Activision Blizzard reported higher net income but lower-than-expected revenue for the second fiscal quarter as it cut expenses but launched fewer game titles in the quarter. The quarter was unique in that online sales finally eclipsed retail game sales.
The Santa Monica, Calif.-based company is the biggest independent publisher of video games and so its results are closely watched in the industry.
The company reported GAAP revenues of $967 million, down 7 percent from $1.0 billion a year ago. Net income was $219 million, or 17 cents a share, compared with $195 million, or 15 cents a share. The company’s big games include Call of Duty Modern Warfare 2 and StarCraft II. The latter launched on July 27 and sold more than 1.5 million copies in its first two days. (Those sales were not included in second quarter results).
Bobby Kotick, chief executive of Activision Blizzard, said in a conference call that this was the first quarter when online revenue exceeded revenue from games sold at retail stores. This marks a big shift for the industry, and the change was driven by Activision Blizzard’s biggest game, World of Warcraft, which remains strong at 11.5 million players, despite the fact that it is more than six years old.
Mike Morhaime, president of Blizzard Entertainment, said that StarCraft 2 is the best-selling strategy game in history and the best-selling PC game of the year so far. Metacritic, which aggregates review ratings, ranks StarCraft 2 at 94 out of 100 in terms of average reviews. The company launched the game on five continents on July 27. In Korea and Taiwan, the game is in a free open beta; the commercial version will be launched shortly.
Morhaime said that Blizzard is also on track to launch World of Warcraft Cataclysm, an expansion pack for the online game, later this year. Tens of thousands of players are testing the expansion pack now.
Players will be able to play the expansion version in Germany at the GamesCon show later this month. This is the first time Blizzard has launched two games in the same year since 1998, Morhaime said. StarCraft 2 is using the new Battle.net online gaming service, which will be upgraded in the coming months. Morhaime said that sales in Korea, where the original StarCraft is still like a national sport 11 years after its launch, sales are highly anticipated but the game will compete with the original StarCraft. Game tournaments in South Korea are expected to use the old StarCraft through the end of the year, and that may hamper sales of StarCraft 2 for the time being.
Meanwhile, the World of Warcraft Wrath of the Lich King expansion pack, which debuted in the U.S. in 2008, has finally been approved for launch in China. China is a huge Blizzard market, but regulatory hurdles have hurt Blizzard.
On a non-GAAP basis, Activision Blizzard reported earnings of $72 million, or 6 cents a share, on revenue of $683 million. Analysts expected a non-GAAP profit of 5 cents a share on revenue of $719.8 million, according to Thomson Reuters. In that sense, Activision Blizzard beat profit estimates but fell short on revenues. Activision Blizzard has a considerable war chest, with cash at $2.9 billion.
Revenues were hurt by a stronger U.S. dollar, but some of the company’s new releases such as Shrek Forever After and Singularity did not perform up to expectations. The sales of music games remain lower than expected. But add-on map packs for Call of Duty Modern Warfare 2 sold huge numbers and World of Warcraft, as mentioned, remained strong. The company was more profitable in part because it cut expenses.
The Call of Duty franchise sold 5 million map packs — which allow gamers to enjoy multiplayer online games for a longer time — at $15 each during the second quarter. The map packs took the No. 5 position in terms of top games of the first half of the year.
The company set a cautious third quarter forecast of $725 million, well below the consensus of $914.5 million. The company is moving two games (including True Crime Hong Kong) into 2011, but the outlook for the full year is unchanged because the company now expects stronger sales of the upcoming Call of Duty Black Ops game coming in the fourth quarter.
By the end of the year, Activision Blizzard expects the installed base of handheld and game consoles to be 265 million units. Nintendo software sales are expected to decline, while PlayStation 3 and Xbox 360 sales are expected to improve. Besides Black Ops, the big releases coming this year include Spider-Man Shattered Dimensions, Golden Eye 007, Guitar Hero Warriors of Rock, Blood Stone 007, Tony Hawk Shred, and DJ Hero 2.
Thomas Tippl, chief operating officer at the company, predicted that Black Ops, which launches Nov. 9, will be the company’s biggest game launch of the year, based on strong buzz and pre-sales. That game is being developed by Treyarch, which has stepped up just as the company’s sister studio, Infinity Ward, has imploded with the firing of its founders. Despite those problems, Tippl says the company’s new Call of Duty division, which has more than 500 developers, represents an increased investment in the Call of Duty games.
“Black Ops is turning out to be one of the best games we ever created,” Kotick said. “This is across the board the biggest investment we’ve ever made in the launch of a title.”