Activision Blizzard Inc. (ATVI) reported fiscal first quarter 2012 non-GAAP earnings (including stock based compensation but excluding one time items) of 5 cents, which handily surpassed the Zacks Consensus Estimate of 1 cent and managements’ guidance of 3 cents. However, on a year-over-year basis, the reported earnings declined 58.3% (12 cents) due to lower revenues and higher sales and marketing expenses.
Revenues
Though non-GAAP revenues (excluding revenues from deferral and related cost of sales) shrank 22.2% year over year to $587.0 million, it easily surpassed the Zacks Consensus Estimate of $566.0 million and company’s guidance of $525.0 million. The year-over-year decline in revenues was due to low subscriber base for World of Warcraft coupled with lower-than-expected sales of Call of Duty and lesser number of downloadable contents (DLC) releases.
On an operating segment basis, revenues from Activision Publishing dropped 16.0% from the previous-year quarter. Blizzard Entertainment and its subsidiaries’ revenue plunged 30.0% from the prior-year quarter due to the lack of any frontline game releases and revenue from Distribution was down 13.0% from the previous-year quarter.
On a geographical basis, North America, Europe and Asia Pacific recorded yearly revenue declines of 26.0%, 20.0% and 15.0%, respectively.
Operating Performance
Total costs and expenses (including stock based compensation but excluding one time items) were $518.0 million, down 7.5% on a year-over-year basis, primarily due to an 8% year-over-year decline of product development cost coupled with general and administrative expenses that remained flat year on year. However, sales and marketing expenses increased 31.7% from the previous-year quarter. As a percentage of revenue, operating expenses deteriorated from the 74.2% in the previous-year quarter to 88.2%.
Thus, operating income plunged 64.6% to $69 million from the year-ago quarter and the operating margin was 11.8% compared with 25.8% in the prior–year quarter.
Net income for Activision was $51 million in the quarter, down from $138 million in the prior-year quarter.
Balance Sheet
Activision exited the first quarter with $3.48 billion in cash and cash equivalents and short-term investments, versus $3.53 billion in the previous quarter.
During the quarter, Activision repurchased 22 million shares for an estimated price of $261.0 million. Activision also raised its dividend by 9.0% from 2011 to 18 cents and will be paid on May 16, 2012.
Outlook
For the forthcoming quarter, Activision expects non-GAAP EPS of 10 cents and revenues of $805 million. The Zacks Consensus Estimate for earnings is pegged at 14 cents per share and expects revenues of $809 million for the upcoming quarter.
For fiscal 2012, Activision’s non-GAAP EPS estimate is 95 cents, above the Zacks Consensus Estimate of 88 cents. Total revenue (non-GAAP) is estimated to be $4.53 billion, in line with the Zacks Consensus Estimate.
Management expects the release of Diablo III and Battleship on May 15, 2012 to boost the second quarter results. Moreover, sales of PROTOTYPE 2, released in April, would come in full effect in the second quarter. Moreover, management expects to be impacted positively by the mix of higher margin revenues in 2012.
Recommendation
Activision is focused on building a number of franchisees that will drive its top and bottom lines in 2012 and beyond. The company’s initiatives to strengthen its Call of Duty and Skylanders portfolio through the launch of new versions and content packs would benefit the company in the long run. Moreover, the company is expected to come out with a new massively multiplayer game in 2012, which coupled with Call of Duty’s expansion in China are the other positives for the company. Activision’s foray into the mobile gaming market is expected to be a long-term positive.
However, the softness in the video game industry and Activision’s limited presence in the social gaming market coupled with significant competition from Electronic Arts Inc. (EA) and Take-Two Interactive Software Inc. (TTWO) keep us Neutral on the stock over the long term.
Currently, Activision Blizzard has a Zacks #3 Rank, which implies a ‘Hold’ rating in the short term.
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