Shares of Activision Blizzard (ATVI) were up 2% in after hours after beating analysts' expectations for third quarter earnings. Shares traded up to $11.36 in the period after the market closed. Activision's earning beat also prompted a revised outlook for the fourth quarter and fiscal year, which had investors getting behind the video game giant.
Third Quarter Earnings
Analysts on Yahoo Finance estimated Activision would earn $0.08 per share from $709.8 million. In the third quarter, Activision reported revenue of $751 million, an increase of 20% from last year. Of the revenue totals, $427 million was from digital. Earnings per share almost doubled analysts' expectations as they hit $0.15. Activision has now posted record nine month revenue, operating income, and earnings per share. The company remains on track for their best year ever. The company had no debt, as of September 30th, and over $2.85 per share in cash. Activision is powered by its four blockbuster franchises listed below.
"Diablo III" was one of the biggest video game launches of all time. The highly anticipated sequel is the best selling game year to date in North America and Europe. The game has sold over 10 million copies in digital and retail formats. Blizzard will launch an expansion, which is currently in development, for the game to bring in additional revenue for the company. I recommended buying shares of Activision previously due to the hype surrounding Diablo III.
Call of Duty
Wednesday's earnings release comes six days before the biggest launch of the year for Activision. "Call of Duty: Black Ops II" comes out on November 13th and will be a blockbuster. According the company, pre-orders of Black Ops II are ahead of where "Call of Duty: Modern Warfare 3" was at this point. Modern Warfare 3 became the highest grossing video game launch of all time. According to VGChartz.com, Black Ops II has the following pre-orders as of November 3rd:
· Black Ops II (XBOX360): 1,797,016
· Black Ops II (PS3): 1,016,330
The game is also in the bestsellers list on Amazon (as of November 7th):
· #2 Black Ops II (XBOX360)
· #3 Black Ops II (PS3)
· #10 Black Ops II Hardened Edition (XBOX360)
One of the items reported today by the company was their decision to make Call of Duty Elite a free service. After charging a premium for certain Elite aspects, the company has decided that the 2.4 million paying members will now get it for free in an attempt to increase interaction with the new Black Ops II game.
Skylanders is becoming a huge hit for Activision. The company combined video games and toys in a unique way to capture the kids' audience. Skylanders has passed $500 million in lifetime sales and will become the next billion dollar franchise for Activision soon. I highlighted the strength of the brand in a previous article.
On October 17th, Activision launched "Skylanders Giants". The game once again features toys along with a new video game. The new toys are in video game stores and toy stores and have been selling well according to the company. Activision entered into over 100 licensing partnerships for the Skylanders brand. Along with the new video game release, sales of the original Skylanders game have picked up heading into the holidays, and several toy figures appear on the top 100 video game list on Amazon.com.
World of Warcraft/Starcraft
Even though World of Warcraft is the blockbuster franchise, I listed it together with Starcraft. World of Warcraft had a large impact on third quarter sales with the release of the expansion "Mists of Pandaria". The WOW expansion sold 2.7 million copies in the game's first week. Blizzard ended the third quarter with over 10 million paying subscribers of World of Warcraft.
"Starcraft II: Wings of Liberty" has sold over six million copies in its lifetime. The game will now have an expansion pack released in the first half of 2013. The game is popular overseas and is part of many video game competitions held annually.
Fourth Quarter and Fiscal Year
In the fourth quarter, analysts' previous estimates called for $0.67 in earnings per share from $2.34 billion in revenue. Those estimates could be raised with the company's updated guidance. Analysts believe the company will report $1.01 in earnings per share and post revenue of $4.68 billion for the fiscal year.
Activision raised their guidance for the fourth quarter. In the December quarter, the company now expects to post earnings per share of $0.70. For the full year, Activision guided for earnings per share of $1.10. The company thinks it will report $4.8 billion in revenue.
Shares of Activision have traded between $10.73 and $13.20 over the last fifty two weeks. Shares appear headed for $12 in Thursday's trading session, as investors get word of the updated outlook. In an earlier article, I thought shares could break through the $14 barrier. I still believe shares can hit $14 based on updated Call of Duty numbers, increases in Skylanders games and toys over the holiday, and the new expansions hitting Diablo III and Starcraft.
After subtracting out the cash level of $2.85 per share, the share price would be $8.51. With the company calling for $1.10 in earnings per share on the fiscal year, shares now trade at 7.7 times expected earnings. This seems like a bargain to me and is part of the reason I still hold shares of the video game giant. Even if investors began to recognize a price to earnings of 10 after subtracting cash, shares would hit a new fifty two week high of $13.85.
Disclosure: I am long ATVI.