ATVI Banks on DLCs to Boost Sales

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Activision Blizzard Inc. (ATVI) has two downloadable content packs (:DLC) to offer to the gamers of PROTOTYPE 2, the action-revenge game. The two DLCs are Colossal Mayhem (releasing today) and Excessive Force (releasing on May 29, 2012).

Both the DLCs are laden with new and improved weaponry that help the protagonist of the game Sgt James Heller to hunt and kill the arch enemy, Alex Mercer. The DLCs will be available through Microsoft Corp.’s (MSFT) Xbox LIVE Marketplace for its Xbox 360 gaming system. For the Sony Corp (SNE) PlayStation 3 gamers, the DLCs will be available in the PlayStation Store.

PROTOTYPE, the first version, had sold 1.2 million copies since its release in June 2009, and the company expects PROTOTYPE 2 to outshine the above figures. The game has got a commendable response after its release on April 24, 2012 in the U.K. as it topped the charts in terms of units sold.

Despite the initial response, PROTOTYPE 2 saw a decline in first-week sales figures when compared with its earlier version, PROTOTYPE. Though the U.S. figures were not available, analysts believe that the latest version of the game won’t attract the same response as its predecessor.

Activision’s launch of the content packs is expected to give the necessary boost to PROTOTYPE 2 sales. Moreover, Electronic Entertainment Design and Research (:EEDAR), a video game market research firm, estimates that given the increasing popularity among Xbox 360 and Play Station 3 console owners, DLCs will generate $1.0 billion in sales in 2012.

Activision, with its famous franchises and timely content pack releases, is expected to grab a chunk of estimated DLC sales. Electronic Arts Inc. (EA), which also has some of the famous franchises of the gaming industry in its kitty, would also be targeting a share in the billion-dollar opportunity.

We believe that the release of Activision’s famous franchise games and their subsequent content enhancements will continue to benefit the company in the forthcoming quarters, driving its top-line growth.

Additionally, the company is scheduled to release its fiscal first quarter 2012 results after market closes today. Activision has outperformed the Zacks Consensus Estimate by an astounding 191.4% over the last four quarters and we expect yet another earnings beat from the company.

We expect that the company’s continued initiatives to expand in the digital online business segment will prove beneficial in the near term. A healthy product pipeline with Giants, the squeal of Skylanders and Diablo III along with Spider-Man, Tony Hawk, Transformers and Call of Duty Black Ops 2 will provide the necessary support to the company’s guided top-line and bottom-line figures in 2012. Moreover, Activision’s foray into the mobile gaming market is expected to be a long-term positive.

However, the softness in the video game industry and Activision’s limited presence in the social gaming market coupled with significant competition from EA and Take-Two Interactive Software Inc. (TTWO) keep us Neutral on the stock over the long term.

Currently, Activision Blizzard has a Zacks #3 Rank, which implies a ‘Hold’ rating in the short term.

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