Looking Into Activision Blizzard's "Biggest Second Half" Ever

| About: Activision Blizzard, (ATVI)
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ATVI is looking to turn Q2 beat into strong Q3 and Q4.

Destiny beta earns "positive" feedback, some kinks, ahead of Sept. 9th launch.

World of Warcraft may see subscriber boost thanks to Warlords of Draenor expansion.

For the third quarter in a row, Activision Blizzard (NASDAQ:ATVI) beat on earnings, posting $658 million in revenue for Q2 2014 and EPS of $0.06, beating street estimates. This was spurred by an uptick in digital sales and in-game purchases, accounting for 73% of sales for the quarter. This compensated for an expected seasonal dip in active subscribers for World of Warcraft as well as the decline of in-store game purchases with the normalization of the market post-console release.

However, Activision's earnings call was more focused on the future, with H2 being heralded as the "biggest second half in company history", thanks to expected releases of Destiny and World of Warcraft: Warlords of Draenor leading the way, which is giving investors hope for higher share prices going into the big holiday shopping season.

World of Warcraft boost expected?

Since hitting a peak in subscribers in 2010, World of Warcraft has steadily declined in active subscribers, dropping to 6.8 million active users this past quarter, the lowest since Q3 2006. Until early 2014, the decline in subscriptions was seen as a hindrance to Activision's stock performance given it was the company's major revenue spinner. Yet 4Q 2013 earnings saw the first boost in subscribers in nearly a year (and its last quarterly boost since), sending the stock price up 12% in the process. This demonstrates that while Activision has diversified its holdings to include popular (and growing) franchises like Call of Duty and Skylanders, investors will always be mindful of Blizzard Entertainment's prized but possibly over-the-hill franchise when evaluating Activision's quarterly earnings.

Despite the subscription drop-off, there was still good news for Warcraft: Character upgrades purchased by active players with real-world money as well as pre-purchases of the upcoming Warlords of Draenor expansion pack, set to be released for Q4. According to company sources, ATVI expected to see subscription drop offs during the warmer months as a game approaches the "end of the life cycle" before a new expansion is released, similar to the 900,000 subscriber boost between Q2 and Q3 in 2012 thanks to Mists of Pandaria. While this hasn't been the recent history of Warcraft (the last boost in subscribers was only 200,000 between Q3 and Q4 2013), beta testing has already begun for Draenor and the response has been positive, though any realized subscription gains may not occur until Q4 earnings come out in winter 2015.

A new Destiny for Activision?

The big focus of the second half for Activision though revolves around the September 9th launch of Destiny, which has been lauded as Activision's "next billion dollar franchise" for the better part of a year now. This quarter was important for the game though, because the recent beta figures could be released. So far, 4.6 million people signed up for the beta, showing that the huge up-selling of Bungie's first major game since the Halo franchise was not in vain.

However, despite the company reporting "overwhelmingly positive" feedback from players, there have been concerns regarding the open world design for the game. Touted as the most open a game will get in terms of terrain and player interaction, players will be expecting a high standard from a big-time collaboration like Destiny. While the reception may be reported as positive, it might not be enough on its own to get a billion dollars. Like Call of Duty and Bungie's Halo, Destiny has to give players an experience that can't easily be duplicated by competitors and develop a loyal franchise following. Call of Duty and Halo did it with inventive weapons, amazing storytelling, and revolutionary online and multi-player experiences. Destiny's claim to fame will be a big open world for players to roam and do missions to allow for long game-play, like Ubisoft's Assassin's Creed franchise, so it has to be unique and first-rate.

Final thoughts

Activision has been on a tear now for three straight quarters, and shareholders have been rewarded by both Call of Duty's impressive launch on the new consoles and the promise of great games to come for the 2014 holiday shopping season. Yet Activision pushed the boat out here with the promise of a huge second half, and the hype concerning Destiny will soon be tested. Activision has blown gamers and investors out of the water before, but will they be able to when expectations are high?

Disclosure: The author is long ATVI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.