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Activision Blizzard, the largest independent game publisher and maker of games like Call of Duty, reported its second quarter earnings for the period ending June 30, beating expectations for both earnings and revenue. The company also raised its guidance for the full year.
Activision Blizzard’s results are a bellwether for the traditional video game industry, which has been in a slump as retail games slow down and social, mobile, and online games take off.
In the second quarter, the company reported non-GAAP revenues of $1.05 billion, up from $699 million a year ago. Earnings per share were 20 cents, compared to 10 cents in the prior year. Analysts had predicted non-GAAP revenue of $832 million and non-GAAP earnings per share of 12 cents. Analysts were expecting Activision to guide to revenue of $805 million and earnings per share of 10 cents for the third quarter.
Bobby Kotick, the chief executive of Activision Blizzard, said, “Our performance was driven by strong audience demand for our great games. We are very excited to have announced our expanded investment in China through Activision Publishing’s agreement with Tencent to bring the Call of Duty franchise to the Chinese market.”
Kotick said that Skylanders Spyro’s Adventures, Call of Duty: Modern Warfare 3, and Blizzard Entertainment’s record-setting Diablo III were the top three games so far this year in North America and Europe.
“For the remainder of the year,” said Kotick, “we are excited about our product slate which includes Activision Publishing’s Skylanders Giants and Call of Duty: Black Ops II and Blizzard Entertainment’s World of Warcraft: Mists of Pandaria. While we are increasing our financial outlook for full year 2012, we remain cautious given economic uncertainty, risks to consumer spending — especially during the holiday season — and the recognition that the majority of our key franchise launches are still ahead of us.”
In a conference call, Kotick noted that the perception is the game industry has been weak, but he noted that sales for the top 5 games are up 11 percent on average for the past couple of years. Since Activision Blizzard has numerous top-five hits, it hasn’t been hurt as much by the weaker overall industry sales.
Activision Blizzard’s stock was down 2.29 percent in after-hours trading at $11.50 a share. Activision’s stock closed at $11.77 a share, down 5 cents, before the news went public. Colin Sebastian, an analyst at R.W.Baird, said that the stock may have fallen after-hours because trading is tied to World of Warcraft numbers, which were down. Blizzard said World of Warcraft, which has dominated online games for almost eight years, lost some subscribers from the previous quarter, falling from 10.2 million to 9.1 million.
The business is still riding high from sales of big franchise games, including Call of Duty: Modern Warfare 3. Activision also has a new hit with Skylanders, which features both a multiplatform video game and a line of toys. And the company’s World of Warcraft, which has dominated online games for almost eight years, lost some subscribers from the previous quarter, falling from 10.2 million to 9.1 million.
Michael Pachter, analyst at Wedbush Securities, had expected the company to beat estimates. In a note issued before the earnings were announced, he said that the combination of Diablo III, Call of Duty, Skylanders, and World of Warcraft was expected to be a big contributor to earnings. Activision Blizzard’s Blizzard Entertainment had previously announced that it sold more than 6.3 million copies of Diablo III in its first week. Now the number has topped 10 million through July. Blizzard is launching its next major upgrade to World of Warcraft, Mists of Pandaria, on September 25.
Activision is expected to release Call of Duty: Black Ops II (pictured at top) on November 13. Pachter expects the game to sell 25 million units in its lifetime. At $60 each, that’s a gross sale of $1.5 billion. Rumors persist that parent company Vivendi Universal, which owns a majority stake in Activision Blizzard, plans to sell the division. But Pachter thinks the likelihood of that happening is low, as there aren’t many buyers who could pay $13 billion or more for the acquisition.
During the third quarter, Activision expects to release Transformers: Fall of Cybertron and Call of Duty: Modern Warfare 3 Content Collection #3 and #4. It also expects to release Ice Age: Continental Drift — Arctic Games, Wipeout 3, and Angry Birds Trilogy for the consoles. Based on the better second-quarter results, Activision is raising its calendar year revenue and earnings-per-share outlook. The company didn’t raise the earnings outlook dramatically, because the outlook for the industry is “choppy,” said chief financial officer Dennis Durkin, in a call with analysts. Kotick added that is is a tough macro-economic picture with high unemployment and instability in Europe. There is also a lot of competition for entertainment time. He thinks that high-quality games are winning because players are turning to games with high replayability. For the rest of the industry, he says the next few years will be challenging.
Answering a question, Kotick said, “You have seen a stream of products that are less than adequate from our competitors.”
Eric Hirshberg, president of Activision Publishing, said that Skylanders has the potential to be the next billion-dollar franchise for the company. On October 19, the company will release the next installment, Skylanders: Giants. Skylanders Spyro’s Adventure was the No. 1 console and handheld game for the first six months of the year, counting accessory packs and figures, and it was the No. 1 action-figure toy line in the U.S. in the first six months of the year as well.
“It will be a huge launch,” he said in a conference call with analysts.
He also said that the next Call of Duty game, Black Ops II, is trending ahead of Modern Warfare 3, which was the fastest-selling video game of all time. Activision closed the quarter with $2.7 billion in cash.
Mike Morhaime, president of Blizzard, said on the call that the quarter was Blizzard’s biggest ever. About 16.9 million players have logged into Battle.net in the past month to play Starcraft 2, Diablo III, or World of Warcraft. He acknowledged that the launch of Diablo III was so big that it stressed the company’s systems and resulted in issues for players trying to get online in the game.
The World of Warcraft number was down due to declines from the East, presumably due to people taking a break to play Diablo III, as well as a drop off before the launch of Mists of Pandaria.