E3 Day 1: ATVI, NTES
Event:
Activision Blizzard (ATVI, Outperform) held an analyst event on the first day of E3 (actually a day before the first day)
Conclusion:
Modest positive. Much of the discussion in the four hour event was on familiar trends that were not new to most investors. We do not believe anything extremely actionable came of the event. However there were a few interesting things to ponder for longer-term investors:
DJ Hero looks like a hit. After seeing the teaser trailers and reading the extensive coverage in Game Informer this month we still thought that there was risk surrounding DJ Hero because the ‘devil is in the details’ for this type of game. However, were impressed by the first live demo we saw of DJ Hero. As long as Activision can get the supply and the price point correct, we think this game will be another multimillion unit selling franchise for the company. As a big Guitar Hero and Rock Band fan, I personally think this is an important expansion to the music genre (although not the first DJ rhythm game). There will be more to say about DJ Hero after Activision’s party Monday night and some time at the booth, but we are incrementally more comfortable about the holiday season.
No surprises in the first discussion of the 2010 release slate. Activision discussed the 2010 slate for the first time publicly. There was not much to say other than that we will see more of the same, which is typical of Activision. That is not to say it does not have anything coming; the slate simply looks a lot like this year just with more of what’s successful. It has a host of big movie-based titles (similar to this year) including Spider-Man and Shrek. Bond will be back as well after a difficult first outing. Guitar Hero, Call of Duty, DJ Hero, Blur, Tony Hawk and all the big expected franchises from this year will have another version. Activision did say that it had one new IP next year, which is an entry into the action genre. We have a hunch we know what that is, but we’ll see if we can get more detail here at the show before we place our bet because it is too early to really matter.
We would not be surprised if this 2010 slate spooks investors more and more as we approach the end of the year. Investors never seem to feel comfortable with the strength of a slate (even Activision’s slate this year, or 2007, as examples) and 2010 will likely be no different. However, that would not deter us from owning ATVI. We think expectations for next year will naturally go up as 2009 comes in better than expected.
Direct to TV Guitar Hero opportunity. Dan Rosensweig, the new VP of the Guitar Hero business, spoke at length about the opportunities with the Guitar Hero franchise. One that was mentioned that we have not accounted for in the model is direct-to-TV. While he didn’t go into much detail, we believe Guitar Hero would have a tremendous opportunity if it could provide the full experience to consumers at the right price without a console. The necessary processing and rendering technology would be relatively inexpensive (the $99 PS2 is a good example) and a plug-and-play option would open the game to households that do not own a console. This market is clearly significant, especially internationally. Consoles don’t have wide distribution in some geographies and are illegal in others (like China). This may be a key to expanding the franchise away from its too-US centric sales patterns.
The benefits of the Blizzard acquisition are bigger than expected. CFO Thomas Tippl gave two important updates to the Blizzard acquisition. Activision now expects between $150 million and $200 million in synergies from the acquisition, which is up from between $50 million and $100 million originally and its most recent guidance of between $100 million and $150 million. It now expects the acquisition to be accretive to non-GAAP EPS by “high-single digits” in the first 12 months. While these benefits are likely already priced into Activision’s guidance, they certainly reinforce what a good deal the Blizzard acquisition has been so far. We continue to believe that Blizzard brings Activision exposure and expertise that it could have gotten no other way and that is necessary to be successful as video game technology advances.
NetEase may get more of Activision’s intellectual property. The topic of the opportunity in Chinese Online Games came up repeatedly at the event. It seems the transfer of the license from The9 to NetEase has finally made the Street step up and realize the incredible growth and profitability of the Chinese gaming market. While we still believe that the Street is making far too much of the financial impact from the transition, we are happy to see U.S. investors finally take notice NINE years after NTES came public.
During the presentation it was mentioned that in the expansion plans for both Guitar Hero and Call of Duty, China and other southeast Asian countries are to be a significant source of growth. Neither have much clout in these markets, but the opportunity is there. If Activision decides to operate either game in China, we think NetEase would be the clear partner and beneficiary.
Random but interesting stats - operating margin by product type:
- Value Added Services 80%
- Downloadable Content 60%
- Subscriptions 55%
- Retail PC Games 45%
- Retail Console Games 20%
Category: ATVI, Games, NTES | Tags: Blizzard, CallOfDuty, djhero, E3, GuitarHero -