Strong Performance By Core Titles Drive Activision’s Annual Revenues In 2014

The American gaming giant, Activision Blizzard (NASDAQ: ATVI), beat its non-GAAP EPS guidance by $0.06 in the fourth quarter of the fiscal 2014 year, as it reported its annual report on February 5. As a result the company managed to deliver record earnings per share of $1.42 for the whole year, up more than 50% from the previous year. Activision’s fourth quarter net revenues declined 2.5% year-over-year (y-o-y) to $2.2 billion. However, impressive financial performance in the first nine months of 2014 resulted in a double digit (nearly 11%) revenue growth for the whole fiscal year, as the company reported $4.8 billion in net revenues. ^[1] The reason for strong revenue figures was the release of more innovative content in titles. Activision released new versions of some of its popular franchises, such as Call of Duty: Advanced Warfare, Diablo III, and Skylanders TRAP TEAM, as well as some new path-breaking franchises, such as Destiny and Hearthstone: Heroes of Warcraft. The company’s core franchises maintained their dominance in their respective genres. Activision’s two new franchises: Destiny and Hearthstone attracted over 40 million gamers combined, generating a net $850 million in non-GAAP revenues.

For the fiscal 2014, non-GAAP digital revenues grew 40% y-o-y, accounting for 46% of the total revenues. The strong growth in the digital segment was spurred by increasing game downloads in consoles and in-game purchases from the first free-to-play game. In 2014, Activision’s results in all the geographical segments improved y-o-y, with nearly 39% growth in Asia-Pacific and 15% y-o-y growth in Europe.

Our $21 price estimate for Activision Blizzard’s stock is nearly 4% below the current market price.

See our complete analysis of Activision’s stock here

According to the research group NPD, the gaming industry managed to overtake 2013’s sales figures, with impressive hardware sales offsetting the dull software sales in 2014. The industry generated $3.25 billion in December 2014, down from $3.28 billion in December 2013. However, the highlight of the last year was the strong demand for consoles during the entire year that managed to overshadow the lagging software sales. In December, gamers spent $1.31 billion on hardware, down nearly 4% year-over-year (y-o-y). However, the trend continued in the software segment, as the net software sales for December 2014 reached $1.25 billion, down 2% year-over-year. ^[2] The sustained demand for new consoles: Microsoft’s Xbox One and Sony’s PlayStation 4, as well as core title releases in the last few months, resulted in a fairly strong holiday quarter in 2014. As a result, for the entire calendar year of 2014, gamers spent roughly $5.1 billion on physical hardware for video games, up more than 18% y-o-y, offsetting software sales, which were nearly $5.3 billion, down 13% y-o-y. As a result, the total revenue for the industry in the U.S. was up 1% y-o-y in 2014.

First-Person Shooter Titles Steal The Show During Holiday Period

The first-person shooter (FPS) genre is becoming more and more popular, and Activision Blizzard (NASDAQ: ATVI) has dominated the FPS domain for the last 5 years, primarily driven by the Call of Duty franchise.

• Call of Duty: Advanced Warfare

Activision released the new Call of Duty title in November – Call of Duty Advanced Warfare, which was off to a great start. Call of Duty: Advanced Warfare sold nearly 7.2 million units on all the major platforms in the first week of its release. ^[3] As of January 3, the title has sold approximately 17.6 million units, delivering over $1 billion in sell-through, leading in the FPS genre, making it the #1 console title of the year. The franchise’s cumulative revenue has now touched $11 billion.

On the other hand, the company is planning to launch more content for the Call of Duty online, but expects modest contributions from this platform. Moreover, in January, Activision launched Call of Duty Online for China, making it the company’s first major step towards a fast-growing free-to-play segment.

• Destiny

In September, Activision released a new FPS franchise: Destiny, which is an online FPS game based on a post apocalyptic science fiction theme 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] Destiny sold nearly 10 million units as of January 3, 2015, of which 4.44 million  units were sold in the first week of its release, making it the #3 highest sold title of the year. ^[5]

Destiny has over 16 million registered users, averaging 3 hours of game-play per day. It became the highest played game in North America on the PlayStation 4 platform in December. The company will release another expansion pack for the game: House of Wolves in the second quarter.

Trefis charts below show our forecasts for the company’s title sales for the two major gaming platforms.

Skylanders & World Of Warcraft Give Additional Revenue Boost

Skylanders, popular among kids, was one of the most awaited titles of the year 2014 from the Activision brand.  The game is played along with toy figures that interact through a “Portal of Power,” reading their tag through Near Field Communication (NFC) technology. According to the company, Skylanders was launched as an experiment to enter into the platform gaming market and to see if the company was able to hit two targets with a single arrow: to get kids to buy the game, as well as the action figures required to play it. This experiment worked out pretty well for the company as Activision has sold over 240 million toys since the launch of the franchise, generating over $3 billion in revenues from this franchise, and was the #1 kids console game in 2014.

Skylanders has been a huge success among the kids, as the franchise outsold all action figure lines in 2014, outperforming its nearest competitor by 30%. Furthermore, Skylanders’  new title: TRAP TEAM, outperformed its nearest competitor by 17%. Activision plans to launch a new Skylanders game in the fourth quarter of 2015.

On the other hand, Activision’s widely popular Massively Multiplayer Online Role-Playing Game (MMORPG) World of Warcraft reached over 10 million subscribers, maintaining its dominance in the subscription based MMORPG segment. New offerings and expansion packs for the franchise attracted many gamers, resulting in an increase in revenues from the franchise. Being a high margin franchise, this led to non-GAAP operating margins of 32% for the company in the fiscal year 2014.

Apart from these core titles, other games, such as Diablo III and Hearthstone also contributed tremendously to the revenue growth. For 2015, the company expects GAAP revenues of $4.1 billion and non-GAAP revenues of $4.4 billion. Activision had a strong first half in 2014, driven by high margin Diablo III, but has no such release in 2015’s first half, and thus expects it to be a bit lighter period.

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More Trefis Research

1. Activision Blizzard Q4 2014 earnings call transcript [↩]
2. NPD December 2014 report [↩]
3. Call of Duty: Advanced Warfare global sales, VGChartz [↩]
4. Activision sells in more than $500 million of Destiny worldwide as of day one [↩]
5. Destiny global sales, VGChartz [↩]