Activision Blizzard on Shaky Ground After Strong Third Quarter

After a traumatic second quarter, Activision Blizzard (NASDAQ: ATVI ) has reported a relatively strong third quarter for their fiscal 2010, with healthy year over year growth in profits and revenue. The impressive quarterly results came thanks to strong international sales for their Microsoft (NASDAQ: MSFT ) Windows and Apple (NASDAQ: AAPL ) Mac OS X strategy game Starcraft II: Wings of Liberty , continuing growth for the six year old massively multiplayer online role-playing game World of Warcraft , and ongoing sales of military shooter Call of Duty: Modern Warfare 2 . Total revenue for the quarter ending in September came to $745 million, a +5.6% increase over the same period in 2009, and $145 million more than Activision’s own expectations for the quarter. Activision also brought in impressive net profits of $51 million, compared to just $15 million in 2009. The video game publisher’s 2010 totals, $651 million in profits and $3.02 billion going into the fourth quarter. With unexpectedly strong sales over the summer months and the company’s two biggest releases of the year, Call of Duty: Black Ops and World of Warcraft: Cataclysm , yet to release, Activision has adjusted its investor guidance for both their fourth quarter and their total fiscal 2010 results. ATVI now expects revenues of $4.28 billion and earnings per diluted share of $0.51, up from $4.18 billion and $0.49 in EPDS. Expectations for the fourth quarter were raised only slightly. ATVI predicts revenues of $4.45 billion and $0.74 in EPDS, compared to the $4.4 in revenue and $0.72 in EPDS they predicted after their disappointing second quarter. Unfortunately for shareholders, Activision’s fourth quarter projections came in below those of industry analysts, leading to a drop in share price this morning. ATVI is now trading at around $11.20 per share, down -3% from yesterday. Activision Blizzard is in a tenuous spot. Call of Duty: Black Ops will lead their console business in the holiday season, but it’s unlikely that the title will match the performance of last year’s sales-record breaking Call of Duty: Modern Warfare 2 . Modern Warfare 2 , a game that has moved more than 21 million units since its release in November 2009, continues to see strong sales. With a lower price point than the new Black Ops and a surge in new Xbox 360 owners, it’s possible that Modern Warfare 2 will cannibalize sales of Black Ops after that game releases next Tuesday. Activision is also releasing two console games based on the James Bond film franchise this month, an original title featuring current Bond Daniel Craig titles James Bond 007: Bloodstone and a remake of video game classic Goldeneye 007 for Nintendo’s (PINK: NTDOY) Wii. With no film to tie these titles to though, hyped products like Microsoft’s Kinect motion controller and Activision’s own Call of Duty franchise will likely overshadow both Bond games. The publisher’s strongest performer this holiday season will likely be the latest expansion for World of Warcraft , WoW: Cataclysm . Blizzard president Mike Morhaime told investors during ATVI’s earnings conference call that World of Warcraft has already seen increased sales over the previous year before the expansion has even released. The release of the Wrath of the Lich King expansion in China this year helped bring the game’s monthly subscriber base up to 12 million players. Blizzard will also be launching an in-game store for Starcraft II called the Map Marketplace, which Morhaime described as the “App Store for Starcraft .” The strength of World of Warcraft and Call of Duty should carry ATVI to their projected FY 2010 and fourth quarter results, but the company’s fate in fiscal year 2011 is a significant question mark. The near complete erosion of the one-time billion-dollar Guitar Hero franchise, the devaluation of the Tony Hawk series, and the loss of key staff from Modern Warfare developer Infinity Ward should all continue to take their toll on the publisher. Activision also has yet to announce software for new and upcoming hardware like the Kinect and Nintendo 3DS. Investors should definitely hold off on buying ATVI, and those shareholders who have held on through the lean year should hold on until early 2011 and sell when share price spikes after the holiday. As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
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