Activision Blizzard (NASDAQ:ATVI) is scheduled to report earnings for the fourth quarter of 2013 on Thursday, February 6. The video game publisher has been outperforming the market for the last few quarters, helped by strong sales of its flagship franchises: Call of Duty and Skylanders and expansion in the digital domain. Despite an absence of new titles during the September quarter, the company was able beat market expectations and its own guidance, earning more than 60% of its non-GAAP revenues from digital streams.
The December quarter saw the highly anticipated launch of the eighth generation Xbox One and Playstation consoles. While the consoles have been well received, they have not yet had a meaningful impact on software sales. Research group NPD has reported that hardware sales increased 28% in December, while software sales were down 17% (NPD’s figures do not include digital sales). The firm also listed Activision’s Call of Duty: Ghosts as the highest selling game through the holiday period. We expect strong results from the company as it goes through the console transition period.
Our price estimate for Activision Blizzard is $18, implying a premium of 10% to the current market price.
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Strong hardware sales indicate that a software revival is just around the corner, and Activision has a strong suite of titles to capitalize. However, the company faces strong competition. Disney (NYSE:DIS) Infinity employs a model similar to that of Activision’s innovative cash cow, Skylanders. Both games require users to separately purchase physical models to access characters in the game. By the end of the September quarter, Skylanders had generated over $1.5 billion in life-to-date revenue since its launch in October 2011. However, Disney will look to leverage the popularity of its intellectual properties like The Incredibles, Pirates of the Caribbean and Toy Story to gain a competitive edge over Activision. NPD Group has listed Disney Infinity as the tenth highest selling game of 2013 whereas Skylanders SWAP Force held the same position for the month of December. The two are poised to go head-to-head in the children’s domain in the coming months and we will keep a close eye on developments.
The Call of Duty franchise has been quite successful for Activision, accounting for close to 70% of the units sold by the company last year.  Annual editions of the franchise have made the top ten best selling games across the globe for the last five years. Sony has listed the latest edition, Ghosts, as one of the best selling games so far for the Playstation 4.  However, the game now faces stiff competition from Electronic Arts’ (NASDAQ:EA) Battlefield 4. Despite initial technical glitches, the first person shooter has been selling well and was listed by NPD group as the second highest selling game for December.
Shooting games like Call of Duty, Battlefield, Far Cry 3 and Halo 4 accounted for close to 20% of game sales worldwide in 2013, highlighting the popularity of the genre.  The Call of Duty franchise accounted for nearly 60% of shooting sales while Battlefield had a market share of 20%. The battle for the shooting game domain will be an interesting one as gamers migrate to the next generation consoles. To allow for a smooth transition, Activision has announced that players who purchase Call of Duty: Ghosts for their current console to download the next-generation version within the same console family for just $10. The coming quarters will reveal the efficacy of this strategy.
Physical Sales To Help Digital Sales
Digital sales include secondary streams like extra downloadable content (DLC), full game downloads, in-game advertising and subscriptions. These streams have been helped by strong sales of Activision’s titles. Online playing time by all Call of Duty users across the globe exceeded 4 billion hours during the last quarter, allowing the franchise to generate more revenues in a single year than any other console game has in the past.  The latest edition, Ghosts, includes à la carte DLC packs, micro DLC and Season Passes, allowing the company to generate more digital revenues. Activision recently launched a DLC pack called Onslaught for Call of Duty: Ghosts.  We expect the company to maintain momentum in the digital domain.
World Of Warcraft Losing Ground
Activision’s World of Warcraft has been losing ground in the massively multiplayer online role-playing game (MMORPG) domain. The title was once dominant game in the genre reaching a peak of nearly 12 million subscribers in 2010 and generating close to $1 billion in annual revenues. However, strong competition from free-to-play online MMORPGs like Aion: Ascension, Vindictus and Allods Online has cut into WoW’s market. The number of subscribers fell to 8.3 million at the end of the March quarter and further to 7.7 million by the end of June. The company was able to arrest the slide somewhat in third quarter, ending September with 7.6 million subscribers. Although it is still the most popular subscription-based MMORPG, World of Warcraft is no longer the powerhouse it once was. Fourth quarter results will provide an insight into the state of the title.Notes:
- VGChartz [↩]
- PlayStation®4 (PS4™) Global Cumulative Sales Surpass 4.2 Million [↩]
- VGChartz 2013 [↩]
- Activision Blizzard Management Discusses Q3 2013 Results – Earnings Call Transcript [↩]
- Activision Blizzard, Inc. : Activision and Infinity Ward’s Call of Duty: Ghosts Onslaught Revealed as the First of Four Epic DLC Packs Planned for 2014, Press Release, January 13, 2014 [↩]