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Activision Blizzard (ATVI) update #16—2Q10 results beat guidance but disappoint investors

Posted by intelledgement on Fri, 06 Aug 10

Our game publishing company, Activision Blizzard (ATVI), announced 2Q10 results yesterday that exceeded management’s guidance from three months ago, but failed to impress The Street…and the stock is trading sharply lower today, currently down over 6%. The guidance had called for revenues of $925 million and a profit of eleven cents per share in the quarter and the actual results included revenues of $967 million and a profit of 17 cents per share. While exceeding the guidance, the revenue results did fall short of what was achieved a year ago (1.038 billion).

CEO Bobby Kotick stated, “Our quarterly results were fueled by continued strong consumer response to Activision Publishing’s ‘Call of Duty’ franchise and Blizzard Entertainment’s ‘World of Warcraft.’ For the first and second quarters, we outperformed our earnings per share outlook, and we grew our operating margin year over year for the six month period, driven by our focused effort to increase digital revenues…. Looking to the balance of the year, we expect to release the best slate in our company’s history. Blizzard Entertainment’s ‘StarCraft II: Wings of Liberty’ is off to a strong start worldwide with midnight openings on July 27, 2010 at 3,100 GameStop stores in the U.S. and 8,000 retailers around the world. We are, of course, enthusiastic about Blizzard Entertainment’s upcoming release of ‘World of Warcraft: Cataclysm,’ which began a closed beta test on June 30. ‘Call of Duty: Black Ops’ is shaping up to be one of the best games Activision Publishing has ever created, the marketing programs are the biggest in the company’s history and to date, pre-orders of the game exceed the pre-orders for Modern Warfare 2 at this time last year. This fall, our lineup includes Activision Publishing’s ‘Guitar Hero: Warriors of Rock,’ ‘DJ Hero 2,’ ‘Tony Hawk: SHRED,’ ‘Spider-Man: Shattered Dimensions,’ ‘GoldenEye 007,’ and ‘Bakugan,’ all of which look to be very promising as well. We have never been better positioned for the holiday season than we are today with such a strong slate of games and the best team in our industry to bring them to market.”

Management also announced that as of 30 June the company had purchased $334 million—approximately 3.1 million shares—of common stock under the $1 billion stock purchase program announced in February. Also, during the second quarter revenue from digital online channels grew more than 20% year-over-year. Guidance for 2010 still calls for revenues of $4.2 billion including $600 million in 3Q10 and 49¢/share of earnings including 0¢ (breakeven) in 3Q10.

Second quarter highlights included:

  • For the first six months of 2010, “Call of Duty: Modern Warfare 2” was the #1 first-person shooter game in the USA and Europe
  • For the first six months of 2010, “Call of Duty” was the #1 third-party franchise in the USA and Europe
  • For the first six months of 2010, Activision Publishing was the #2 third-party console and handheld publisher in the USA
  • For the quarter, “Call of Duty” was the #3 franchise overall and the #1 first-person shooter franchise in the USA
  • For the quarter, “Call of Duty: Modern Warfare 2” was the #1 first-person shooter title in the USA
  • For the quarter, Activision Blizzard had four top-10 PC games—Activision Publishing’s “Call of Duty: Modern Warfare 2” and Blizzard Entertainment’s “World of Warcraft: Wrath of the Lich King,” “World of Warcraft Battle Chest,” and “Diablo Battle Chest” in the USA
  • 19 May—“Shrek Forever After” released
  • 25 May—“Blur” released
  • 14 June—Activision Publishing extends deal with Microsoft (MSFT) to release new “Call of Duty” releases first on Xbox LIVE through 2012
  • 22 June—“Transformers: War for Cybertron” released
  • 24 June—“Wipeout: The Game” released
  • 29 June—“Singularity” released
  • 30 June—“World of Warcraft: Cataclysm” beta testing initiated

Things seem relatively calm in China, although Netease (NTES), Blizzard’s partner who runs the “World of Warcraft” (WoW) subscription business there—and will run “Starcraft” if that game ever gets approved—had a bad quarter. 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 21 months now. It would be embarrassing if the “Cataclysm” WoW expansion is released in the West before the “Wrath of the Lich King” is available in China.

Speaking of Blizzard, they did manage to cause a stir last month with an announcement that all posters on their gaming forums—which are quite lively—would henceforth be forced to sign their posts with their real names, instead of their game-playing screen name pseudonyms, as has always been the case heretofore. The intent was to constrain the activity of so-called “troll” posters, who lurk on message boards and are quick to castigate other posters for no discernible reason other than to gain attention or cure boredom. The idea was that if the trolls had to ascribe the real names to their noxious messages, they would cease and desist, and the forums would be more civil and more pleasant for everyone else. Unfortunately, it turns out it was not only the trolls who objected to losing the cloak of anonymity. According to a CNBC report, “Others…were more worried that anything they wrote on those message boards could be easily found with a Google search—and an off-the-cuff comment made online could have repercussions for them in real-world relationships…. Still others were concerned that with access to their real name, other players could dig up additional information about them, including photos, addresses, phone numbers and more. Some female players said they feared harassment.”

After three days of increasingly bad PR, Blizzard management recanted, apologized, and scrapped the change.

