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Activision Blizzard, Inc. (ATVI), Electronic Arts Inc. (EA): Uncertainty Surrounds This Game Company

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This year is an exciting one for the world of video games. With Sony and Microsoft set to launch new consoles this holiday season, the Playstation 4 and the Xbox One respectively, there should be a much needed jolt provided to the gaming industry. One of the biggest game companies, Activision Blizzard, Inc. (NASDAQ:ATVI), is in prime position to benefit from this new generation of gaming. But the company is certainly not without problems.

A slowly deflating cash cow

Activision Blizzard, Inc. (NASDAQ:ATVI)When Activision Blizzard, Inc. (NASDAQ:ATVI) reported its Q2 earnings recently, the results were a mixed bag. While GAAP numbers looked decent, with a 2% revenue decline and a 75% increase in net income, non-GAAP adjusted figures told a different story. Adjusted revenue fell 42%, while adjusted net income was just 8 cents per share compared to 20 cents per share one year ago.

One issue that Activision Blizzard, Inc. (NASDAQ:ATVI) is facing is a declining user base for its popular World of Warcraft online game. After peaking at 12 million subscribers in 2010, the game now has just 7.7 million users, down from 8.3 million users last quarter. World of Warcraft is one of Activision Blizzard, Inc. (NASDAQ:ATVI)’s main cash cows, and its continuing decline is troubling for the company.

Franchise fatigue

One of Activision Blizzard, Inc. (NASDAQ:ATVI)’s big franchises is Call of Duty, a shooter which will see a new version this holiday season for current consoles as well as next-generation consoles. Call of Duty is one of the most popular franchises of all time, with the last version reaching $1 billion in sales in just 15 days. There is concern, however, that the franchise is starting to get tired. Each successive game is very similar to the last, and with plenty of competition Call of Duty’s reign as king of the online shooter may be coming to an end. The upcoming version, Ghosts, is on track for fewer pre-orders than the previous version. Part of the reason for this could be uncertainty regarding the new console releases, but there’s the possibility that interest for the game is lower than for previous iterations.

While many shooters have come and gone, Battlefield 4 from Electronic Arts Inc. (NASDAQ:EA) has a real chance at dethroning Call of Duty. Set to release a week before Call of Duty: Ghosts, Electronic Arts Inc. (NASDAQ:EA)’s game could offer something new for gamers sick of the Call of Duty formula. The previous Battlefield game sold about 16 million copies worldwide, compared to the previous Call of Duty game’s 24 million, and it will be interesting to see if this gap closes or reverses later this year.

Another big game coming out this year is Grand Theft Auto V from Take-Two Interactive Software, Inc. (NASDAQ:TTWO). While GTA is a different genre of game than Call of Duty, the mega-popular series could still draw people away, especially those tired of the Call of Duty series.

Free at last

The big news for Activision Blizzard, Inc. (NASDAQ:ATVI) this month was a deal struck with majority-owner Vivendi to buy back most of the company. Currently Vivendi owns 57% of the diluted share count, giving it control over Activision, but after the deal Vivendi will own just 12% of the company. The company will buy 429 million shares for $5.83 billion, while an investor group led by CEO Bobby Kotick will purchase 172 million shares for $2.34 billion. This represents an average purchase price of $13.60 per share.

Activision will fund this deal with mostly debt. The company has $4.6 billion in cash on the books, and after the deal the company will still have $3 billion in cash and $4.6 billion in debt. The share count will be reduced significantly, from 1.19 billion to about 750 million diluted shares. This will have the effect of boosting per-share numbers significantly, while reversing a net cash position into a net debt position.

Two scenarios

Activision is at somewhat of a crossroads, and there are two paths which it can take:

  1. World of Warcraft subscriber losses moderate and the company releases a new game that takes its place. Call of Duty remains the top shooter, and the new version at least matches the previous version’s sales. The new console generation gives a boost to sales.
  2. World of Warcraft bleeds subscribers with no successor on the horizon. Gamers get sick of Call of Duty and switch to Battlefield or other games, sending the franchise into decline.
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