Shares of video game publisher Activision Blizzard (ATVI) slipped last week, despite reporter strong first quarter earnings that beat analyst estimates on both the top and bottom lines. For its first quarter, Activision earned an adjusted $0.17 per share, up from $0.06 in the prior year quarter. This topped Wall Street estimates by 6 cents per share. Revenue also grew from $587 million to $804 million, beating the consensus estimate by $100 million.
The company, which owns the Call of Duty, World of Warcraft, Starcraft and Diablo franchises, also announced its second installment of real-time strategy game Starcraft II, Heart of the Swarm, was the best selling PC game during the quarter.
Yet a single figure spooked investors. World of Warcraft, its flagship massive multiplayer online role-playing game, reported a quarterly loss of 1.3 million users, hitting a 6-year low of 8.3 million users. World of Warcraft is considered Activision’s cash cow, since it has operated on a paid subscription model since its initial release in 2004. That single game accounts for nearly a third of Activision’s annual revenue.
In the past, every time World of Warcraft’s user base has declined, Activision has released a new expansion to revive sales. Yet that tactic has faced diminishing returns, and its newest expansion set, Mists of Pandaria, has failed to attract new users. Increased competition from newer free-to-play games, such as Riot Games’ League of Legends, has stolen users from both World of Warcraft and Starcraft, both of which are tremendously popular in Asia. In response, Activision recently made World of Warcraft free-to-play up to Level 20 in an attempt to attract new users.
To add insult to injury, Activision offered full-year guidance for $0.80 to $0.82 per share, lower than the consensus estimate of $0.85. CEO Bobby Kotick warned that the company would face a tough year due to uncertainties regarding the global economy as well as gamers waiting for the upcoming eighth generation of consoles, which are due out later this year.
The eighth console generation, which started with Nintendo’s dismal launch of its Wii U, is expected to pick up later this year when Microsoft (MSFT) and Sony (SNE) respectively release the new XBOX and PS4 near the holiday season. Shifts in the release schedules at competitors Electronic Arts (EA) and Take-Two (TTWO) are also causes for concern for Activision.
Looking ahead, Activision is expected to release a new installment of its best-selling first-person shooter franchise, Call of Duty, during the 2013 holiday season. Call of Duty is the company’s most profitable franchise, accounting for nearly half of its annual EBITDA. Activision is also expected to release a new franchise, Destiny, with Bungie Studios, the makers of Halo, later this year.
Activision currently trades at 14.66 times forward earnings with a 5-year PEG ratio of 2.26. The stock also pays an annual dividend of $0.19 per share, a 1.27% yield at current prices.
Other News About ATVI
Activision Blizzard: Expectations Raised, Shares Down
Activision plunges on World of Warcraft subscriber loss.
Activision Sees Headwinds After First-Quarter Tops Views
Activision sees challenges ahead.
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