We are right in the middle of Wall Street earnings season, and I know that everyone is as excited as I am! right? hello? anybody? Bueller….
Okay, so maybe it is an acquired taste, but when it comes down to the brass tacks, earnings calls can help identify details about a company that you would not be able to find anywhere else, particularly within the secretive gaming industry.
We detailed EA’s upbeat earnings report yesterday, and now we get to move to the second largest publisher in the game space, Activision-Blizzard.
In short, Activision had a “better-than-expected” first quarter and are CAUTIOUSLY optimistic going forward. This is investor speak for an uncertain environment in the second half of 2013, and should be seen as a relatively bearish (negative) statement.
Their success during the first quarter specifically relied on the strong sales performance of Starcraft 2: Heart of the Swarm, the Skylanders franchise, Call of Duty: Black Ops 2 and Diablo 3.
Skylanders and Call of Duty remain the top two best-selling franchises for North America and Europe combined. Further, COD saw a 100 percent year-over-year increase in digital revenue, which is great from a margin standpoint (higher margins = more profit).
With regards to the actual numbers, the publisher brought in net revenues of $1.32 billion during the quarter, a 13 percent improvement over the same period in 2012 and 14.1 percent ahead of the company’s projections. Activision also showed a marked year-over-year jump in net income from $384 million to $456 million, a 13.75 percent increase.
It was not all rainbows and butterflies for the publisher though, with their main cash cow, World of Warcraft, having suffered one of the largest subscriber drops in its history, hemorrhaging 1.3 million players during the quarter. This equals a 14 percent drop in its user base in just 3 months, bringing down the total number of players to 8.3 million worldwide.
From an investor standpoint, this is a very difficult pill to swallow because the surest way to consistent earnings is a revenue stream that requires monthly payments. When subscriber numbers drop, especially for a game with millions of players, this could make a huge dent in expected profits.
This may seem like a “cry me a river’ moment, but in a capitalistic system like ours, the only real success is profit growth, not profit stability…and especially not negative growth. No matter how successful WoW has been in the past, investors operate on the “what have you done for me lately” mentality. This does not mesh well with a creative industry like gaming, but this is the reality we live in, for better or worse (mostly worse).
CEO Bobby Kotick went so far as to mention that they are expecting these numbers to be even lower at the end of 2013, making the necessity to find new revenue streams ever more critical for Activision.
“While we have had a solid start to the year, we now believe that the risks and uncertainties in the back half of 2013 are more challenging than our earlier view, especially in the holiday quarter,” said Kotick in an investor release announcing Activision’s first-quarter results. Kotick cited the drop in World of Warcraft users, the poor performance of the Wii U, uncertainty surrounding next-generation consoles and stronger opposition from other publishers.
Although most of Activision’s main series are performing well, increased competition will be the next obstacle they must deftly maneuver. Skylanders will have to fend off Disney Infinity, Call of Duty: Ghosts will have its hands full with Battlefield 4, and WoW must stay relevant while most other major MMO’s are successfully transitioning to a free-to-play model. Additionally, Bungie’s Destiny and Blizzard’s Titan seem to be moving quite slow in development, which could be a bad sign for the two highly anticipated (and highly expensive) titles.
While ATVI ‘won’ 2012 from a financial perspective, they need to continue evolving to fend off the other publishers. EA is making big changes and have always proven to be a survivor, while Take-Two continues to be the true innovator of the three big publishers. They also have to deal with the resurgent Frenchmen at Ubisoft and a motivated push from our Japanese peers. All in all, Activision must adapt or die, because they are finally getting to the point where they cannot rely on their past success for very much longer.
Even with this cautious outlook, Activision is still raising their full year outlook by 3.3 percent, to 4.22 billion, which is less than Wall Street expected, but still a serious amount of cash. Must be tough….