digital content and expansion packs, extraordinary graphics and smooth game-play. The active Call of Duty player community is still gaining momentum with more number of members joining during the second quarter, unlike the usual trend, where the industry witness declining active player count at this time of the year. The company believes that this unusual trend might be due to more players that have not made the transition yet, engaging in two titles – ghosts and Black ops II– together. Moreover, Activision released the 2nd and 3rd map packs for the COD Ghosts in the second quarter: Devastation and Invasion. The company recently released its final COD: Ghosts Downloadable Content (DLC), Nemesis, on August 5. These attractive DLC packs have led to increase in digital downloads and thus contributed to the revenue growth.

Additionally, the Call of Duty online in China has entered into large scale testing, bringing a large number of gamers in China to join the franchise’s online community. China, with a large population of FPS gamers (100 million +), is a very lucrative market for the gaming company.

The strong online demand for the franchise has raised the hopes of the company ahead of Call of Duty’s new edition’s launch. Activision has scheduled the release of next edition of the franchise – Call of Duty: Advanced Warfare – on November 4 for all major platforms. The company expects the COD pre-orders to lead the industry this year as well. The gamers can pre-order their Call of Duty: Advanced Warfare to get their personalization pack. Looking at the success of the franchise and the pre-release demand in the market for its new edition, the company expects more gamers to go for the online content, thus generating strong revenues from the digital content of this franchise.

  • World Of Warcraft (WOW) Survives Yet Another Quarter

As mentioned in our previous article, Activision is trying to revive its World of Warcraft franchise through expansion packs. [3] The company scheduled the release of its fifth expansion pack for the franchise – Warlords of Draenor –in December. However, the pre-orders for the expansion pack in the second quarter contributed to the revenue growth, with pre-sales exceeding $1.5 million in the west. The franchise’s subscription, World of Draenor’s pre-sales and paid character boost not only kept the franchise alive, but revived its subscriber base slightly.

The Standard Edition of the fifth expansion pack is priced at $49.99 and Digital Deluxe Edition at $69.99. [4] The company expects the World of Warcraft subscribers to bounce back once the expansion pack is released. Despite Activision’s best efforts, we expect a gradual decline in World of Warcraft subscribers through the decade, as core gamers are shifting their interests to other genres.

  • All Eyes On New FPS Title Destiny

In the recently held 2014 Electronic Entertainment Expo (E3), Activision unveiled the highly awaited title of the year, Destiny, a role playing FPS game. The game features a unique multiplayer system, with an innovative combination of multi-level gameplay integrated into an online world and is scheduled for release on September 9. The company expects the title to be the biggest selling title of the year, as its beta version managed to attract over 4.6 million players and an overwhelming feedback. Moreover, FPS is a major genre, accounting for about 14% of the video game market in 2013 and Destiny is believed to be the next big thing in this segment. Activision already leads the FPS segment with its Call of Duty franchise. Destiny’s success will confirm the company’s dominance and will make it tougher for EA, which is trying to penetrate the segment with its Titanfall and Battlefront Hardline. ((VGChartz))

The company has also planned to release the next edition of its innovative toy-to -life franchise Skylanders: Skylanders Trap Team in October. The latest edition of the franchise, Skylanders SWAP Force, significantly contributed to the net revenues, as the company sold over 175 million toys since the launch of the franchise, generating over $2 billion in revenues from this franchise as of February 2014. We have discussed the impact of Skylanders on the company’s growth in a prior article. (See: Activision Confident With Skylanders Franchise Despite Tough Competition)

Apart from these major franchises, comparatively new games such as Hearthstone and Diablo III are delivering strong results as well through their online digital content. Diablo III: Reaper of Souls expansion pack and sales of Hearthstone cards and its iPad version launched in April were few key factors that drove revenues in Q2.

It would be interesting to watch how the upcoming titles perform in the initial phase, as the company believes that Destiny, Skylanders and Call of Duty could deliver the largest second half revenues in Activision Publishing’s history.

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Notes:
  1. Activision Blizzard Q2 2014 earnings call transcript []
  2. May 2014 NPD: Watchdogs & Mario Kart 8 fuel industry wide surge []
  3. Activision’s Earnings Preview: Digital Expansion To Drive Revenues []
  4. Warlords of Draenor: expansion pack []