Activision Blizzard Inc. Delivers a Strong Quarter

As digital sales rose to a record, Activision Blizzard was able to reap the spoils of higher margins.

May 12, 2014 at 12:30PM

When digital sales hit a record in the video game industry, good things tend to happen as margins expand. Activision Blizzard (NASDAQ:ATVI), generated 68% (a record) of its $772 million in non-GAAP revenue from digital sales in its latest quarter. That enabled it to blow past the Street estimate of $0.10 in non-GAAP earnings per share -- Activision Blizzard instead posted EPS of $0.19 and beat revenue estimates by $84 million, which sent shares up 7% the next day. 

A beat and a raise
Along with the bullish quarterly earnings beat, Activision Blizzard raised its full-year outlook. The video game maker now expects to post $4.675 billion in non-GAAP revenue and $1.27 in non-GAAP earnings per share, up marginally from its previous expectation for $4.6 billion in revenue and EPS of $1.26. 

While this is a small revision, it is a big testament to where management sees Activision Blizzard heading over the year. If the company can beat estimates now, imagine what it is capable of once the holiday season rolls around.

World of Warcraft subscriptions fell by 200,000, to 7.6 million, but a new game expansion expected in the second half of this year could boost that number. Until then, the subscriber count will keep trending lower. To keep the cash cow alive, Activision Blizzard leveraged the success of WoW by making a card game out of it. 

Any good video game company needs a solid pipeline of offerings to ensure it maintains an otherwise stable cash flow. For shareholders, there is plenty to like in Activision Blizzard's product pipeline this year. 

On the mobile gaming front, Activision Blizzard in March released Hearthstone: Heroes of Warcraft, which has over 10 million registered users so far. Hearthstone is available for the PC and iPad, but later in the year it will also become available to iPhones and Android-powered smartphones. 

Hearthstone: Heroes of Warcraft is a card game that uses elements from the Warcraft franchise, and the free-to-play product offers Activision Blizzard an opportunity to take a chunk of the mobile gaming market. By offering the game on almost every mobile device (sorry Windows), Activision Blizzard can leverage its 10 million-plus registered user base to generate high-margin income from microtransactions.

Destined for success
It's no coincidence that Activision Blizzard plans on plunking down millions in marketing to showcase its new potential blockbuster, Destiny. The game was developed by Bungie, the company that made the top-selling Halo franchise, which has sold over 50 million copies so far on the Xbox and Xbox 360. Destiny will be available on both the Xbox One and the PlayStation 4, which will give Activision Blizzard the best chance at another multibillion-dollar gaming franchise. 

Destiny's pre-order numbers are pointing toward a record for a new game, a testament to the pent-up demand for this title launching on Sept. 9. By investing millions into marketing and advertising Destiny, Activision Blizzard hopes to recreate the success story of Call of Duty and give it two blockbuster franchises in the first-person shooter realm. It remains too early to see if Activision Blizzard will get its wish, but high pre-order numbers paint a promising picture for shareholders.

Foolish conclusion
Activision Blizzard posted another great quarter and was able to pay off $375 million of its debt. The company should have another good year in 2014, as it continues to do what works (Call of Duty iterations, WoW expansions) while focusing on building out new franchises and creating new sources of revenue (Destiny, Hearthstone). Due to its rock-solid fundamentals, stable 1% dividend, and concrete pipeline of great offerings, Activision Blizzard is prepared to ride the waves of next-generation consoles and mobile gaming, showering down great returns to those who are patient.

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Callum Turcan owns Activision Blizzard May 17 call options. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of 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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