Activision Blizzard, Inc. (NASDAQ:ATVI) is an interactive gaming publisher. Its operations are spread across the US, Europe and Asia Pacific and 91% of its net revenues are attributed to the developed markets of the US and Europe. The following discussion is specific to the company's performance and the changes occurring in the gaming industry across the globe.
The full year revenue base of the company has plunged by 5.62% compared to the revenue generated in 2012. The following chart represents the revenue growth of the company since 2008.
Despite a tough year in 2013, the company managed to beat analysts' estimates by 8.20% during the previous quarter which led to a price hike following the earnings release. However, the charm of the higher than expected earnings began to wear off in a week leading to a downward trend in price. This could be partially due to the lower than expected 2014 earnings guidance provided by the company. For the first quarter of 2014, Activision announced expected earnings of $675 million below a consensus estimate of $687.4 million. Furthermore, the company hopes to earn per share earnings of 10 cents compared to the analysts' estimate of 11 cents. I believe that the lower earnings expectation for the first quarter of 2014 is justifiable since the company is expanding its operations in the Digital Online segment that requires considerable product development costs. Activision is critical about bringing about quality games to the market lest the gamers should get disappointed. The company expects to market its products more heavily as well thus increasing its marketing expenses too.
Besides an increased level of competition and a lower top line 2013 was not all that bad. The company bought back a significant amount of its shares (429 million) from Vivendi and that strengthened the overall controlling position of the company. The share buyback put Activision in a controlling position thus enabling the management of the company to practice tighter quality control checks. The share buyback is great news for the remaining investors since per share earnings will receive a significant boost. In addition to the share buyback the company increased per share dividends as well thus further benefiting investors. The historical trends of share buybacks and dividends per share are shown in the graphs below.
Source: Company Presentation
Dissecting Activision Blizzard
The company generates its revenues mainly from digital online subscriptions, PC games, mobile games, and gaming consoles. The pie chart underneath indicates the revenue attributed to each to these segments as reported in the fourth quarter of 2013.
Source: Earnings Release Q4 (Does not equal 100% due to rounding error)
The company distributes its games to consumers through two channels: retail channel (for physical deliveries) and digital online channel. The retail channels accounts for 67% of the total game distributions as of now while 37% of the total distributions are attributed to the digital online channels. However, this distribution is expected to tilt heavily towards digital channels over the coming years.
In terms of geography, Europe and the US combined make up 91% of the total revenue base of the company with the US accounting for approximately 50% of the total revenues generated. Over the past four quarters, the US share in revenues has gradually declined from 51% in the first quarter to 49% in the last quarter of 2013. Europe has shown fluctuating results during the same period, presently standing at 42%. To cushion the declining revenue base, the company is currently making an effort to penetrate the Asian gaming market that which is presently in a high growth phase.
With regards to market share holdings, Activision is leading the Xbox subscriptions market but the company lags behind Electronics Art Inc. (NASDAQ:EA) in most of the market segments, particularly PC, PlayStation, and mobile platforms. The following table shows that market share captured by Activision and Electronics Art in each of the operating segments.
In the Digital Online segment, the credit for four of the top ten played games goes to Activision's Call of Duty through Microsoft's (NASDAQ:MSFT) XBOX Live that is an online gaming network for Xbox consoles. Call of Duty: Black Ops II has been one of the most popular games among gamers and the gaming hours recorded for it exceeded the 4 billion hour mark. Activision is expected to launch more downloadable content (NYSE:DLC) for Call of Duty: Ghosts in the next few months as a sequential move in response to the successful launch of the Onslaught DLC pack in January.
In spite of securing the best game spot for the past few years, the future looks rather challenging for the company in terms of rising competition, particularly in the developed markets of the US and Europe. The most threatening competitor for Activision's COD is Electronics'Battlefield. NPD ranked Battlefield as the second most popular game in December beating COD by two places. Further segregating the game sales, COD accounted for 60% of the total first shooter games whereas Battlefieldachieved 20% sales. If Battlefield continues to magnetize COD's gamers its subscribers will soon approach and possibly surpass COD subscribers.
World of Warcraft is losing popularity as well owing to competitive 'free to play' online MMORPGs (Massively Multiplayer Online Role-Playing Games). The game has lost about 4.2 million subscribers since 2010. However, QoQ subscriber base for the game is increasing over the recent history.
Walt Disney (NYSE:DIS) is all set to attack Activision's kid gamers through its Disney Infinity, which is in direct competition to Activision's Skylanders SWAP Force. The Disney game was ranked on the tenth place by NPD in 2013. For the month of December, however, Skylanders secured the 10th place.
The company's 2014 plans include a Diablo III expansion, World of Warcraft expansion, Destiny's Bungie launch in addition to previously mentioned DLC support launches. Bungie is expected to be launched towards the end of the third quarter of 2014. The company has high hopes for Destiny and believes it could become a billion dollar franchise in the upcoming future.
Apart from new game launches the company plans to further penetrate the Asia Pacific market by launching COD in China. The penetration would diversify the company's revenue base, thus strengthening the overall competitive position of the company.The recent drop in revenues owing to maturing markets in the developed countries is expected to be recovered and in fact yield growing profits due to the penetration into the high growth gaming industry.Breaking down the industry, I identified that console gaming makes up just 0.11% of the total gaming industry in China; China's tight regulations kept the major gaming consoles from penetrating the market up until now. However, the country has recently become more open to international gaming companies, allowing their consoles to be sold to the Chinese gaming population. This means tremendous growth for console game publishers given that the country's gaming revenue growth is skyrocketing. As of 2013, China's gaming industry indicated a 38% YoY growth. The industry is projected to yield an even higher growth next year. Please note that although a number of domestic and foreign companies have made investments in the market the demand for games has not reached maturity up until now. Domestic competition might hamper growth for foreign companies to some extent.
The future for the company looks bright, given that the company has increased its R&D investments and is bringing forth new games to the market. In addition to that, Activision is instigating renewed efforts to enhance the quality of its previously launched games to win back subscribers lost to rivals. The company's entrance into the Chinese markets is expected to boost the future revenue base for the company. Lastly, investor profits will significantly enhance following the dividend increases and share buybacks. The company is all set for future growth and yielding increased level of returns to investors. It is a great medium term buy but not a long term investment candidate in my opinion. The rationale for my investment decision is that the company has strong rivals to fight who are not going to sit still while Activision penetrates the Asian markets. Plus, the life cycle of technology stocks is very rapid which makes these stocks very volatile in nature.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.