Activision Blizzard Inc's first-quarter outlook missed Wall Street expectations and it will shut down the unit that makes Guitar Hero music games, sending its shares down more than 7 percent.
The company forecast revenue of 70 cents per share for the entire year, which falls short of analysts' average estimate of 83 cents per share, according to Thomson-Reuters I/B/E/S.
Guidance for 2011 was very disappointing -- far weaker than people expected since the company has a long track record of growing earnings, said MKM Partners analyst Eric Handler.
Activision Blizzard shares fell to $10.81 in extended trading after closing at $11.69 on Nasdaq.
Activision Blizzard said it would disband its Guitar Hero business unit and stop development of its next Guitar Hero game because the popularity of music-themed video games has faded. It said it would cut 500 people out of its global workforce of 7,000.
In December, Viacom Inc sold Harmonix Music Systems, the developer behind the Rock Band franchise, to the investment firm Columbus Nova and gained up to $200 million in the deal, analysts have estimated.
Despite the Activision Blizzard stock sell-off on Wednesday, some investors like Harry Rady, chief investment officer of Rady Asset Management, cheered the company's decision to scale back on titles like Guitar Hero, and focus on its hit games like Call of Duty.
Anytime a company focuses on its most valuable franchises and on making them better and more profitable -- cutting off the arm to make the body stronger -- that shows a disciplined management team, Rady, who owns Activision Blizzard shares, said.
Music games are expensive to manufacture, between the licensing fees for the songs and the cost of making the hardware such as plastic guitars.
We simply cannot make these games profitable based on current economics, Activision Publishing Chief Executive Eric Hirshberg told analysts on a conference call.
The company also said it would not release a skateboarding game next year and that it would scrap the game True Crime: Hong Kong.
The company announced a new digital platform, Beachhead, which will focus on the highly successful shooter franchise, Call of Duty.
Since its launch in November, Call of Duty: Black Ops has smashed retail records and pulled in more $1 billion in sales.
The company did not announce any news titles for next year in the Blizzard division, which publishes World of Warcraft, the company's main revenue generator. This lowered the company's earnings forecast for next year, Chief Executive Bobby Kotick said in an interview.
You have to take a conservative view of your outlook when there's no Blizzard title in the plans, Kotick said.
The company said if it did not release a new Blizzard title game this year, it would release two in the following year.
Activision Blizzard also said it would repurchase up to $1.5 billion of outstanding common stock.
For the first quarter of 2011, the company expects earnings of 7 cents per share on revenue of $640 million. Analysts on average forecast 10 cents per share on $734.70 million.
On an adjusted basis, EPS was 53 cents a share, beating analysts' average estimate of 51 cents a share.
Adjusted for various costs, the company's revenue was $2.55 billion, up from $2.50 billion a year earlier. This beat analysts' average expectation of $2.36 billion, according to Thomson-Reuters I/B/E/S.
The company was formed in 2008 through the merger of Activision with Blizzard, the former games unit of France's Vivendi SA, which still owns more than half the combined company.
(Reporting by Liana B. Baker; Editing by Bernard Orr, Andre Grenon, Matthew Lewis and Richard Chang)