Activision Blizzard Worries Investors Despite Earnings Beat

Activision Blizzard (Nasdaq: ATVI  ) had largely good news for its investors on Tuesday, but lingering questions over the long-term viability of its World of Warcraft franchise sent shares lower after hours. The world's biggest video gaming company reported record third-quarter earnings and saw its net income triple over the year-ago quarter, from $51 million to $148 million. However, the biggest number for many was the 800,000 subscribers lost by World of Warcraft since July.

What's the good news?
A streamlined sales channel, now heavily reliant on digital downloads, was a major boost to the company's bottom line. Activision earned 57% of its revenue from digital sales in the third quarter, and 38% for the year to date, up 25% over 2010. The company easily beat analyst projections for revenue and earnings per share.

The company released hotly anticipated Call of Duty: Modern Warfare 3 on Tuesday, and it's already a record-breaker -- pre-order sales were estimated at 6.5 million by game sales tracker VGChartz. MW3 joins mid-October release Skylanders: Spyro's Adventure on store shelves. The youth-focused game has already sold "millions of toys" according to CEO Robert Kotick, although it's uncertain whether he was referring to the game itself or the 32 different mini-figurines sold as add-on content.

What's the (potentially) bad news?
Investors fixated on the loss of 7% of World of Warcraft's subscriber base. In spite of these losses, Activision Blizzard actually improved its orc-based revenue, with the Warcraft segment earning $336 million in the third quarter against $289 for the year-ago quarter. World of Warcraft made up 33% of Activision Blizzard's revenue on the year to date against 29% last year, and 44% for the third quarter against 39% from the same quarter in 2010. Blizzard CEO Michael Morhaime admitted that revenue was lower than the same quarter last year, which saw the release of hugely popular StarCraft II.

Other challenges
Morhaime also said that most subscriber losses came from the East, a noncommittal way of blaming Chinese players without mentioning whether or not most of the losses actually came from China. Chinese players are worth far less to Activision Blizzard than other regions, including other Eastern countries, as that market is localized and operated by NetEase (Nasdaq: NTES  ) under an hourly payment plan that amounts to pennies per hour.

World of Warcraft is also coming under siege from Electronic Arts (Nasdaq: ERTS  ) , which will release its anxiously awaited massively multiplayer online game, Star Wars: The Old Republic, right before Christmas. The game already has over 800,000 preorders, according to VGChartz, and is on track for over a million preorders by launch day.

Foolish final thoughts
Activision's move toward subscriptions for Call of Duty should offset Warcraft's subscriber losses, and if Skylanders is as popular as claimed, it could be the next Pokemon. The critical reception toward Call of Duty has been quite positive, a good sign for a franchise that continues to best its own sales records each year. The orc-shaped hole in Activision's armor could be patched by Diablo III next year, and the company's long-term move toward subscriptions and digital downloads should help it maintain its dominant position for some time.

Add these companies to your Watchlist to keep up to date on their struggle for the gaming crown.

Fool contributor Alex Planes holds no stake in any company mentioned here. Add him on Google+ or follow him on Twitter. The Motley Fool owns shares of Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and NetEase.com. Motley Fool newsletter services have also recommended creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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