Activision Blizzard Inc.’s (ATVI) robust fiscal second quarter 2011 results surpassed the Zacks Consensus Estimate on both the top and bottom lines. Activision earned 9 cents per share (including stock based compensation but excluding one time items), well ahead of the Zacks Consensus Estimate of 4 cents and management’s guidance of 4 cents. Reported earnings jumped 125.0% from the year-ago quarter.
The quarterly results were driven by the online integration of its products and digital revenue streams, including Blizzard's World of Warcraft and Activision's Call of Duty, which also continued to push the retail revenue stream.
Revenues
Revenues on a non-GAAP basis (excluding revenues from deferral and related cost of sales) surged 2.34% year over year to $699.0 million, easily surpassing the Zacks Consensus Estimate of $609.0 million and management’s guidance of $575.0 million.
Activision’s focus on the digital channel, which is a higher-margin and high potential business, led to the robust revenues. This business generated 61% of revenues, growing 13.4% on a year-over-year basis. Revenue from distribution, which accounted for 9% of total revenue, grew 12.0% on a year-on-year basis, while the retail distribution channel, which was 30% of revenues, was down 17.8% from the prior-year quarter.
On a segment basis, Massively Multiplayer Online Role-Playing Game (MMORPG) sales accounted for 42% of the revenues and were relatively flat on a year-over-year basis. Sales from PC accounted for 6% of revenues and increased 7% from the year-ago quarter. Revenue from total console (38.0% of the revenues) was up 5% from the prior-year quarter, while handheld devices (5.0% of revenues) contracted 28% on a yearly basis.
On a geographical basis, revenues from North America (47.0% of total revenue) decreased 11.7% year over year to $331.0 million, while revenues from Europe (41.0% of total revenue) were up 10.9% year over year to $286.0 million. Although the Asia-Pacific region contributed only 12.0% to the total revenue, revenues from the region jumped 64.0% on a year-over-year basis to $82.0 million in the quarter.
During the quarter, Activision Blizzard had two top-10 PC titles, namely World of Warcraft: Cataclysm and StarCraft II: Wings of Liberty
Comparing with the digital downloads of the Call of Duty: Modern Warfare in the year-ago quarter, digital downloads of the Call of Duty: Black Ops First Strike content pack surged over 30% in this quarter.
Operating Performance
Total costs and expenses on a non-GAAP basis were $534.0 million, down 8.2% on a year-over-year basis. Operating income increased 72.6% to $145 million from the year-ago quarter and the operating margin was 25.8% compared with 12.3% in the prior–year quarter, driven by strong digital top-line performance.
Net income for Activision was $103 million in the last quarter, up from $60 million in the prior-year quarter.
Balance Sheet
Activision exited the first quarter of 2011 with $2.94 billion in cash and cash equivalents and short-term investments, versus $3.40 billion in the previous quarter.
Share Repurchase
As of June 30, 2011, Activision Blizzard purchased approximately 43 million shares of its common stock, for approximately $479 million, under the $1.5 billion share repurchase program that was authorized by its Board of Directors on February 9, 2011.
Outlook
For the forthcoming quarter, Activision expects an EPS of 1 cent on a non-GAAP basis and revenues of $530.0 million. The Zacks Consensus Estimate projects an earnings of 6 cents and revenue of $641 million for the upcoming quarter.
For full year 2011, Activision raised its outlook both for EPS and revenues. EPS (non-GAAP) is expected to be 77 cents, up from the prior outlook of 73 cents and was above the Zacks Consensus Estimate of 68 cents. Total revenue (non-GAAP) is estimated to be $4.05 billion, up from prior guidance of $3.95 billion, but was in line with the Zacks Consensus Estimate of $4.05 billion.
Activision expects to unveil the Call of Duty: Black Ops Resurrection content pack for Microsoft Corp.’s (MSFT) Xbox 360, Sony Corp.’s (SNE) PlayStation3 and for the PC. The company also plans to release X-Men Destiny, Cabela's Big Game Hunter 2012 and Cabela’s Hunting Party.
Our Take
Activision Blizzard has posted better-than-expected results on the back of top-line growth and online expansion.
We expect the company’s initiatives to expand in the high-margin digital business segment to pay rich dividends in the forthcoming quarters. Additionally, the title releases scheduled in the forthcoming quarter will prove beneficial for Activision.
However, Activision continues to face tough competition from Electronic Arts Inc. (ERTS) and Take-Two Interactive Software Inc. (TTWO), which will act as a headwind going forward.
Moreover, Activision does not have any exposure in the social gaming platform as compared to Electronic Arts, which may hurt its competitive position over the long term.
In the long run, we maintain our Neutral rating.
However, we currently have a Zacks #2 Rank for Activision Blizzard Inc., which implies a Buy rating in the short term (1-3 months) on the back of strong quarterly results and a raised outlook.
ACTIVISION BLZD (ATVI): Free Stock Analysis Report
ELECTR ARTS INC (ERTS): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
SONY CORP ADR (SNE): Free Stock Analysis Report
TAKE-TWO INTER (TTWO): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment