Activision blows away first quarter earnings targets, raises estimates for year

Activision Blizzard reported better-than-expected earnings today for its first quarter ended March 31.

Activision Blizzard’s business is driven by major franchises, including Call of Duty, World of Warcraft, Skylanders [above], and PC games such as StarCraft II: Heart of the Swarm. These have helped make the company into the largest independent publisher of video games, and it has been making more money than rivals such as Electronic Arts.

But gaming’s No. 1 publisher warned that risks in the second half of 2013 are “more challenging than our earlier view.” But it also raised estimates for its financial performance. The company now expects revenues of $4.25 billion on a non-GAAP (generally accepted accounting practice) basis in 2013, compared to its earlier outlook of $4.175 billion. It also expects earnings per share of 82 cents, compared to 80 cents earlier.

The Santa Monica, Calif.-based company previously warned that 2013 would be a tough year, partly because it will have a major transition to new consoles for Microsoft and Sony. On a non-GAAP basis, earnings per share were 17 cents, compared with 6 cents a share a year earlier. Revenues were $804 million, compared with $587 million a year earlier. For the first quarter, analysts expected to see revenues of $704 million and earnings per share of 11 cents.

In after-hours trading, Activision Blizzard’s stock price fell 5 percent to $14.49 a share. Before that, the stock closed today at $15.26 a share, up 2.14 percent. GAAP revenues for the quarter were $1.32 billion, up from $1.17 billion a year ago and better than the expected $1.16 billion. GAAP earnings per share were 40 cents, up from 33 cents a year ago and the expected 29 cents a share

Activision Blizzard chief executive Bobby Kotick said in a statement, “Our first-quarter performance was driven by continued consumer interest in all of our key franchises.”

Kotick said that Blizzard Entertainment’s StarCraft II: Heart of the Swarm was the No. 1 PC game for the quarter. He also said that Blizzard’s World of Warcraft remained the No. 1 subscription online game with more than 8.3 million subscribers. But that number actually represents a loss of 1.3 million paying subscribers. Most of that loss was in Asia.

And this decline is one of several reasons why Activision is speaking cautiously about the second half of 2013 despite raising earnings estimates.

“While we have had a solid start to the year, we now believe that the risks and uncertainties in the back half of 2013 are more challenging than our earlier view, especially in the holiday quarter. The shift in release dates of competing products, the disappointing launch of the Wii U, uncertainties regarding next-generation hardware, and subscriber declines in our World of Warcraft business all raise concerns, as do continued challenges in the global economy. For these reasons, we remain cautious,” Kotick said. “However, our focused and disciplined approach to our business has served us well in the past, and through continued investment and careful management of our costs, we expect to continue delivering shareholder value over the long term as we have for the last 20 years.”

Last quarter, Activision Blizzard said its outlook for 2013 was for non-GAAP revenues of $4.175 billion and net income of 80 cents a share. It also previously said it had expected $690 million in revenue and earnings per share of 10 cents for the first quarter. For the second quarter, it now expects non-GAAP revenues of $590 million and earnings per share of 5 cents.

Before the earnings were announced, analyst Michael Pachter of Wedbush Securities expected the company to beat earnings targets because of continued strong sales of Call of Duty: Black Ops II, which sold more than $1 billion in its first 16 days back in retail in November. Overall retail software sales for console games were up 19 percent in the first quarter, according to NPD. Pachter also said that the newest version of Skylanders, Skylanders: Giants, was selling better than he and others excepted it would.

In the future, Activision will publish a new first-person shooter game from Bungie, the maker of the smash hit Halo series. Pachter believes that Destiny would arrive in the fourth quarter of 2013. Analyst Arvind Bhatia of Sterne Agee said that he is bullish on Activision Blizzard and its long history of exceeding expectations.