Activision announced its earnings yesterday and mostly met expectations, with a few surprises. As Activision had warned, sales were somewhat below last year’s, but profits beat expectations handily, at least by generally accepted accounting practices (GAAP). Looking at GAAP results, Activision had $1.05 billion in revenue versus $1.075 billion in the same quarter last year, but net income was $324 million versus $185 million.
The non-GAAP numbers don’t look anywhere near as good. Activision’s non-GAAP revenue was $608 million, compared to revenue in the same quarter last year of $1.054 billion. Net income was $119 million, versus $300 million. What’s going on The difference, of course, was Diablo III. There’s just something about releasing new software, especially when it’s a long-awaited title. Blizzard does have some new titles in the works including the free-to-play online game Blizzard All-Stars (its offering in the hot multiplayer online battle arena (MOBA) category) and its free-to-play tablet game Hearthstone, as well as a new content update for World of Warcraft, followed by Diablo III for Xbox 360 and PS3.
Morhaime also talked a bit about Blizzard’s Titan project. “I want to say a few words about our unannounced project, codename Titan,” Morhaime said. “We’re in the process of selecting a new direction for the project and re-envisioning what we want the game to be. And while we can’t talk about the details yet, it is unlikely to be a subscription-based MMORPG. I also want to reiterate that there has not been an official announced or projected release date.”
This statement is also a pretty clear indication that World of Warcraft will become a free-to-play game when it becomes expedient to make itso. Morhaime knows that’s inevitable, and that’s why Blizzard is testing and rolling out the ability to make in-game purchases of virtual goods. Once that’s in place game-wide, Blizzard can shift to a fully free-to-play game whenever it seems expedient. At a guess, that’s likely to happen next year sometime.
Activision is expecting a tough fight this holiday for Skylanders and Call of Duty. “We expect that marketing costs might well be up year-over-year,” said Activision Publishing CEO Eric Hirshberg. “That said, we do have extremely strong plans already in place. And I think we’ve shown best-in-class marketing efforts in our ability to make our launches into real cultural events and make them unignorable. And that’s what we plan on doing this year.”
As far as Skylanders goes, Activision will be fighting an aggressive ground war of retail shelf space against Disney Infinity. “Just when we thought we couldn’t get any bigger after last year’s retail presence, we’ve increased it by 25% again this year,” said Hirshberg. Of course, the Skylanders product line will be bigger than Disney’s lineup, especially if you include previous Skylanders releases and not just the latest one. Don’t underestimate the value of sheer square footage in retail stores for generating sales. The visual impact of Skylanders when you walk into a Toys R Us should be undeniable.
Activision looks set to finish out the year strongly, though the company is still expecting to end up below last year’s revenue. The outlook for 2014 depends in part on some factors beyond Activision’s control, in particular how well the PS4 and Xbox One sell. Activision Blizzard’s CEO Bobby Kotick expressed guarded optimism. “If you look back in history, what you’ve seen is that every new cycle has been larger than the prior cycle. I don’t know that we’ve had the same number of competing platforms or opportunities to deliver interactive entertainment,” said Kotick. “But I will say this, I think, that most manufacturers are delivering on the promise of excellent hardware. We have much more visibility today than we even did 3 months ago. And I think they both made great progress. I think they’re going to put more marketing money against the launches than ever before.”