Games — Evan Wilson

Category: Games

ATVI: Raising Our Call of Duty Unit Estimate to 12.5 Million

Activision Blizzard, Inc.
Rating: Outperform
Price: $12.37

Raising our ‘Modern Warfare 2’ unit estimate to 12.5 million from 9.5 million. Checks indicate that preorder totals for Call of Duty: Modern Warfare 2 (MW2) are the highest ever. Our checks extrapolate to 12.5 million units of sell-in in Q4—an increase from our previous estimate of 9.5 million, which we set after E3. Preorders are typically solid indicators of overall success.

Expectations are still highly varied. Our conversations with the buy side, combined with the wide range of printed sell-side estimates, have made it clear that a formal consensus for Modern Warfare 2 does not yet exist. We have heard Q4 unit expectations ranging from 9 million to 16 million. While it is still early, we feel confident regarding the low end of this range, and we believe that expectations could still move higher into the game’s release.

‘Modern Warfare 2’ still the catalyst for near-term ATVI Outperformance. Last week, Activision delayed Blur, but reiterated its guidance. The company also set a very cautious tone in its press release, which seemed to hint that the company was not as optimistic as some of the printed above-guidance estimates. However, we are maintaining our above-guidance estimates because of Modern Warfare 2’s strength. We continue to believe ATVI will outperform into the release of Modern Warfare 2.

Detailed Discussion

Most Preordered Game of All Time Makes Up for ‘Blur’ Delay
Checks indicate that preorder totals for Call of Duty: Modern Warfare 2 (MW2) are the highest in history. Preorders are typically a solid indicator of overall success. Our checks extrapolate to 12.5 million units of sell-in in Q4—an increase from our previous estimate of 9.5 million, which we set after E3. We detail our thoughts, including estimate revisions, below. Note that our conversation of units sold equates to sell-in, upon which the company recognizes revenue.

First Iteration Sold 7 Million Copies in December Quarter
The previous Modern Warfare (2007) sold 7 million copies in its first two months, into an installed base of 28.2 million consoles. Every store we have spoken with said that preorders are outstripping the previous version of MW, which should be expected. The first game sold 7 million copies in its first quarter and has sold 13 million copies life to date. However, its quality “snuck up” on gamers and the company, giving the title an extended tail, especially given initial supply constraints at retail. We expect MW2’s sales to be much more front-end weighted.

The previous best selling game of this cycle, Grand Theft Auto IV, sold 11 million copies in its first two months, into 35 million consoles. MW2 preorders are tracking ahead of GTA IV and, at launch, the worldwide console installed base will be twice the size at approximately 70 million. The U.S. installed base will be approximately 30 million, versus 14.7 million for GTA IV.

First-Quarter Sell-In Totals (M)

Sources: Company reports, The NPD Group, Pacific Crest Securities

Expecting a Shorter Tail – ‘GTA’ vs. ‘MW’ Tail Comparisons (M)

N.B. – Totals are U.S. sell-through, according to The NPD Group, through each game’s first 15 months. GTA sales are PS2-only, for a consistent comparison. Sources: The NPD Group, Pacific Crest Securities

Raising ‘MW2’ Unit Estimate to 12.5 Million from 9.5 Million
We now expect MW2 to sell 12.5 million copies this holiday, up from our previous estimate of 9.5 million. We raised our estimate coming out of E3, but increasing pre-orders, especially after recent hardware price cuts and details on the game’s multiplayer mode, support a higher estimate. In addition, retailers are reporting that, as games have been delayed, preorders for other games have been rolled into MW2 at a very high rate. Our new estimate is near the high end of the published sell-side estimates for the game. This estimate does not include the Wii port of Call of Duty 4: Modern Warfare, which we have modeled at 600,000 units.

Wide Band of Expectations and No Formal Whisper
Considering our conversations with the buy side and referencing the wide range of printed sell-side estimates, it has become clear that a formal consensus for MW2 does not yet exist. We have heard Q4 unit expectations ranging from 9 million to 16 million. While it is still early, we feel confident regarding the low end of this range, and believe that expectations could still move higher into the game’s release.

Maintaining Our Above-Guidance Q4 Estimates
Last week, Activision delayed Blur, but reiterated overall guidance. We are maintaining our estimates to incorporate this delay, which equated to $80 million in revenue and less than $0.01 in EPS. We are also lowering our catalog estimate to $390 million from $500 million to incorporate continued slow industry sales. The company also set a very cautious tone in its press release—apparently a hint that the company was not as optimistic as some above-guidance estimates would suggest. However, we are maintaining our above-guidance estimates because of Modern Warfare 2’s strength.

ATVI, Games - September 29th, 2009 — 5:00am

ATVI: Delays Blur; Reiterates Guidance, But Cautious

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Event:
Activision announced it is delaying Blur, its first foray into the racing-genre. The game is now expected to come out in 2010
It reiterated its guidance for $4.05B and $0.63, but urged investors to be “cautious and prudent in evaluating the company’s forecasts”

Conclusion:
Negative. The delay is somewhat disappointing, but the more cautious tone surrounding its guidance is the biggest news

The Street is as at $0.65 for 2010 and may move lower given the cautious tone. The company attributes the caution to the macro environment, but given its three significant game delays, it certainly deserves some of the blame
We were expecting 1.75M units of Blur, or approximately $80M in sales. Given the amount of capitalized software and the marketing budget associated with the game, it was likely not going to contribute profit this calendar year
Given the modest contribution of revenue and profit that we expected from Blur, we still believe Activision can hit our estimates for the holiday season. However the hope that it will post meaningful upside and come through the holiday unscathed is a distant memory

However, ATVI is trading at 18x our 2009 EPS estimate, which we believe already prices-in a lot of negative sentiment and limits downside from these levels, especially because we expect investor sentiment to improve as we go into the holiday

Background:
Blur was not setting up to be a hit and its delay is not a total disappointment. The game does not look terrible, but gamers are waiting for Forza (Oct.) and Gran Turismo (Mar.), the two big first-party simulation racing games that come out every few years. Activision said in the release that the delay was for more work on the online multiplayer, but the game could use more time in all facets for it to really stand out.

This is Bizarre’s first game for Activision since its acquisition in September 2007. Not yet releasing a game is a disappointment in relation to the acquisition as well as Activision’s hope to finally break into the racing genre.

Activision has had far more delays this year that usual. It also delayed StarCraft II and Singularity (its other new IP that was slated to launch this year). Historically Activision has delayed fewer games than its peers, a point that it often reminds investors of. It is difficult to tell if these three delays represent an internal change or more delays to come, but against Activision’s strong track record they are a disappointment. While a game can potentially do better when it is delayed, ongoing delays erode investors’ confidence in companies’ ability to hit forecasts.