Activision’s Q1 Earnings Review: Record Digital Revenues Driven By Core FPS Titles & New Entries

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ATVI: Activision Blizzard logo
ATVI
Activision Blizzard

Recently added to the Fortune list of top 100 Best Companies to work for, Activision Blizzard (NASDAQ: ATVI) reported better than expected first quarter earnings results for the fiscal 2015. [1] For Q1 2015, Activision reported GAAP net revenues of $1.28 billion, up 15% year-over-year (y-o-y), whereas the non-GAAP net revenues were $703 million, compared to $772 million in Q1 2014. GAAP digital revenues reached a record $581 million for the quarter, and were a record 45% of the total GAAP net revenues. As a result, GAAP diluted EPS rose 33% y-o-y to $0.53, whereas the GAAP operating margin reached 43%, up from 37% in the same period last year. Digital receipts and console full game downloads contributed to the strong growth in this quarter.

Activision increased the non-GAAP revenue outlook to $4.425 billion and EPS outlook to $1.20 per share for the fiscal 2015.

Our $21 price estimate for Activision Blizzard’s stock is $3 below the current market price.

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See our complete analysis of Activision’s stock here

World of Warcraft’s Future Seems Blurred

Activision’s widely popular Massively Multiplayer Online Role-Playing Game (MMORPG), World of Warcraft (WOW), has been losing its luster over the last couple of years. Still a leader in its genre, the franchise is facing a decline in the subscriber base, due to the introduction of several free-to-play online games. To revive the interest of gamers in the franchise, the company has been constantly improving the game-play, by introducing new offerings and expansion packs. This resulted in an increase in the subscriber base to over 10 million in November 2014, as well as generated additional revenues.

However, the company again reported a decline in the number of subscribers, as the subscriber base cuts down to 7.1 million at the end of Q1. On the other hand, Blizzard has been able to maintain the franchise’s revenue performance at par, driven by nominal growth of value-added services and price increase in some of the regions. Despite the recovery efforts of the company, the franchise faces a threat from new free-to-play titles in the market.

As a result, Blizzard is trying to expand its portfolio by introducing franchises such as Hearthstone and Diablo, which have boosted the company’s top-line performance in this category. As a result, Blizzard’s revenues except those from WOW rose from 30% of the total revenues in 2013 to 40% of the total revenues last year. Moreover, the introduction of Heroes of the Storm might further push this figure to 50% of the revenues in 2015. Later this year, Blizzard will come up with additional content and live service updates for World of Warcraft, Hearthstone, and Heroes of the Storm.

Big Plans For FPS Franchises

Activision released two of the widely played First-Person Shooter (FPS) titles last year: the new franchise Destiny and the highest selling FPS game Call of Duty’s new edition Advanced Warfare. Call of Duty: Advanced Warfare sold nearly 7.2 million units on all the major platforms in the first week of its release. [2] As of March 21, the title sold approximately 18.64 million units worldwide, with roughly 50% of the sales in North America. Sony’s PlayStation platforms lead the race in terms of the unit sales on console systems. In 2015 alone, the title sold roughly 1.9 million units, indicating the sustaining demand for the franchise. It was the #1 console title of the year 2014, with consolidated revenue of $11 billion. Furthermore, the company released the second expansion pack for the game, called Ascendance, on March 31, 2015. [3] It provided the gamers with four new multiplayer maps, bonus weapons, and a variety of other features. In Q1, revenues from Call of Duty: Advanced Warfare were up by double digits percentage y-o-y, driven by growth in online revenues per user.

Another promising franchise by Activision is Destiny, which has sold over 10 million units as of March 21, 2015, of which 4.44 million units were sold in the first week of its release, making it the 3rd highest title sold in 2014. [4] 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 later in May 2015. Destiny, and another new IP launched by the company last year: Hearthstone, now have roughly 50 million registered gamers, and have accounted for nearly $1 billion in non-GAAP revenues till date.

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

Activision promises to release new downloadable content in the second quarter for both the titles, as well as expanding the live operations of Call of Duty Online in China, the largest gaming market in the world. Furthermore, Activision is planning to launch another annual edition to Call of Duty with a new title, Call of Duty: Black Ops III, as well as an addition to the Destiny franchise, later in Q3 and Q4. After the huge success of both the Black Ops titles, and it being the most played series in the Call of Duty history, the company is very confident of the reception of Black Ops III among the core gamers.

More information of the new releases will be provided by the company in the upcoming Electronic Entertainment Expo (E3) to be held in June 2015.

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Notes:
  1. 100 Best Companies to work for, Fortune []
  2. Call of Duty: Advanced Warfare global sales, VGChartz []
  3. Call of duty: Advanced Warfare Ascendance DLC pack available now []
  4. Destiny global sales, VGChartz []