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It's not often that Wall Street gets excited over a video game developer, but maybe it's high time they did: 2012 has been a banner year for Activision- Blizzard (Nasdaq: ATVI  ) . With the world's number one subscription-based online game, number one retail video game, and the number one retail- and digital-selling game, it's hard to imagine that things could get much better for the developer. But Activision's just getting started.

MRE – Major Records Eradicated
The company reported record revenues, operating margins, and EPS during each of the first three quarters of 2012:

Record Results Category

Q3 2012

Q3 2011

% Improvement (year over year)

Net Revenues

$841 million

$754 million

11.5%

Operating Margin

26.9%

21.5%

25.1%

EPS

$0.20

$0.13

53.8%

Source: AVTI Q3 2012 press release.

Activision raised its guidance for the remainder of 2012, and expects to produce $1.5 billion of free cash flow in the fourth quarter, a company first. On a trailing 12-month basis, the company has produced annual free cash flow of $1 billion or more for the past three years running.

The biggest factor propelling Activision's record results? The release of Diablo III in May, which broke sales records for the company, and has been the best-selling PC game ever since. It's a testament to how one highly-anticipated release can pay off for a game developer, and gives an investor a key sign to look for to gauge future company performance.

And, with another blockbuster-franchise game set for release this week, Activision is sending out all the right signals.

In the Black (Ops)
Forget Christmas morning -- the 30 year-old "kid" in my house was waiting for this morning , when Activision's Call of Duty: Black Ops 2 debuted unto the masses. And he's not alone: The pre-launch activity for the game reached record highs, with pre-orders beating the former record set by Call of Duty: Modern Warfare 3.

Call of Duty has a loyal (and somewhat fanatical) player base, which explains how the brand is No. 7 on the Forbes brand loyalty survey -- ahead of powerhouses like Facebook, Google, Starbucks, and Nike. It also explains the jump in online interaction on both Facebook and Google's YouTube, which has more than doubled from the previous edition's online engagement.

Elite members only
Activision has gotten creative with some of the game's accompaniments, like new live-streaming of multi-player matches on the game's "League Play" network, and changes to its Elite memberships, which will now be free for any Black Ops 2 players.

Though Activision racked up 2.4 million premium subscriptions (and over $120 million of revenue) in less than a year since Call of Duty: Modern Warfare 3's release, it's willing to give it away for free as a way to get players more involved with the game, and more likely to purchase future content, because Elite members usually play longer and more frequently.

The company's trade-off on Elite subscription revenue is not entirely pure of heart. By spinning off Elite's downloadable content discount into a Black Ops 2 season pass, Activision is able to charge players an upfront cost for future updates, before interest in the game dwindles. Players still have the option to buy content a la carte at full price, but the new structure allows Activision to cash in further on players' launch-day excitement.

Forward march
By maintaining the blockbuster status of the Call of Duty franchise, Activision has given itself the flexibility to expand its offerings and move into new markets. That will come in handy for the game developer in three promising areas:

  • 2013 looks like the year of the game console transition. Activision will be able to work hand-in-hand with the hardware developers on new systems like the Xbox 720 or PlayStation 4, positioning itself for a smooth transition with both new and current gamers alike.
  • Asia is a largely untapped market for U.S. game developers, but it's a proven ground for video game entertainment. Activision is looking to expand there with a free online version of Call of Duty, as well as its recent worldwide release of World of Warcraft: Mists of Pandaria. The latter has already sold over 2.7 million subscriptions.
  • An ongoing collaboration with Bungie (original developer of the blockbuster Halo game franchise) on a new multi-platform game, Destiny, looks promising for both companies. Previews have players and gaming websites talking about the game, with quite a buzz about its Halo-like qualities, which could prove an advantage in attracting players. The Halo games have grossed over $3.4 billion to date.

Endgame
With a killer year, a hot new release today, and three positive growth prospects, Activision-Blizzard has things nicely lined up for it. On top of its record growth and earnings, the company carries no debt. And, according to Activision's latest earnings call, it's provided investors with $500 million in value from dividends and buybacks so far this year.

Company

P/E Ratio

Dividend Yield

Dividend Payout Ratio

Activision-Blizzard

13.93

1.70%

23% 

Electronic Arts (Nasdaq: EA  )

281.72

N/A

N/A 

Konami (NYSE: KNM  )

14.09

2.20%

17% 

Source: Yahoo! Finance

Electronic Arts reported a loss in two of the last four quarters, making its trailing-12-month P/E ratio positive, but overstated. With no dividends to investors, there is little incentive to put your cash in EA's stock.

Activision's closest rival in both pricing and dividends is Konami, which does provide investors with a higher yield. Though this is attractive for dividend investors, Konami's portfolio of games is not as mainstream as those produced by Activision-Blizzard, and its free cash flow has been half that of Activision's.

Video games aren't just kid's play anymore. Investors looking to add a proven media or dividend stock with solid earnings, cash flow, and future growth potential should consider Activision-Blizzard, a portfolio game changer.


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