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Activision warns of rocky second half, shares slide

By Malathi Nayak

SAN FRANCISCO (Reuters) - Activision Blizzard Inc warned investors on Wednesday that it expects a challenging second-half and holiday quarter because of heavy competition and uncertainty around the launch of new video game consoles.

The shares of the largest U.S. video games publisher were down about 5 percent at $14.45 in after-hours trading from its $15.26 close on the Nasdaq.

Subscribers to "World of Warcraft," a large source of steady subscription-based revenue, dropped sharply by about 14 percent to 8.3 million last quarter from 9.6 million in the previous quarter, the company said.

Activision executives told analysts they expect Warcraft subscriber figures to dip further in coming months as the fantasy-action game continues to lose users to similar, free-to-play games.

"No one understands what 'numbers to go lower' means and that's got investors concerned," said Michael Pachter, an analyst at Wedbush Securities. "Activision's going to have to stabilize that."

To arrest the loss of subscribers, the company will invest significantly in the franchise and deliver new content to engage players, Chief Executive Officer Bobby Kotick said in an interview.

The company, known for its "Call of Duty" and "Skylanders" games, slightly raised its 2013 revenue and earnings forecast to $4.25 billion and 82 cents per share, compared with $4.18 billion and 80 cents provided at the end of the last quarter ended January 30.

Its 2013 outlook was below the view of Wall Street analysts, who expected the company to forecast revenue of $4.27 billion and earnings at 85 cents per share.

In contrast, rival Electronic Arts Inc on Tuesday forecast fiscal 2014 earnings above Wall Street's expectations, triggering a 17 percent rally in its shares on Wednesday.

WHITHER THE XBOX?

The video game industry is grappling with flagging sales as players migrate from to buying packaged games for consoles to free or less-expensive offerings on mobile devices.

Moreover, consumers have held back from buying hardware and software as they await new versions of Sony Corp's PlayStation and Microsoft Corp's Xbox, which are expected later this year.

Nintendo Co Ltd's new Wii U console, which was launched in November, has disappointed investors with its lackluster sales, casting doubt on the industry's hope that new consoles could boost prospects.

This year, Activision will clash with a number of mega-franchises during the coming holidays, a crucial period that often accounts for the bulk of the industry's annual revenue.

Its top releases include shooter game "Call of Duty: Ghosts", which will compete with EA's "Battlefield 4" over the holidays. Its "Skylanders SWAP Force", a children's fantasy-adventure game sold with actual toys that come to life onscreen, will battle Disney's "Infinity", based on a similar concept, and is slated for release in August.

"Infinity is going to be supported by a large marketing budget so obviously, it's something that's formidable," Pachter said.

To try and get a leg up on the competition, Kotick told analysts that Activision will "further increase our sales and marketing investments," without offering specifics.

Activision's warnings about the competition overshadowed strong first-quarter earnings.

The Santa Monica-based company said non-GAAP revenue, adjusted for the deferral of digital revenue and other items, rose to $804 million, surpassing Wall Street's average revenue forecast for $704.6 million and up 37 percent from $587 million in the same quarter a year ago.

Non-GAAP income totaled $199 million, or 17 cents per share, in the fourth quarter, compared with $67 million, or 6 cents per share a year earlier. This beat Wall Street's average earnings estimate of 11 cents per share, according to Thomson Reuters I/B/E/S.

(Reporting by Malathi Nayak; Editing by Richard Chang, G Crosse and Andre Grenon)

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