Activision’s Stock Up 12% On Impressive Digital Growth In Q2 & Positive Guidance

With some of the strongest and most popular video game franchises in the industry, Activision Blizzard (NASDAQ: ATVI) delivered yet another strong earnings result in its Q2 2015, beating EPS estimates by $0.05. The company posted record Q2 revenues and strong growth in the digital segment, driven by sustained momentum of its core franchises, namely Call of Duty, Destiny, and Skylanders; as well as excellent user response to the new releases: Heroes of The Storm and Hearthstone.

However, the major highlight of the earnings was that the company raised its fiscal 2015 EPS outlook for the second time this year. With impressive financial results in the first two quarters of the year, coupled with strong anticipation among the gamers for the upcoming releases in the second half of the year, Activision Blizzard raised its full year EPS guidance by 10 cents to $1.30. ^[1] As a result, ATVI’s stock jumped nearly 12% to its all time high just after the report, and is currently trading close to $29. The stock has risen more than 54% since the start of this year, driven by strong franchise momentum.

Our $29 price estimate for Activision Blizzard’s stock is roughly the same as the current market price.

See our complete analysis of Activision’s stock here

Call of Duty: Widening The Gap

The FPS (First-Person Shooter) leader, Call of Duty, has been a dominating franchise for many years now, with the highest worldwide sales and one of the largest online gamer bases. The latest edition of the franchise, Call of Duty: Advanced Warfare, is still in high demand among the game lovers, with roughly 19.5 million units sold through June 2015. ^[2] The increasing contribution of the digital receipts indicates the rising popularity of online game contents and mobile platforms among the users. Downloadable content (DLC) of Call of Duty: Advanced Warfare, success of Call of Duty Online in China, increasing number of accounts on Battle.net, and the release of Heroes of The Storm contributed significantly to the digital growth in the second quarter.

The only topic of concern for the company is the sluggish performance of World of Warcraft due to its declining subscriber base. To remedy  the situation, the company has been trying to introduce new expansion packs. In June, the company launched a non-expansion content update for the franchise, aimed at stabilizing the subscriber base in the last part of the quarter. However, with the introduction of many free-to-play online games in same category, Activision Blizzard’s efforts seem unproductive.

Trefis estimates the number of subscribers for World of Warcraft to drop to 5.8 million by the end of this year.

Apart from these major contributions, the release of Hearthstone on handheld devices, Destiny’s new expansion pack: House of Wolves, and Diablo III’s success in China, were other drivers that led the revenue growth in the second quarter. Activision is highly confident ahead of its new releases, which include Destiny’s mega expansion:  The Taken King, Skylanders SuperChargers, Guitar Hero Live, Hearthstone’s next expansion: The Grand Tournament, and Call of Duty: Black Ops III. More details about the upcoming surprises will be revealed in the Gamescom 2015 event, taking place from August 5 to 9, 2015. ^[3]

Earnings takeaways:

• GAAP revenues rose 8% year-over-year (y-o-y) to $1.04 billion, with digital revenues accounting for 55% of the total revenues.
• Non-GAAP revenues grew 15% y-o-y to $759 million
• GAAP operating margins of 32% and non-GAAP operating margins of 23%, up 550 basis points y-o-y.
• Non-GAAP digital revenues grew 27% y-o-y to $611 million
• 5 million hours of gameplay on online communities
• Monthly active users grew 35% y-o-y

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1. Activision Blizzard, SEC filing, 8-K, August 4, 2015 [↩]
2. Call of Duty: Advanced Warfare, VGchartz)) Advanced Warfare’s seasons pass sales, downloadable content, and increase in average revenue per user, drove the title’s revenue growth by a double digit  percentage.

   To further strengthen the franchise’s dominance in the category, the company is releasing this year’s edition of the franchise with the return of Black Ops series. At the 2015 Electronic Entertainment Expo (E3), Activision announced the release date for its next title, Call of Duty: Black Ops III. The game is scheduled to release on November 6 this year across major gaming platforms. The previous two editions of this series averaged around 29 million unit sales. (See: Activision might continue FPS domination with new Black Ops title) Being one of the highly anticipated games this year, the company reported that the number of Black Ops II monthly active users rose to over 11 million players. Considering the fact that Black Ops II is 3 year-old game now, and is only available on previous generation platforms, it surely will boost the company’s console revenues in the coming few quarters.

   Both the driving factors—the year-over-year increasing sales of the Call of Duty franchise & strong build up to the release of Black Ops III—might drive the franchise sales more than usual in the holiday season. Consequently, Activision might witness a surge in the revenues from all the major platforms.

   Trefis estimates the next-generation console revenues to increase to $1.5 billion by the end of 2016, whereas the PC revenues are estimated to touch $600 million over the same period.

   Digital Growth: Accelerating Trend

   Activision’s non-GAAP digital revenues grew 27% year-over-year (y-o-y) to $611 million, accounting for nearly 80% of the total non-GAAP revenues. ((Activision Blizzard, Q2 2015, earnings call transcript [↩]

3. List of games at Gamescom 2015 [↩]