Analyst: ‘Poor’ Call of Duty and Skylanders sales dampen expectations for Activision’s first quarter

Call of Duty and Skylanders are two of publisher Activision’s most-important game properties, but they struggled to carry their weight in January and February.

Sales for both Call of Duty: Ghosts and Skylanders: Swap Force failed to perform as well as expected in the first quarter of 2014, according to industry-intelligence firm Cowen & Company. The games are so important to Activision’s bottom line that Cowen is reducing its estimated earnings per share (EPS) for the company’s first quarter from 14 cents to 10 cents. Both franchises are seeing major competition from other publishers’ games either for the first time or the first time in a while.

“We are taking down our Q1 estimates to reflect poor sell-through of Call of Duty: Ghosts and Skylanders: Swap Force in January-February — and we expect March as well,” Cowen analyst Doug Creutz wrote in a note to investors.

Call of Duty: Ghosts has sold well in recent months. Since its debut in November, it has topped the best-seller list for new physical games, according to industry analysis firm The NPD Group. Despite that, Ghosts isn’t selling quite as well as its predecessor, Black Ops II, which launched in 2012. This is likely due to lower review scores as well as players looking at new properties like Electronic Arts’ sci-fi shooter Titanfall, which launched in early March.

Skylanders: Swap Force is also selling well, but it is facing major competition for the first time. The house of Mickey Mouse released its interactive-toy game, Disney Infinity, last year. Both games enable players to place physical toys on a USB portal that suddenly zaps a digital re-creation of the item into a game, but Skylanders is using a relatively new brand while Disney is leveraging properties like Cars, Pirates of the Caribbean, and Toy Story.

Despite Activision’s slipping Q1, Creutz thinks the company will make up the different later in 2014.

“Our fiscal-year 2014 EPS estimate remains unchanged at $1.31,” Creutz wrote. “We are pulling some EPS out of Q1 and into Q2-Q4. We are also raising our price target from $21 to $23 on
higher seasonal multiple.”

That optimism is largely due to the strong debut performance of Activision subsidiary Blizzard’s collectible-card battler Hearthstone: Heroes of Warcraft, which is out now on PC, Mac, and iPad (in some territories). In fact, that game is already generating significant revenue on mobile. The developer is also introducing new methods to get players spending in the free-to-play release.

“We believe Activision Blizzard is the best-managed company in the video game sector,” wrote Creutz. “We also believe that Blizzard is the single best, most consistent content-creation asset in our coverage universe. We expect the company to launch several franchises next year that should be incremental to the current operating model — [including the upcoming sci-fi shooter] Destiny, Hearthstone, [online strategy game] Heroes of the Storm, and Call of Duty: Online. We also expect current cornerstone franchises Call of Duty, World of Warcraft, and Skylanders to continue generating strong revenue and operating profits for the next several years.”

Call of Duty: Online is a new free-to-play shooter in development for the huge Chinese market. Heroes of the Storm is Blizzard’s take on League of Legends-style games. In 2013, the Chinese free-to-play shooter Crossfire made nearly $1 billion and League of Legends made $624 million. Activision is hoping to reach that level of success with Call of Duty: Online and Heroes of the Storm.

So while Activision’s big names are having a couple off months, it’s probably doesn’t mean that Call of Duty and Skylanders are done for even in the medium term. With games like Hearthstone, Destiny, and Heroes of the Storm all (likely) hitting this year, the company also has plenty of new big properties to see it through the long-term as well.