Activision Blizzard Earnings Preview: Success Of FPS Titles In Holiday Period To Drive Top-line Growth

The American gaming giant, Activision Blizzard (NASDAQ: ATVI), is scheduled to announce its annual report for the fiscal 2014 year on February 5. ^[1] 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.

In the third quarter, the company delivered financially strong results, as it managed to beat its EPS guidance by $0.10. Activision’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 2014, the company released two new franchises: Destiny and Hearthstone, adding to the already strong portfolio. ^[3]

Our $21 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

Strong Holiday Quarter To Boost Annual Revenues

The first-person shooter (FPS) genre is becoming more and more popular, and Activision has dominated the FPS domain for the last 5 years, primarily driven by the Call of Duty franchise. Activision Blizzard released two of the most awaited titles just before the holiday festive period: Call of Duty Advanced Warfare and Destiny. Both the titles from the first-person shooter (FPS) genre took the gaming industry by storm. Call of Duty (COD), with over 10 titles for the consoles, handhelds, and PC, over the last decade, is one of the best western interactive franchises with over $9 billion of life-to-date revenues and around 150 million units sold to date, and has also accounted for 56% of the total shooter game sales in 2013. Call of Duty: Advanced Warfare sold nearly 7.2 million units on all the major platforms in the first week of its release. ^[4] As of January 3, the title has sold approximately 17.6 million units, leading in the FPS genre. Moreover, the Call of Duty online community is one of the biggest online platforms in the world and its users are increasing day by day. COD: Advanced Warfare was the highest selling title in the holiday period.

Moreover, Destiny sold nearly 10 million units as of January 3, 2015, of which 4.44 units were sold in the first week of its release. ^[5] Being a new franchise and the 6^th highest title sold globally in 2014, Destiny might just be the next big FPS franchise in the coming few years. Activision has always surprised its gamer base with additive features to its most popular games, and they have been well received by the gaming community. In short, Activision is ensuring that it maintains its dominance in the FPS genre, with new and far more addictive titles.

Strong performance by the company’s FPS titles in the holiday period might boost the company’s net revenues in the fourth quarter, and for the whole fiscal year as a whole. Trefis charts below show our forecasts for the company’s title sales for the two major gaming platforms.

Look Out For World Of Warcraft

Activision’s financial results in the third quarter was also spurred by relatively strong performance by its widely popular Massively Multiplayer Online Role-Playing Game (MMORPG): World Of Warcraft. By the end of the September quarter, the subscriber base for the franchise improved to 7.4 million, with more than 1.5 million pre-orders for the fifth expansion pack ‘Warlords of Draenor,’ which was released on November 13, 2014. The fifth expansion pack is priced more than its previous versions; the digital and physical standard edition is available for $50 and the digital deluxe edition is available for $70. Within 24 hours of its availability, more than 3.3 million copies were sold, and its subscriber base crossed 10 million. ^[6]

The resurgence in the WoW subscriber base might be a one-time spark and if it declines 33% over the next two years, there will be a 4% downside to the Trefis price estimate. However, if the gamers drift back to the MMORPG genre due to a lack of software titles in the market, and the subscriber base crosses 12 million by 2016, there will be a 4% upside to the Trefis price estimate.  Time will tell whether this genre continues to have legs, and if there is further room for these games to run.

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More Trefis Research

1. Activision Blizzard Q4 2014 earnings conference call [↩]
2. NPD December 2014 report [↩]
3. Activision Blizzard Q3 2014 earnings call transcript [↩]
4. Call of Duty: Advanced Warfare global sales, VGChartz [↩]
5. Destiny global sales, VGChartz [↩]
6. World of Warcraft surpasses 10 million subscribers as Warlords of Draenor launch begins [↩]