Popular FPS Titles To Drive Activision’s Top-line Performance

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ATVI: Activision Blizzard logo
ATVI
Activision Blizzard

Gaming giant, Activision Blizzard (NASDAQ: ATVI) is scheduled to announce its third fiscal quarter earnings report on November 4. [1] The company accounted for 14% of the global video game software sales in 2013. [2] According to the research group NPD, gamers spent $481 million on software sales in September, down 36% year-over-year (y-o-y). However, last year September sales were boosted by the blockbuster release: Grand Auto Theft V (GTA V). According to the sales figures, when we exclude the sales of GTA, software sales this year come out to be 2% more y-o-y. ((September NPD report))

Activision delivered strong results in its second quarter earnings report released on August 5. The company managed to generate $658 million in non-GAAP revenues, up 8% 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%. ((Activision Blizzard Q2 2014 earnings call transcript))

Our $21.64 price estimate for Activision Blizzard’s stock is 8% above the current market price.

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See our complete analysis of Activision’s stock here

First Player Shooter (FPS) Games To Drive Activision’s Revenues

Activision has dominated the FPS domain for the last 5 years, primarily driven by the Call of Duty franchise. Call of Duty is a first person and third person shooter franchise, with over 10 titles for the consoles, handhelds and PC over the last decade. Call of Duty (COD) is one of the best western interactive franchises with over $9 billion of life-to-date revenues and around 150 million units sold till date, as well as accounting for 56% of the total shooter game sales in 2013. Last year, 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 the #8 spot in June and is still popular among the core gamers, due to its digital content sales.

Moreover, the company is all set to release its most anticipated title of this franchise: Call of Duty Advanced Warfare on November 4. It will be the first Call of Duty to be unavailable on Nintendo after Call of Duty: Modern Warfare 2. [3]

On the other hand, Activision released another of its core FPS title: Destiny on September 9. Destiny is an online FPS game based on a post apocalyptic science fiction in a persistent online world. In the gaming world, persistent world refers to a virtual world that continues to exist even after the user is offline and the changes made by the user can be saved. This innovation, generally used in Massively Multiplayer Online Role-Playing Games (MMORPGs), has recently gained popularity among gamers. On September 10, Activision reported that nearly $500 million of the game products have been shipped to retail and third-party stores in just 24 hours, making Destiny the most successful new video game franchise launch of all-time. [4] According to NPD’s report, Destiny was the highest selling game in September, beating Electronic Arts’ (NASDAQ:EA) Madden NFL 15 and FIFA 15, which took the #2 and #3 place respectively.

The success of FPS games could end the company’s dull spell in terms of title sales. Already a dominant force in FPS genre, Activision aims at strengthening its hold over the segment, as EA is rapidly climbing up the ladders in this segment with its Titanfall & Battlefield franchises stealing market share from Activision’s Call of Duty. Trefis charts below show our forecasts for the company’s title sales for the two major gaming platforms.

Digital Content: A Key Factor To Revenue Growth

All the major video game developers are gradually adapting to the shift in trend from physical media games to digitalization of gaming content. Digital expansion is a priority for both Electronic Arts and Activision Blizzard, as they head into the new era of gaming. call Of Duty has one of the largest online communities due to its constantly updated digital content and expansion packs, as well as 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.

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.

New Expansion Pack For World Of Warcraft Series

The highly popular MMORPG: World of Warcraft, which was once a blockbuster franchise for the company, has been losing subscribers gradually. The franchise accounted for nearly $1 billion in annual revenues, reaching a peak of 12 million subscribers in 2010. However, stiff competition from free-to-play titles led to decline in subscribers, as the franchise had only 7.6 million subscribers at the end of March 2014. Activision is trying to revive interest in the franchise through another expansion pack- Warlords of Draenor. The expansion pack is scheduled to launch on November 13. [5] The success of the new expansion pack might drive the company’s net revenues for the holiday quarter.

Despite Activision’s best efforts, we expect a continuous decline in World of Warcraft subscribers through the decade, as core gamers are shifting their interests to other genres.

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Notes:
  1. Activision Blizzard Q3 2014, earnings conference call []
  2. VGChartz, 2013 Global Yearly Chart []
  3. Nintendo loses third party staple as Call of Duty: Advanced Warfare will skip Wii U []
  4. Activision sells in more than $500 million of Destiny worldwide as of day one []
  5. World of Warcraft: Warlords of Draenor launches November 13 []