Activision Blizzard Inc.’s (ATVI) fiscal third quarter 2011 results surpassed the Zacks Consensus Estimate on both top and bottom lines. Activision’s earnings per share (EPS) came in at 6 cents (including stock based compensation but excluding one time items), well ahead of the Zacks Consensus Estimate and management’s guidance, both of which were pegged at 1 cent.
However, EPS slumped 45.5% year over year, primarily due to fewer large-scale game releases during the quarter.
Revenues
Though revenues on a non-GAAP basis (excluding revenues from deferral and related cost of sales) were down 26.8% year over year to $627.0 million, it easily surpassed the Zacks Consensus Estimate of $557.0 million and management’s guidance of $530.0 million.
The better-than-expected revenues were driven by increasing digital downloads and online presence of popular titles such as World of Warcraft and Call of Duty. Activision’s focus on the digital online channel, which comprised 62% of the total revenue stream, increased 6.3% from the year-ago quarter. Revenue from distribution, which accounted for 12% of total revenue, grew 24.2% on a year-on-year basis, while the retail channel, which was 26% of revenues, was down 62.0% from the prior-year quarter.
On operating segment basis, revenue from Activision Publishing (34% of total revenue) was down 19.4% from the previous-year quarter. Blizzard Entertainment and its subsidiaries revenue (39.0% of total revenue) plunged 38.3% from the prior-year quarter. However, revenue from Activision Blizzard Distribution (10% of total revenue) was up 24.2% from the year-ago quarter.
On a geographical basis, North America, Europe and Asia Pacific recorded yearly revenue declines of 35.6%, 16.8% and 19.7%, respectively.
During the quarter, Activision Blizzard had two top-10 PC titles, namely World of Warcraft: Cataclysm and StarCraft II: Wings of Liberty
Operating Performance
Total costs and expenses (including stock based compensation but excluding one time items) were $560.0 million, down 18.5% on a year-over-year basis. Operating income decreased 61% to $67 million from the year-ago quarter and the operating margin was 10.7% compared with 19.8% in the prior–year quarter.
Net income for Activision was $74 million in the quarter, down from $127 million in the prior-year quarter.
Balance Sheet
Activision exited the third quarter of 2011 with $2.90 billion in cash and cash equivalents and short-term investments, versus $2.94 billion in the previous quarter.
Share Repurchase
As of September 30, 2011, the company had purchased approximately 45 million shares for an aggregate price of approximately $502 million, under the $1.5 billion stock repurchase program authorized by its Board of Directors in February 2011.
Outlook
For the forthcoming quarter, Activision expects an EPS of 55 cents on a non-GAAP basis and revenues of $2.17 billion. The Zacks Consensus Estimate for earnings is pegged at 53 cents per share and expects revenues of $2.11 billion for the upcoming quarter.
For full year 2011, Activision raised its outlook both for EPS and revenues. EPS (non-GAAP) is expected to be 85 cents, up from the prior outlook of 77 cents and was above the Zacks Consensus Estimate of 74 cents. Total revenue (non-GAAP) is estimated to be $4.25 billion, up from prior guidance of $4.05 billion, above the Zacks Consensus Estimate of $4.12 billion.
Our Take
Though the third quarter results were marred by the lack of game launches, the upcoming quarter is expected to be a winner for the company as major games have been released including the much awaited Call of Duty: Modern Warfare 3. Along with it, Call of Duty Elite, a new online service, was also launched. Additionally, games such as Survival: Shadows of Katmai, in partnership with Cabela’s, and James Bond classic thriller GoldenEye 007: Reloaded and Skylanders: Spyro's Adventures are expected to drive top-line growth.
We expect the company’s continued initiatives to expand in the digital online business segment, which will pay rich dividends over the next 12-18 months. A healthy product pipeline for the holiday season will help Activision tap the strong demand, thereby driving its top-line growth.
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, a gloomy macro environment in North America and Europe, increasing competition and weak video game results during the last 12 months, as well as Activision’s limited presence in the social and mobile gaming platforms will act as headwinds in the near term.
In the long run, we maintain our Neutral rating. We currently have a Zacks #3 Rank for Activision Blizzard Inc., which implies a Hold rating in the short term (1-3 months).
ACTIVISION BLZD (ATVI): Free Stock Analysis Report
ELECTR ARTS INC (ERTS): 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