Call of Duty, Skylanders lead Activision Blizzard to beat analysts’ expectations

Activision Blizzard beat expectations for the first-fiscal-quarter earnings today. The results, coming two days after Electronic Arts posted better-than-expected earnings, could be interpreted as good news for the larger game industry.

Activision Blizzard is the largest independent publisher of traditional video games, and its results are a bellwether for the PC and console game business. Of course, how the stock fares today will depend on how investors interpret the company’s signals about its future earnings. On that front, the company guided estimates slightly upward for 2012. It expects non-GAAP revenues for the current year to be $4.5 billion and earnings per share to be 95 cents, compared to previous estimates of 94 cents to 97 cents a share.

Activision Blizzard will, of course, want to show that its juggernaut money-maker, World of Warcraft, has kept its status as king of the hill in the massively multiplayer online (MMO) space, while also proving that the hit Call of Duty franchise has financial legs with Modern Warfare 3, Black Ops II, and the new Elite multiplayer service.

Analysts expected to see non-GAAP revenues for the quarter of $555 million and an earnings per share of 4 cents. The company actually did slightly better: On a non-GAAP basis, Activision Blizzard reported first fiscal quarter revenue of $587 million and net income of 6 cents a share.

In a conference call, Activision Blizzard chief executive Bobby Kotick said that “building a billion dollar business” with new game franchises requires a huge up-front investment. Looking beyond 2012, he said he sees big “mega franchises” coming, with a new massively multiplayer online game from Blizzard and another project from Bungie.

Kotick said preorders for Diablo III, which debuts May 15 after nine years of development, have been the biggest in history. In a statement, Kotick said, “Our better-than-expected first-quarter performance was driven by global consumer demand for Activision Publishing’s Call of Duty: Modern Warfare 3, and Skylanders Spyro’s Adventures, as well as Blizzard Entertainment’s World of Warcraft which remains the No. 1 subscription-based MMORPG in the world.”

A year ago, the company reported net income of $156 million, or 13 cents a share, on revenue of $755 million. Sales were driven by titles such as Call of Duty: Modern Warfare 3 (pictured above), which was the fastest-selling video game in history. Analysts focus more on non-GAAP revenue. In the second fiscal quarter, Activision expects revenue of $805 million and EPS of 10 cents a share.

During the first quarter, Activision Blizzard published Prototype 2. During the second quarter, the company is publishing Battleship on May 15 and The Amazing Spider-Man on June 26.

Since the launch of Call of Duty: Modern Warfare 3 in November, gamers have logged more than 1.6 billion hours playing the game. Game sessions have topped 2 billion, up 19 percent from Call of Duty: Black Ops a year earlier. The company said its social network for shooter fans, Call of Duty Elite, has reached more than 2 million premium members, while the number of registered users, which includes free members, is more than 10 million.

Beyond solid Call of Duty sales, Activision Blizzard said it sold more than 30 million Skylanders hybrid toys to date since the launch last fall. Kotick said that was more than the number of Star Wars toys sold in the first quarter. Sales of Skylanders were above $100 million in the quarter, above the 2011 revenues for Rovio, publisher of Angry Birds.

Analyst Michael Pachter of Wedbush Securities has worried about an increasing reliance on Call of Duty and World of Warcraft, noting that the Activision arm continues to commit more and more financial resources to the military first-person-shooter (FPS) franchise, while Blizzard focuses more on the upcoming Diablo III, Starcraft II expansions, and its successful MMO. In addition, while the futuristic Black Ops II game should help the Call of Duty franchise maintain its market share, it could well succumb to FPS fatigue as the market continues to become saturated with similar titles.

Additional success could come from the multiple releases by Blizzard, if Call of Duty packaged goods do better than expected at retail, and if the upcoming Skylanders expansion, Giants, outperforms the original game. Eric Hirshberg, president of Activision Publishing, said on the call that more than 850,000 multiplayer clans have been formed.

Traditionally, Activision Blizzard has maintained a strategy of culling its titles ruthlessly to focus its resources on what works. While it maintains a leadership position in online console games, it hasn’t experimented as much as EA in the realm of social, mobile, and free-to-play online games. EA hasn’t had huge successes in those areas, but it is generating $1.2 billion a year in revenues and it has spent a lot of time learning lessons.

Those new markets represent the big expansion opportunities in the games business, while the core console market — where Activision Blizzard focuses most — has been shrinking. How Activision Blizzard and EA manage these industry-wide transitions will determine who comes out on top in the long run.

Activision Blizzard can, and has, argued that it has the most important digital gaming business in World of Warcraft. But the online game has shown weakness in recent quarters, dropping to 10.2 million paying subscribers in the fourth calendar quarter compared to past highs of around 12 million. World of Warcraft numbers were flat at 10.2 million in the first qurater.

Star Wars: The Old Republic may has gained 1.3 million subscribers in the past four months. But other online game worlds such as Trion’s Rift (which is soon bound for China) and En Masse Entertainment’s Tera are also likely to peck away at the big game.

Dennis Durkin, a former Microsoft executive, has joined Activision Blizzard as chief financial officer, replacing Thomas Tippl, who was serving both as chief operating officer and CFO. Tippl remains COO.

Call of Duty: Black Ops II, which is set in the near future with weapons such as drones and robots, is “hands-down our most ambitious Call of Duty game to date” and it pushes the edge on a number of fronts, Hirshberg said. The game debuts on Nov. 13. Early consumer response has been big, and the initial trailer for the game was viewed by 82 percent more people than those who viewed the trailer for Modern Warfare 3.

“We believe that Black Ops II could be the best Call of Duty we’ve ever made,” Hirshberg said. “It’s the biggest step for the franchise since leaving World War II and entering the modern era.”

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