Activision Blizzard: A New MMORPG and Subscription Model for Starcraft II

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May 7, 2010 | SIN Picks | | Author Asif

Call of Duty Black OpsAgainst the backdrop of one of the strangest days in the market with the Dow Jones dropping nearly 1,000 points in late afternoon trading, gaming giant Activision Blizzard announced strong first quarter results. During the conference call following the release of their results the company revealed some interesting details about its pipeline for the rest of the year. I got a chance to live tweet most of the conference call but in case you missed the call, I decided to post this blog entry with some key highlights from the call just like I did last quarter with the post Thoughts on Activision Blizzard’s Q4 Results.

The Good:

  • Activision reported revenue of $1.3 billion in the first quarter and earnings of 30 cents per share, more than double the 14 cents in earnings it reported in Q1 2009. On a non-GAAP basis, which excludes revenue and expenses that have been deferred for certain games, Activision reported revenue of $714 million and earnings of 9 cents per share. Non-GAAP earnings were more than double analyst expectations of 4 cents per share.
  • Activision Blizzard increased its cash balance by $300 million and now holds $3.34 billion in cash and short-term investments on its balance sheet.
  • Under a $1 billion share buyback program launched in February, the company has already purchased 8.5 million shares for an average price of $10.84.
  • The company recently struck a 10 year deal with development studio Bungie, the developers who created Microsoft’s highly successful game Halo. Bungie has almost 200 people working on a new intellectual property for Activision.
  • Activision Blizzard announced that “hundreds of thousands” of players were trying out the beta version of their highly anticipated game Starcraft II that is slated for release on July 27, 2010. The game is already the top selling PC game on and one analyst has an optimistic sales estimate of 6 million units in the first year.
  • The company is trying a couple of different revenue models with Starcraft II. In certain western countries like the United States, the company will sell Starcraft II at a certain price ($59.99 at Amazon right now), which will include unlimited online play on their platform. Players of the original Starcraft have been playing on for free for over a decade now. In certain other countries like Russia, the company will provide two purchase options. At a higher price point of $33, players will get the game and one year of online play. At a lower price point of $16.50, players will get the game and 4 months of online play. This new subscription model should help bring a consistent stream of revenue much like the World of Warcraft franchise.
  • World of Warcraft has in excess of 11.5 million subscribers and did better than expected in the first quarter. Growth in China has been particularly good thanks to the relationship with NetEase (NTES).
  • The Blizzard Entertainment division of the company is expected to have its biggest year ever driven by the release of Starcraft II and the new expansion pack for World of Warcraft called Cataclysm. World of Warcraft already brings in more than a billion dollars in annual subscription revenue.
  • The company is working on another Massively Multiplayer Online Role Playing Game (MMORGP) confirming rumors that have been floating around for months.
  • The Call of Duty: Modern Warfare 2 expansion map pack called “Stimulus Pack” sold more than a million copies for the XBOX 360 console within 24 hours of its release towards the end of the first quarter. Activision released this map pack for the Playstation 3 earlier this week.
  • Troubled studio Infinity Ward, which created Call of Duty: Modern Warfare 2 is already working on a second map pack that will be released later this year.
  • Full year 2010 outlook remained unchanged at non-GAAP revenue of $4.4 billion and earnings of 72 cents. Earnings outlook was increased from 70 cents to 72 cents just a few days before the call.
  • Activision’s outlook for the industry calls for 5 to 8% growth in software sales through both retail and online channels. As of March 31, the installed base of console and handheld hardware increased 34% year-over-year to 227 million. Activision expects 2010 to end with a “massive installed base of 265 million units of consoles and handhelds”.

The Bad:

  • Second quarter non-GAAP revenue is expected to drop to $700 million and earnings are expected to drop to 4 cents, well below analyst expectations and below year ago levels. Analysts were expecting earnings of 9 cents on revenue of $797 million in the second quarter. Some expenses from the first quarter were delayed and hence will impact second quarter results. Most of the bigger titles like Call of Duty: Black Ops and World of Warcraft: Cataclysm are slated for release in the second half of the year.
  • Activision’s results may be negatively impacted due to currency exchange rates especially in light of the recent weakness in the Euro and the British Pound.
  • More than 35 employees have left Infinity Ward following the firing of the two Infinity Ward heads for insubordination. The fired duo turned around and struck a deal with Electronic Arts (ERTS) and have been recruiting Infinity Ward talent to join their new studio Respawn Entertainment.

Overall I continue to remain happy with the execution of this company and continue holding on to my long position in the stock.

On an unrelated note, the May investment newsletter has been delayed and should be out on Monday, May 10th.

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