Activision Blizzard(NASDAQ:ATVI)has run into trouble with one of its tentpole franchises. The video game publisher announced last week that its decade-old World of Warcraft title suffered a 30% plunge in subscribers to start off 2015. Three million players exited in the first three months of the year, bringing the total gamer base down to just 7.1 million active gamers.
Despite the plunge, Activision still increased its first quarter sales and profit. On a GAAP basis, revenue rose 15% year-over-year to $1.28 billion, while earnings gained about 33% at $0.53 per share. Both figures beat Wall Street expectations.
Activision is as excited as ever about its business outlook, and investors clearly agreed -- shares traded up over 5% following the announcement.
That is partially because the Warcraft plunge was not a surprise. Management warned shareholders in February to expect "downward pressure on the number of subscribers in 2015." After the Warlords of Draenor expansion launched in November, it was inevitable that the original title would lose many of the three million new gamers who signed up to play it.
When it was all about World of Warcraft
More importantly, the World of Warcraft franchise is just not as critical to the company as it used to be. And it used to be extremely important. In fact, management has included some version of this warning in every annual report of the last five years:
A significant portion of our revenues [comes from] a relatively small number of popular franchises, and these products are responsible for a disproportionately high percentage of our profits. Due to this dependence on a limited number of franchises, the failure to achieve anticipated results by one or more products based on these franchises could negatively impact our business.
That "limited number of franchises" includes World of Warcraft, Call of Duty, and Skylanders, which together accounted for 80% of sales in 2013 and an even higher proportion of profits. The three brands powered a smaller but still massive 67% of the business last year as well.
And that product concentration risk continues to fall. The game publisher built up several new AAA franchises over the last year, including Hearthstone and Destiny, which are already profitable.
Activision also has several promising titles, including Call of Duty Online and Heroes of the Storm, that should become steady hits. All told, by the end of this year, the company will have 10 leading franchises in its portfolio, up from just five at the beginning of 2014.
In fact, these new brands are expected to push Activision past an important milestone. Management sees World of Warcraft accounting for less than half of the Bizzard business in 2015.
That is a dramatic shift in the revenue profile, considering the game was responsible for 90% of Blizzard's sales as recently as 2011.
Packed release calender
Last week, management boosted its forecast for 2015 sales and profits. The release calendar for the next three quarters has the usual yearly installments that shareholders have come to expect. There will be a new Call of Duty game, along with updates to the Skylanders and World of Warcraft franchises.
But the good news for investors is that the 2015 release calendar is also packed with titles (Overwatch, Diablo, Guitar Hero, Hearthstone, StarCraft) that do not revolve around those franchises. Yes, Warcraft will likely end 2015 with significantly fewer players than the 10 million global subscribers it started with, but the overall business is still set to post solid growth.
Demitrios Kalogeropoulos owns shares of Activision Blizzard and Apple. The Motley Fool recommends Activision Blizzard and Apple. The Motley Fool owns shares of Apple. 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.