Macro Tsimmis

intelligently hedged investment

Activision Blizzard (ATVI) update #14—1Q10 results surge on early Call of Duty release

Posted by intelledgement on Fri, 07 May 10

Our game publishing company, Activision Blizzard (ATVI), announced 1Q10 results yesterday that materially exceeded management’s guidance from three months ago. The guidance had called for revenues of $1.1 billion and a profit of twenty cents per share in the quarter and the actual results included revenues of $1.3 billion and a profit of 30  cents per share. The good news was tempered, however, by the realization that the bounty was largely attributable to the early release of a “Modern Warfare 2” expansion kit that had not been expected until the second quarter…and ergo the boost from which shall now be missing in 2Q10. And the beat was not a surprize, as management had preannounced it last month.

CEO Bobby Kotick stated, “Our better-than-expected first quarter performance was driven by strong global consumer demand for Activision’s ‘Call of Duty’ and Blizzard Entertainment’s ‘World of Warcraft’. Activision’s ‘Call of Duty: Modern Warfare 2’ was the #1 title overall in the U.S. and Europe for the quarter, which illustrates the continued momentum of our catalogue. Additionally, during the quarter, Activision launched DreamWorks’ ‘How To Train Your Dragon’ and the ’Call of Duty: Modern Warfare 2 Stimulus Package,’ which shattered Xbox LIVE records with more than one million packages downloaded in the first 24 hours…. We expect to deliver record calendar year non-GAAP net earnings and expanded non-GAAP operating margins. In addition, we continue to strengthen our franchise portfolio and development resources for the future. Our high-quality brands, industry leading operational capabilities and solid balance sheet should enable us to take full advantage of the opportunities afforded by the expanding interactive entertainment market and allow us to deliver continued superior returns to our shareholders. As of March 31, 2010, we have delivered compound shareholder returns of 28% compared to the S&P average of -2 % over a ten-year period. We continue to find ways to add profitable franchises that allow us to increase our operating margins. In this regard we recently announced a ten-year alliance with Bungie, one of the premier studios in our industry. This relationship will allow Activision to broaden its product portfolio with exciting new games and underscores our commitment to partnering with the best creative talent in the industry.”

Management also announced that as of 31 March the company had purchased $92 million—approximately 8.5 million shares—of common stock at an average price of $10.84 per share under the $1 billion stock purchase program announced in February. Guidance for 2010 still calls for revenues of $4.2 billion including $925 million in 2Q10 and 49¢/share of earnings (up from the previously projected 47¢) including 11¢ in 2Q10.

First quarter highlights included:

  • In the quarter, “Call of Duty: Modern Warfare 2” became the #1 best-selling third-party video game of all time
  • For the quarter, “Call of Duty” was the #1 third-party franchise in the USA and Europe
  • For the quarter, “Band Hero” and “Cabela’s Big Game Hunter 2010” were top-10 titles on the Nintendo Wii in the USA
  • For the quarter, “Call of Duty: Modern Warfare 2” and “World of Warcraft: Wrath of the Lich King” were top-10 PC titles in the USA
  • 10 February—stock repurchase program announced under which the company can repurchase up to $1 billion of ATVI shares
  • 11 February—Percy Jackson & The Olympians: The Lightning Thief released
  • 2 March—Activision Publishing announced the firing of Infinity Ward co-founders Jason West and Vince Zampella and the formation of a new business unit dedicated to the “Call of Duty” franchise headed by Philip Earl with the missions of expanding the brand to new geographies and devising “new margin expanding digital business models.”
  • 23 March—Zhu Zhu Pets released
  • 23 March—How to Train Your Dragon released
  • 30 March—Cabela’s Monster Buck Hunter released
  • 30 March—Call of Duty: Modern Warfare 2 Stimulus Package released

In China, the good news finally panned out as on 12 February, Blizzard licensee Netease received permission from the General Administration of Press and Publications (GAPP) to (re)release The Burning Crusade, the first expansion released for World of Warcraft (WoW) back in January 2007. This ends seven months of uncertainty and intermittent interruptions in WoW availability on the mainland, ever since the expiration of Blizzard’s five-year deal with The9, their previous licensee. Still no word on the oft-delayed Wrath of the Lich King expansion, which Chinese WoW players have been awaiting—excepting those who have “defected” to Taiwan-based servers—for 18 months now.

Now that the China WoW contretemps winding down, we will have to content ourselves with the Infinity Ward legal warfare drama. That heated up late last month as 38 additional Infinity Ward employees sued Activision over alleged delinquent royalties. They are seeking between $75 and $125 million plus $500 million in punitive damages. This is in addition to the $36 million in royalties sought by fired Infinity Ward co-founders West and Zampella in their suit filed in March. It is unclear how many of the 38 employees involved in the second suit have left Activision, but clearly there are some morale issues in the “Call of Duty” business unit, to say the least.

In 2Q10, four games are expected to be released: the new racing title “Blur,” “Shrek Forever After” based on DreamWorks Animation’s upcoming feature film, an original Transformers game, “Transformers: War For Cybertron,” and “Singularity.” Also, in the last ten days the company announced release dates for “Starcraft II” (27 July and separately, as of 28 April the Mac beta was released and Intelledgement staff are expecting to install it imminently) and “Call of Duty: Black Ops” (30 November).

Previous ATVI-related posts:

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