Activision Blizzard continues to advance into the changing game market with a largely traditional publishing strategy, and the results were better than expected this last quarter — though still down from the same quarter last year. There were no great surprises revealed in the earnings call, with the numbers and the statements by executives showing the company poised to do well if the console market revives as expected. Still, there are challenges ahead in the market and with different products — success will not be easy.
First off, let’s look at the numbers. Non-GAAP revenue was $657 million, handily beating the consensus of estimate of $589 million and the company’s own guidance of $585 million. Still, this was down 2012’s $751 million. On a GAAP basis, the company’s $691 million was down 18 percent from last year’s $841 million, and profits dropped 75 percent to $56 million. The drop versus last year was expected, since the World of Warcraft expansion Mists of Pandaria shipped last year and there was nothing comparable this year. This underscores the importance of World of Warcraft to Activision Blizzard, and why it’s important for the company to maintain that title as long as possible.
Activision’s stronger than expected results were driven by digital sales, which comprised a record 59 percent of the company’s total net revenues. The company joins other traditional publishers in providing a steady stream of downloadable content (DLC) for major franchises, and of course the World of Warcraft subscriptions count as digital revenue. Operating expenses were up, which CFO Dennis Durkin said was “due in part to increased marketing investment for our franchise launches.” In other words, Activision ramped up the marketing spend on Call of Duty and Skylanders because of tough competition.Â
World of Warcraft continued to decline in subscribers, but only by 100,000 this quarter. The franchise still has 7.6 million subscribers, and if Blizzard can keep things going with content updates like the Siege of Orgrimmar, the old cash cow may still be providing milk for years to come. Here’s the key thing to watch: How do WoW subscriber numbers look in a quarter when there isn’t a major update or expansion This quarter saw a drop of 100,000 subscribers even with a major release, so we could see larger declines unless something else changes.
Will going free-to-play be Blizzard’s big move They continue to resist, and certainly no mention was made of such a step. The company has to choose between waiting to move to F2P until the subscriber decline is unmistakable and irrevocable, and moving to F2P early and leaving subscription money with excellent profit margins on the table, or hoping that somehow WoW subscriptions will stabilize. That’s one of the tough calls ahead for Activision Blizzard management.
Activision’s key franchises Call of Duty and Skylanders are under increased pressure this year, which the company acknowledged. Skylanders had some particular issues, which Activision Publishing CEO Eric Hirshberg noted. “Overall, we’re down, which is not unexpected. The two main issues here are that we’ve invented a category two years ago, and for the past few years, we’ve had a competitive landscape completely to ourselves,” noted Hirshberg. “This year, we’ve had two major competitors, with both Disney and Pokemon launching the day before us, as you guys know. And second, Skylanders is also not immune to the effects of the console transition year. In fact, our quantitative research has shown that this is one of the top reasons that parents who’ve shown an intent to purchase the game are hesitating.” Hirshberg expects that the strong final quarter of the year will take care of the current softness in sales.
Meanwhile, although Call of Duty:Ghosts racked up an impressive $1 billion in sales right away, the franchise is still posting numbers below last year’s Call of Duty installment. It looks like the peak years for the boxed retail product are behind it, but Activision is making up for that with increased DLC. The positive sign for this year is the increased engagement so far among Call of Duty players. “On the Xbox 360, we’re seeing average player sessions for Ghosts which have been longer than either Black Ops II or Call of Duty: Modern Warfare 3 during the same time period,” noted Hirshberg. Interestingly, Hirshberg also pointed out that “Call of Duty: Ghosts will be available via digital download on Xbox 1 and PS4 on the same day that it’s available in stores.” This is a harbinger for retail, as next-gen consoles will accelerate the move away from buying boxed products.
Next year looks strong for Activision Blizzard, with a Diablo III expansion, more Call of Duty and Skylanders (of course), and the highly anticipated launch of Bungie’s Destiny title. Analyst Michael Pachter expects those titles to do very well (he projects Destiny to drive $500 million in sales next year), and also noted the Call of Duty Online in China could be a major revenue generator.
Activision Blizzard is relying on its core franchises and the continued strength of the console market for the bulk of its revenue, while hoping that Destiny and Call of Duty Online can become major new franchises. This strategy looks good for 2014, but there are till no major bets being placed on mobile. CEO Bobby Kotick hinted that Activision may be moving in that direction, when he said “tablets and mobile devices are now starting to provide opportunities to create differentiated and compelling new types of games and access to new audiences and new geographies.” Sounds like a game or two might be in consideration for those platforms in the future.
