A leading developer, publisher and distributor of interactive entertainment and leisure products, Activision Blizzard Inc. (ATVI) announced that the second content pack of Call of Duty: Black Ops will release on May 3, 2011.
The second content pack known as Escalation will be launched first on Microsoft Corp.’s (MSFT) Xbox LIVE gaming system. The content pack features four new multi-player maps and a Zombies game known as Call of the Dead.
In February 2011, Activision released the first content pack known as First Strike, which witnessed unprecedented success, generating a record 1.4 million downloads within 24 hours of its release. This was 21% more than the sales generated by Call of Duty: Modern Warfare 2′s first content pack release.
According to Gamestop, 28% of all Xbox 360 Black Ops buyers bought the First Strike from stores within the first week of its availability.
Developed by Treyarch and published by Activision Blizzard, Call of Duty: Black Ops was the best-selling console title and #1 franchise in North America and Europe in the fourth quarter ended December 31, 2010.
Call of Duty: Black Ops continues to attract millions of online gamers around the world and with the release of the second pack online gamers will further increase, in our view. To date, Call of Duty players have logged on for well over 2 billion hours to play Black Ops since its release last November
In its fourth quarter conference call, Activision announced that it does not expect to release any new major title in 2011. However, we believe that it may launch a new version of the Call of Duty franchise in order to counter its nearest rival, Electronic Arts’ (ERTS) upcoming title Battlefield 3, which is scheduled to release in November 2011.
In case Activision does not release any major title this year, management plans to launch two Blizzard titles in 2012.
For full-year 2011, Activision anticipates non-GAAP revenue of $ 3.90 billion and earnings per share of 70 cents.
Activision plans to reduce its exposure to low-margin and low-potential businesses, thus helping it grow over the long term and enable it to continue expanding its position as the largest digital publisher. However, management also expects growth from the high-margin Digital business going forward.
Given the continued decline in the music genre, the company plans to spin off its Publishing unit’s Guitar Hero business unit that has witnessed slow growth in the last two years and will discontinue development on its Guitar Hero game for 2011. The company will also stop development on True Crime: Hong Kong.
Recommendation
We are neutral on Activision over the long term due to the lack of any major title release in the last 6-12 months. We believe Activision’s top line will suffer in 2011 due to the lack any new major product.
Activision continues to face tough competition from Electronic Arts and Take-Two Interactive Software Inc. (TTWO), which will hurt its profitability going forward.
Moreover, Activision does not have any exposure in the social gaming platform as compared to Electronic Arts, which may hurt its competitive position over the long term.
Currently, Activision has a Zacks #3 Rank, which implies a Hold rating in the short-term (1-3 months).
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