Activision Blizzard Q1 Earnings: Heart of the (Money) Swarm

“I can’t say that you’re going to see any dramatic shift in the way we monetize on the console.” So said Bobby Kotick during the Q&A portion of Activision’s Q1 earnings investor call, responding to a question about how the coming transition to the next generation of consoles would affect Activision Blizzard’s business practices.

That’s an interesting response considering the growing consensus among gaming industry professionals and observers that the next generation will feature an increasingly wired, multiplayer framework with loads of potential for monetization from an audience more captive than ever before. Our immediate take away is that Activision at least appears not to expect the next generation to be earth-shattering in terms of customer behavior.

But just never you mind, because the publisher declined to talk about plans for the next console generation in any detail, though it hinted at more information coming at E3 2013. However, Activision had no problems displaying a mostly bullish outlook on the coming year, revealing it has done exceedingly well, despite some setbacks.

Highlights:

  • Activision’s quarterly earnings were $1.3 billion.
  • Skylanders remains a huge franchise, as does Call of Duty.
  • World of Warcraft lost 1.3 million paid subscribers, mostly in Asia, during the first quarter of Calendar year 2013, but retains 8.3 million.
  • StarCraft 2: Heart of the Swarm was the No. 1 PC game during the quarter.
  • Destiny is expected to launch next year.
  • Blizzard’s forthcoming card game Hearthstone is expected to go into beta testing this summer.

Despite Setbacks, Earning Money Hand Over Fist

First up, spoiler alert: Activision Blizzard is still huge, remaining the single largest publisher in North America and Europe combined. During the first quarter of 2013, its GAAP1 net revenues were approximately $1.3 billion, putting them in a virtual tie with Electronic Arts during the same period. Non-GAAP revenue for the period was $804 million, compared to $587 million during the same period in 2012 (thanks to the Heart of the Swarm — the publisher had no comparable launch during the same period last year), and well in excess of Activision Blizzard’s prior projection of $690 million.

Helping the company’s fortunes is the success of its flagship franchises. Skylanders remains hotter than the sun, with combined sales Skylanders Giants and associated toys and accessories making it leading North American gaming franchise. Call of Duty is no slouch either, comfortably occupying the No. 2 slot in North America and Europe combined, thanks to the success of Black Ops 2, which has outpaced Modern Warfare 3 in all available metrics in Q1, including sales during the same period in 2012, and total monthly active users. StarCraft 2: Heart of the Swarm was also a major success, selling a brisk 1.2 million copies during its first two days on the market alone, and going on to become the best-selling PC game during the quarter.

Also helping Activision Blizzard is the almost absurdly low corporate tax rate it enjoys. The company disclosed that its GAAP tax rate was 23%, but thanks to an R&D tax credit extension secured earlier this year, its effective (non-GAAP) tax rate 21%. Add to this the facts that the publisher ended the quarter debt-free and that Blizzcon 2013 tickets sold out “in seconds,” and you have a very successful start to the year.

World of Warcraft: Suffering, But Still Strong

World of Warcraft is suffering from the general decline in MMO subscriptions along with everyone else, but it remains a monster franchise. During the quarter, the game lost 1.3 million subscribers, mostly in Asia, where there is substantially more competition in the MMO space than in the western market. That said, due to what was called “a decrease in ‘casual’ playing,” the west also saw a slight drop in subscribers. Activision also expects to see further decline in membership before year’s end.

However, WoW retains 8.3 million subscribers and remains by far the No. 1 subscriber-based MMORPG.

“We believe in the long term value of this franchise,” Kotick said during the call, “and will continue to commit substantial resources to World of Warcraft.” This includes a new content update due later this month, and a focus on making it easier for returning players to come back. Overall, it was said during the call that Activision Blizzard will “remain laser-focused on delivering the things we know our consumers care about.”

The Digital Space

Like Electronic Arts, Activision Blizzard is enjoying increasing success in the digital market, with digital revenues (including subscriptions and memberships, licensing royalties, value-added services, DLC and mobile) increased more than 100 percent over the same period last year. No doubt boosted by healthy sales of digital copies of Heart of the Swarm and Call of Duty: Black Ops 2 DLC, on a GAAP basis, they account for 28% of the company’s total revenues. More impressive, on a non-GAAP basis, that fraction climbs steeply, to 53 percent. In all, GAAP digital net revenues were $377 million, while non-GAAP digital revenues were $429 million.

The Upcoming Year

While Activision Blizzard was cagey about its plans for the rest of the year, it did confirm several points of interest. Among them:

  • Call of Duty: Ghosts is once again confirmed for its launch on Nov. 5. It will benefit from “one of the largest sales and marketing plans in the franchise’s history,” and is powered by a new engine.
  • Diablo 3 for Playstation 3 is due “later this year.” A Playstatoin 4 version was also once again confirmed. It was stated that the game’s controls and interface have been modified to suit consoles, and that it will have local and online multiplayer capability.
  • Blizzard’s Hearthstone: Heroes of Warcraft digital card game is expected to go into public beta for Mac and PC this summer, and will launch before the end of the year.
  • Destiny will launch in 2014.
  • “Several” titles have been pushed to the latter half of 2013, and as a result Activision Blizzard expects a far more competitive holiday quarter.
  • Blizzard was confirmed to be developing an “unannounced MMO.” This probably referred to the “Titan” project, but no specifics were given during the call.

Activision Blizzard representatives repeatedly talked about the challenges coming in 2013, due not only to a changing marketplace but to the upcoming console transition, and to a holiday season that will see the launch of a number of strong competing games. Despite this, the publisher has adjusted 2013 earnings forecast upward slightly, and now expects to make $4.3 billion by year’s end.

Owing to that positive news, Activision Blizzard stock jumped slightly after the call, rising 2.14 percent to $15.26 per share. That said, investors might be comparing it less than favorably to its main rival. Electronic Arts’ price per share has increased nearly $3 since yesterday’s earnings call, closing today at $21.56.

Read more of Ross Lincoln’s work here, and follow him and Game Front on Twitter:@rossalincoln and @gamefrontcom.

1) A note: GAAP is short for Generally Accepted Accounting Principles. These are a standard framework for accounting set in coordination with the SEC and numerous private organizations. Non-GAAP estimates are often provided along with GAAP estimates because the company feels they more accurately reflect the true state of the company’s finances.

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