As a shareholder of Activision Blizzard (ATVI), it is always nice to see an earnings beat. However, it was surprising that shares actually traded down over 1% in the after hours session. Activision beat revenue estimates, earnings per share estimates, and raised full year guidance. With shares trading down, could investors have an opportunity to buy into Activision Blizzard before shares finally break out?
Since March 2009, shares of Activision have traded below $10 and $14 with only several daily ranges breaking the $14 mark. Back in 2008, shares hit $18 at the height of World of Warcraft, Guitar Hero, and the growing interest in Call of Duty. Shares now trade under $12 and are down over 2% on the calendar year.
Here is a look at second quarter earnings for Activision Blizzard:
|Revenue||Earnings Per Share|
|Quarter 2 Non GAAP 2012||$1.1 billion||$0.20|
|Quarter 2 GAAP 2012||$1.1 billion||$0.16|
|Quarter 2 Non GAAP 2011||$699 million||$0.10|
|Analysts Estimates (Yahoo)||$835 million||$0.12|
As you can see Activision beat analyst targets by $0.08 and came in ahead of last year's earnings per share figure by 100%. The strong revenue and earnings was led by Skylanders, Diablo III, World of Warcraft, and Call of Duty: Modern Warfare 3. The company reported record second quarter revenue, non-GAAP earnings per share, and operating profits. Activision also had the top three selling games during the first half of fiscal 2012 (Skylanders, Diablo 3, Call of Duty: Modern Warfare 3 respectively).
The second half of Activision's fiscal year is particularly strong with key releases including:
· September 25 - World of Warcraft: Mists of Pandaria
· October 19 - Skylanders Giants
· November 13 - Call of Duty: Black Ops II
Skylanders is shaping up to be the next $1 billion video game franchise for Activision. The company remains bullish on the game and has projected the next Skylanders game in October to be set with a larger launch. With a built in fan base and the game's characters selling out at stores, Skylanders Giants will have a 50% larger retail presence. I wrote an article discussing how Skylanders is becoming the next big franchise for the company. The new Skylanders Giants game comes complete with 8 Giants, 8 Light Core, and 8 new Skylanders figures. There are also 24 updated characters associated with the new game. The first Skylanders game saw sales around 2 million for Nintendo Wii, and 0.5 million for both XBOX 360 and Playstation 3. The toys associated with the game are what make the franchise so valuable and has kept interest in the game.
Call of Duty: Black Ops II has already seen significant pre-sales. The game has sold 430,000 copies for XBOX 360 and 249,000 for the Playstation 3, according to Video Game Chartz. The new game features brand new multiplayer options and has also changed the popular Zombies game mode. Call of Duty Elite continues to be a huge revenue driver for Activision as it collects monthly revenue. At the end of the second quarter, there were 12 million members of Call of Duty Elite, with 2.3 million being premium paying customers. Back in January, only 1.5 million of the 7 million Elite members were paying subscribers. The first Black Ops game was the best selling in the franchise prior to Modern Warfare 3. The game, released in 2010, saw sales of 13.4 million (XBOX 360), and 11.4 million (Playstation 3) copies. Modern Warfare 3, the most recent Call of Duty game, sold 14.3 million (XBOX 360), and 12.1 million (Playstation 3) copies. The new Black Ops II game should see sales between 14 and 15 million for XBOX 360 and around 12 million for Playstation 3.
Other key developments in Activision Blizzard's pipeline include:
· Blizzard All-Stars
· Unannounced MMO game (Titan)
· New game from Bungie studio
· Walking Dead video game based on hit television show and comic book series (See previous article here)
Another big event for Activision Blizzard is a new partnership with Tencent to bring Call of Duty to the Chinese market. The game will target the $8 billion Chinese online gaming market. The game will be free to play and will rely on micro-transactions to generate revenue. No details have been released about the financial split between Activision and Tencent. The game will go under beta testing once the Chinese government has approved the deal.
Activision is guiding for earnings per share of $0.07 in the company's third quarter. Revenue is expected to be $690 million. Analysts expect earnings per share of $0.12 on $728 million in revenue. For fiscal 2012, analysts expect Activision Blizzard to earn $0.98 on $4.58 billion in revenue. Activision's revised earnings per share now call for earnings per share of $0.99 on $4.63 billion in yearly sales. Fiscal 2013 has analysts predicting full year earnings of $1.08 on $4.7 billion in revenue.
The only hiccup here is Vivendi deciding what to do with their 61% ownership stake in the company. Vivendi made it pretty clear publicly that it was trying to find suitors for its large Activision stake. The huge ownership was acquired when Activision and Blizzard merged together, with Blizzard being a former Vivendi component. News of a sale sent Activision shares down, as investors and analysts worried that it would create a lower value with such a large portion of shares being sold.
Finding a buyer for a majority ownership in a video game for $8.1 billion is no easy task. Vivendi has also said that if it can't find a buyer, it will offload its shares on the common markets. That second option may be the worse case scenario for shareholders. Shares will likely be stalled if a huge chunk of shares hit the open market, as investors will be able to buy in at a lower price, as Vivendi cashes out. News is out today from the Financial Times that Vivendi is now backing away from a sale, after not receiving any serious bids. Were Activision Blizzard's second quarter earnings enough to make Vivendi hold onto shares a bit longer? Perhaps Vivendi is waiting for Activision's second half of games to play out to create a higher value for their ownership stake. Vivendi could also be smart to wait for announcements on the new MMO game or the new Bungie game that will likely send shares higher.
Activision Blizzard shares sit in a good position for new investors to take a look at entering the video game market. With shares under $11.66, a simple move to $14 would generate a return of 20%. If shares can hit the $14 mark and gain some momentum, shareholders could be in for a fun ride with the company's pipeline of potential hits. I have put share price targets on Activision in the past, but choose not to here. I think with the earnings guidance and loaded second half, shares should break out. I think you will see shares hit $14, have a slight drop and then stay above $14 for quite some time.
Disclosure: I am long ATVI.