Destiny’s Impressive Launch & Digital Growth Drove Activision’s Q3 Financial Results

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ATVI: Activision Blizzard logo
ATVI
Activision Blizzard

The American gaming giant, Activision Blizzard (NASDAQ: ATVI), delivered financially strong results in its third quarter earnings report released on November 4, as the company beats its EPS guidance by $0.10. [1] The company’s net GAAP revenues increased 9% year-over-year (y-o-y) to $753 million, whereas the net non-GAAP revenues rose 78% to $1.17 billion, primarily driven by strong title launches and digital growth. The third quarter GAAP digital revenues accounted for 67% of the company’s total revenues. Activision’s results improved in all the geographical regions y-o-y, with 30% growth in Asia-Pacific.

In this calendar year, the company successfully launched two new franchises: Destiny and Hearthstone, adding to the already strong portfolio. Moreover, the strong consoles in the last 5 months boosted the title sales in the initial stage of their launches. ((September NPD report))

Our $21.64 price estimate for Activision Blizzard’s stock is 4% above the current market price.

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See our complete analysis of Activision’s stock here

Destiny and World of Warcraft Strengthened Activision’s Financial Backbone

Over the last decade, Activision’s titles have been among the top played titles annually, with some of the path breaking franchises, such as Call of Duty, World of Warcraft and Skylanders. 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. It 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. World of Warcraft is a widely popular Massively Multiplayer Online Role-Playing Game (MMORPG) and has had a huge gamer base over the last decade.

  • First Player Shooter (FPS) Games Dominate the Gaming Industry

Activision has dominated the FPS domain for the last 5 years, primarily driven by the Call of Duty franchise. 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. 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. [2] According to the September’s NPD report, Destiny led the software title sales, beating other FPS games, as well as games from other genres. The game has generated non-GAAP revenues of over $500 million, with over 9.5 million registered users.

On the other hand, Activision launched the most awaiting title of the year: 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] However, this might not affect the game’s anticipated sales, as the popularity of the franchise is gaining tremendous momentum over the last few years. Last year, the title’s previous version: Call of Duty Ghosts 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.

With the rising demand for FPS titles and Activision’s firm hold in the segment, the company expects its FPS titles to break previous financial records. Furthermore, as the holiday season nears, gamers who prefer FPS titles might be inclined to buy Activision’s titles in the absence of other major competing titles in this category. Trefis charts below show our forecasts for the company’s title sales for the two major gaming platforms.

  • Revival Of World Of Warcraft Subscriber Base

Another driving factor to the company’s strong quarterly performance is the revival in the subscriber base of World of Warcraft franchise. The subscribers for the franchise were up 600,000 compared to the worldwide total of 7.4 million at the end of the quarter. 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. [4] The success of the new expansion pack might drive the company’s net revenues for the holiday quarter.

Digital Content & Online Communities To Drive Revenues In The Holiday Quarter

In the third quarter, the digital online channels contributed around $504 million in revenues on GAAP basis. The digital receipts were boosted by the strong content of the company’s core franchises: Destiny, Call of Duty and World of Warcraft. Activision has created some of the most engaging online communities in the industry, with a wide gamer base.

During the third quarter, Activision witnessed strong demand in subscriptions, paid extra content, value-added services and full game downloads. Full game downloads for Destiny and Diablo III drove strong growth for total console volumes. In the nine-months ended period, the company generated $1.15 billion in non-GAAP revenues from digital domain, up 25% y-o-y. In December, Activision plans on launching Destiny’ first expansion pack -The Dark Below-due to high demand from the registered gamers. On November 13, the company is already releasing the fifth expansion pack for World of Warcraft.

The primary focus of the company remains on the Call of Duty’s online community in China, which 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 plans on releasing unlimited access beta testing in Q1 2015.

The company plans to launch 2 more free-to-play online platforms next year: Blizzard’s Heroes of the Storm and Call of Duty online, aimed at attracting more gamers.

With the aim of delivering overall double digit non-GAAP revenue growth, record EPS and significant cash flow for the fiscal year 2014, Activision released numerous other titles in other genres. In October, the company launched the next addition to the popular toys-to-life franchise: Skylanders TRAP TEAM. The franchise has sold over 200 million toys and continues to perform incredibly well in North America and Europe for the third consecutive year. Other titles that impacted the top-line growth are Diablo III: Reaper of the Souls and Hearthstone: the curse of Naxxramas. The company’s massive gaming festival, Blizzcon, is taking place on November 7 and 8. It might attract a huge gamer base this year, primarily due to the release of key ace titles just before the holiday quarter.

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