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Activision Blizzard, Inc. (ATVI): What Happened?

Activision Blizzard, Inc. (NASDAQ:ATVI) reported a fairly strong quarter driven by the release of some blockbuster video gaming titles like StarCraft 2: Heart of the Swarm, Diablo 3, and Call of Duty Black Ops 2. The company’s release schedule in the first quarter led to the strong surge in revenue and net income.

Activision Blizzard, Inc. (NASDAQ:ATVI)

Earnings highlights

The company reported earnings per share of $0.40 for the first quarter beating its prior outlook of $0.29. The company beat its outlook by a staggering 37.9%. The company grew its earnings per share figure from $0.33 in 2012 to $0.40 per share in 2013.

Investors have bid up the stock by 36.68% since the beginning of 2013. The company’s strong performance was driven by the release of 3 blockbuster titles. Subscription and licensing also contributed to the strong performance. The revenue from subscription and licensing grew from $298 million in the first quarter of 2012 to $334 million in the first quarter of 2013. The company grew its revenue year-over-year from $1.172 billion to $1.324 billion in the first quarter of 2013.

The company isn’t that optimistic on its future, which can be seen by the analyst community who anticipate the company to report a decline in earnings for the full fiscal year. The company’s earnings are expected to decline by 28% for the full-year. The reason for the decline in earnings is driven by the transition from PlayStation 3 and Xbox 360 to the next generation consoles.

Outlook

Activision Blizzard, Inc. (NASDAQ:ATVI) anticipates revenue of $4.220 billion with EPS guidance at $0.73 for the full-year. The decline in earnings is driven by a sudden increase in operating expenses. The company’s operating expenses are expected to increase from 40% to 49%. The operating expenses are expected to increase in anticipation of the console refresh cycle (development costs are likely to rise due to the console refresh cycle).

Hardcore gaming isn’t very compatible with mobile devices, and with mobile devices expected to take up a larger amount of our attention span it is becoming increasingly difficult for the hard-core gaming community to stack up against casual gaming. Sony Corporation (ADR) (NYSE:SNE) hopes to bridge the divide from mobile devices through the use of the cloud. Sony Corporation (ADR) (NYSE:SNE) hopes to enable video gaming on any and all mobile devices using the internet, which will allow mobile devices to access the hardware of the PlayStation 4 remotely. The remote access capabilities of mobile devices to a PlayStation 4 will allow consumers to access PlayStation content on the go.

Therefore, the barrier of entry caused by hardware will be off set. The problem with this approach is that data packages limit the amount of data that can be accessed at 4G LTE speeds. For example, AT&T puts a 2GB memory limit, meaning that Sony Corporation (ADR) (NYSE:SNE)’s attempt at using the cloud could be thwarted by the limitations of cellular networks.

In the near future, it could very well be possible for hard-core gaming to be able to compete with soft-core gaming in the mobile space. Assuming that is the case, Zynga Inc (NASDAQ:ZNGA) could be in trouble.

Zynga Inc (NASDAQ:ZNGA) has been relying heavily upon both the Google and Apple app stores for incremental revenue growth. In fact, Google’s app store currently has 70% of the global mobile market, implying that hundreds of millions of mobile users will be shopping for online content through application stores over the next decade.

This business model could be under attack by Sony if Sony can play its cards right, and assuming cellular internet technologies are able to catch up to the needs of the market. This could put a dent in casual gaming on mobile devices, but for now mobile gaming will be dominated by mid and soft-core titles.

Conclusion

Activision Blizzard, Inc. (NASDAQ:ATVI) will experience a decline in profitability for the full year based on its weak outlook. The reason has to do with the console refresh cycle that will increase development related costs for the next generation games. It could be a tough year to invest into Activision Blizzard, Inc. (NASDAQ:ATVI) as the company’s transition to next-generation consoles will hurt profitability.

The article Activision Blizzard Hurt by Console Refresh originally appeared on Fool.com is written by Alexander Cho.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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