Activision beats estimates by going big, focusing on retail hits

While the video game retail space is generally in decline, Activision doesn't seem to be taking much of a hit. The company far exceeded expectations for its third fiscal quarter thanks in large part to hit retail products like Skylanders and boxed sales for titles like Diablo III. During its September quarter, the company saw revenues of $841 million (up from analyst estimates of $710 million) and profits of $226 million. That's a marked increase compared to the $754 million in revenue it saw this time last year, and much of that growth came from the publisher's retail business. Digital sales remained largely flat at $430 million, while retail sales jumped 43 percent to $357 million. This pro-retail trend is particularly unusual compared to other publishers, who are heavily investing in digital, mobile, and other platforms to move away from the tough retail market. Luckily for Activision, it's in a more fortuitous position than most. The company pointed out that the industry's top five retail games are now commanding more and more of the overall marketshare every year, as less-than-gigantic games fall out of favor with consumers. Activision commanded three of the top five games for the first half of the year (including number one, Skylanders), and says it will continue focusing on triple-A games to command this space. The Skylanders franchise has been especially fruitful at retail, as Activision noted that the game's associated toys have been the number one action figure line in the U.S. for the last nine months. The franchise will likely grow even bigger in the months to come, as Activision launched Skylanders Giants in October, which has seen a 50 percent larger retail presence than its predecessor. Unlike Skylanders, Diablo III is also available as a digital release, but Activision said the game also has very strong momentum at retail. Combining its digital and retail sales, the game has maintained its position as the number one selling PC game in terms of dollars and units across the U.S. and Europe. Activision noted that the game has now sold more than 10 million copies. And of course, Activision's Call of Duty franchise has been a retail juggernaut for the publisher since the release of Call of Duty 4: Modern Warfare in 2007. Modern Warfare 3 is still seeing strong catalog sales, and Activision said it expects the upcoming Call of Duty: Black Ops II to see an extremely strong launch later this year. Judging from these major releases, Activision's retail games are clearly the backbone of the company's plan going forward. It's investing more and more resources into making these retail releases as large as they can be, and company CEO Bobby Kotick noted that mobile titles and other emerging platforms are "not yet financially meaningful" for the publisher. "We also continue to stress our competitive position by doing what we do best: Driving our business by prioritizing our biggest opportunities, and not getting distracted by initiatives unlikely to result in the creation of great interactive entertainment and superior shareholder returns," he said. Of course, much of Activision's hefty digital revenues still come from its flagship MMO World of Warcraft, and the company is very much committed to maintaining the game's subscriber numbers. During this most recent quarter, the publisher launched the game's latest expansion, Mists of Pandaria, which boosted player subscriptions to just over 10 million, up from 9.1 million compared to last quarter. Looking ahead into upcoming months and years, Activision said that another Blizzard title, StarCraft II: Heart of the Swarm, is currently scheduled for release sometime in early 2013. The publisher said that Blizzard is also working on an expansion for Diablo III, though that title is still a ways off. Finally, Activision raised its guidance for the third time in 2012; it now expects its fiscal year revenues to hit $4.57 billion instead of $4.3 billion. Kotick noted, however, that investors should be wary of the months ahead, as Activision (and the rest of the industry) will face a few challenges in the coming year. "As we look to 2013, we are cautious about business prospects given a continuingly challenged global economy, the ongoing console transition and very difficult year-over-year comparables due to Blizzard’s record-shattering Diablo III sales in 2012," Kotick said.