Activision Blizzard Inc. (ATVI) reported earnings (including stock-based compensation but excluding one-time items) of 91 cents in the fourth quarter of 2014, which comfortably beat the Zacks Consensus Estimate of 84 cents. Earnings increased significantly from 76 cents earned in the year-ago quarter.
Quarter Details
Adjusted revenues were $2.21 billion, which narrowly missed the Zacks Consensus Estimate of $2.25 billion and decreased from the year-ago figure of $2.27 billion. While revenue growth remains modest, the company’s popular franchise Call of Duty: Advanced Warfare, Destiny, and Skylanders: Trap Team registered significant demand securing positions in the top five best-selling new releases list of 2014.
Product sales were $1 billion, down from $1.15 billion. However, Subscription, licensing and other revenues increased from $366 million in the year-ago quarter to $481 billion.
Activision reported retail sales of $1.3 billion (down 23% year over year) and digital online revenues of $685 million (94% surge from the year-ago quarter), contributing 91% of total revenue.
On a geographical basis, revenues from North America decreased 6%, while the same from Europe and Asia Pacific increased 1% and 5%, respectively, on a year-over-year basis.
Margin
Total operating expenses (including stock-based compensation but excluding amortization and net effect of deferrals) stood at $1,328 million compared with $1,446 million a year ago.
Balance Sheet
Activision exited 2014 with $4.8 billion in cash and short-term investments versus $4.4 billion in the previous quarter. Long-term debt stands at $4.32 billion compared with $4.7 billion in 2013.
The company generated operating cash flow of $1.3 billion and free cash flow of $1.2 billion in 2014. Capital expenditure for the year was $107 million.
Outlook
For first-quarter 2015, Activision expects non-GAAP net revenue of $640 million. Earnings are expected to be 5 cents per share, while the Zacks Consensus Estimate is pegged at 21 cents. Diluted shares are expected to be around 745 million.
The company expects its full-year non-GAAP net revenue to be $4.40 billion based on the strong performance by its major franchises, solid product pipeline and expected higher consumer spending on new consoles, going forward. Non-GAAP earnings are expected to be 89 cents and diluted shares are expected to be 750 million.
Our Take
We believe that Activision’s superior product portfolio offers it a competitive advantage over the likes of Electronic Arts (EA), Take-Two Interactive Software Inc. (TTWO) and Glu Mobile, Inc. (GLUU).
However, Activision’s limited presence in the mobile gaming segment, higher adoption of free-to-play games and significant competition are the headwinds in the near term. Also, the company’s dependence on a handful of mega franchises (Call of Duty, World of Warcraft and Skylanders) for the lion’s share of its revenues makes it highly susceptible to the success of these games.
Further, Activision’s limited presence in the mobile gaming segment, higher adoption of free-to-play games and significant competition are the major headwinds in the near term.
Currently, Activision Blizzard has a Zacks Rank #3 (Hold).
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