In 3Q10, three games are expected to be released: “StarCraft II: Wings of Liberty,” which was published 27 July, “Guitar Hero: Warriors of Rock” for the Xbox 360, the PLAYSTATION3, and the Wii, and “Spider-Man: Shattered Dimensions” for the Xbox 360, the PLAYSTATION3, the Wii, and the Nintendo DS.

Previous ATVI-related posts:

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Activision Blizzard (ATVI) update #7—3Q09 results provide surprize profit

Posted by intelledgement on Thu, 05 Nov 09

A third straight quarter of beating guidance on the top and bottom lines—including a penny/share profit when a loss had been expected—highlighted the 3Q09 results that our game publishing company, Activision Blizzard (ATVI) announced today. Revenues for the quarter amounted to $703 million as compared to guidance of $680 million. The 1¢/share profit handily beat the guidance of a loss of 3¢/share.

CEO Bobby Kotick stated, “Our performance was driven by positive audience response to Activision Publishing’s Guitar Hero 5, Marvel: Ultimate Alliance 2, and the Guitar Hero and Call of Duty franchises, as well as Blizzard Entertainment’s World of Warcraft. Year to date through September 30, the Guitar Hero franchise was the #1 best-selling third-party franchise in North America and Europe. For the month of September, sales of music games in the U.S. increased 72% in dollars year over year, which demonstrates the sustained interest in this new and important game category. During the quarter, we continued to see strong sales for Call of Duty World at War and associated map packs, which year to date have sold more than seven and half million units…. This success is the result of our focus on delivering the highest game quality and the best entertainment experiences possible for our consumers.”

Guidance for the calendar year remains unchanged: revenues of $4.05 billion and 26¢/share. For the fourth quarter, management anticipate revenues of $1.33 billion and a loss of 4¢/share.

Third quarter highlights included:

  • Year-over-year 3Q09 U.S. market share up 3.1 points to 13.3%
  • Year-over-year 3Q09 U.S. and European combined market share up 1.2 points to 12.1%
  • Year-to-date U.S. market share of the music/dance category up 5 points over 2008 to 51%
  • Year-to-date Guitar Hero World Tour #1 best-selling third-party title in North America and in the top ten 3Q09
  • Year-to-date Guitar Hero combined U.S. and European sales for the Xbox 360(TM) and PLAYSTATION(R) 3 increased 20% over 2008
  • 3Q09 Guitar Hero #1 third-party console and handheld franchise in Europe
  • Year-to-date and Call of Duty: World at War #2 best-selling third-party title in North America and in the top ten 3Q09
  • Year-to-date Blizzard Entertainment had three of the top-five bestselling PC games in units in North America and four of the top-10 bestselling PC games in units between North America and Europe combined
  • 18 August—Wolfenstein released
  • 21 August—Cataclysm, the third expansion for WoW, announced at BlizzCon; no release date has been specified by Blizzard but according to company president Mike Morhaime, it is targeted for 2010
  • 1 September—Guitar Hero 5 released
  • 9 September—Cabela’s Outdoor Adventures released, a simulation of big game hunting, freshwater fishing and bird hunting in collaboration with Cabela’s (CAB)
  • 15 September—Marvel: Ultimate Alliance 2 released, a collaboration with Marvel Comics (DIS)
  • 30 September—as of this date, Activision Blizzard had purchased $960 million, or approximately 89 million shares, of common stock at an average price of $10.81, under its stock repurchase program since the program’s inception in November 2008

The news from China continued to be mixed…or maybe “mixed up” would be a better description. Evidently ATVI’s new licensee, NetEase (NTSE), initiated a World of Warcraft (WoW) beta test in mid-July, expecting to be able to effect a full relaunch within a week or two. However, final approval from Chinese authorities was not immediately forthcoming, and after several weeks—keep in mind that back on 7 June, WoW effectively closed down in China when ATVI’s contract with their former WoW licensee, The9 (NCTY) ran out, leaving millions of Chinese WoW games stranded offline—NetEase opened up the free beta to everyone. While expensive, this beat the alternative of having frustrated Chinese WoW “defect” to Taiwanese WoW servers—slow to access from the mainland, and requiring them to start from scratch with a new character—or to another non-Blizzard game altogether. Finally, on 19 September, NetEase relaunched WoW in China, after a hiatus of 15 weeks. And last month, NetEase announced that the long-delayed Wrath of the Lich King update—launched in the rest of the world last November—would be released in China later this month.

But then, just Monday, we received a report that one Chinese agency—the General Administration of Press and Publications (GAPP)—had ordered NetEease to stop collecting subscriptions and signing up new subscribers, accusing them of “illegal” behavior, and threatening to yank the company’s internet access. The GAPP had been reviewing the content of WoW—it is not clear why this review was undertaken, as the content is the same as what had been running in China under The9’s aegis—and possibly there was miscommunication as to whether or not that review had been completed. Or perhaps it is a political thing. Doing business in China is a trial! But never boring…stay tuned.

In 4Q09, ATVI management plan to release:

  • Bakugan Battle Brawlers™
  • Band Hero
  • Call of Duty: Modern Warfare 2
  • DJ Hero
  • Tony Hawk: RIDE

Previous ATVI-related posts:

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