Activision Blizzard Inc.’s (ATVI) fiscal fourth quarter 2011 results surpassed the Zacks Consensus Estimate on both top and bottom lines. Activision’s earnings came in at 59 cents per share (including stock based compensation but excluding one time items), ahead of the Zacks Consensus Estimate of 55 cents. Earnings not only increased 15.7% from the prior-year quarter, but also surpassed management’s guidance of 55 cents.
Revenues
Though non-GAAP revenues (excluding revenues from deferral and related cost of sales) shrank 5.5% year over year to $2.41 billion, it easily surpassed the Zacks Consensus Estimate of $2.20 billion and company’s guidance of $2.17 billion. The better-than-expected revenues were driven by digital revenue streams and online presence of popular titles such as World of Warcraft, Call of Duty and Skylanders.
On an operating segment basis, revenue from Activision Publishing (80.0% of total revenue) was up 8.1% from the previous-year quarter. Blizzard Entertainment and its subsidiaries revenue (11.5% of total revenue) plunged 51.5% from the prior-year quarter due to the lack of any frontline game releases. However, revenue from Activision Blizzard Distribution (8.5% of total revenue) was up 5.2% from the year-ago quarter.
On a geographical basis, North America, Europe and Asia Pacific recorded yearly revenue declines of 7.0%, 4.0% and 3.0%, respectively.
Operating Performance
Total costs and expenses (including stock based compensation but excluding one time items) were $1.56 billion, down 7.3% on a year-over-year basis, primarily due to year-over-year decline of product development cost and flat sales and marketing expenses as well as general and administrative expenses when compared with the previous-year quarter.
Operating income decreased 2.0% to $847 million from the year-ago quarter and the operating margin was 35.2% compared with 33.9% in the prior–year quarter, primarily due to lower operating expenses.
Net income for Activision was $692 million in the quarter, up from $631 million in the prior-year quarter.
Balance Sheet
Activision exited the fourth quarter with $3.53 billion in cash and cash equivalents and short-term investments, versus $2.90 billion in the previous quarter.
The company has approved a new stock repurchase program to repurchase approximately $1 billion of the company's stock that will be effective from April 1, 2012.
Outlook
For the forthcoming quarter, Activision expects non-GAAP EPS of 3 cents and revenues of $525 million. The Zacks Consensus Estimate for earnings is pegged at 13 cents per share and expects revenues of $779.0 million for the upcoming quarter.
For fiscal 2012, Activision’s non-GAAP EPS estimate is 94 cents, above the Zacks Consensus Estimate of 91 cents. Total revenue (non-GAAP) is estimated to be $4.50 billion, below the Zacks Consensus Estimate of $4.57 billion.
Our Take
Activision’s holiday release of Call of Duty: Modern Warfare 3 had a major impact on the top line of the company along with the reduction in the loss of subscribers in its World of Warcraft franchise. We believe that the release of Activision’s famous franchise games and their subsequent content enhancements will continue to benefit the company in the forthcoming quarters, driving its top-line growth.
We expect the company’s continued initiatives to expand in the digital online business segment will pay rich dividends over the next 12-18 months. A healthy product pipeline for 2012 will also boost Activision’s top-line growth in the long term.
However, Activision continues to face tough competition from Electronic Arts Inc. (EA) and Take-Two Interactive Software Inc. (TTWO), which will act as a headwind going forward.
Moreover, a gloomy macro-economic 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 #2 Rank for Activision Blizzard Inc., which implies a Buy rating in the short term (1-3 months).
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