Activision Blizzard Inc. ATVI posted decent third-quarter 2015 results wherein the top line and the bottom line surpassed the respective Zacks Consensus Estimate. However, the year-over-year comparisons were unfavorable.
The company posted adjusted earnings (including stock-based compensation but excluding one-time items) of 18 cents, which comfortably beat the Zacks Consensus Estimate of 13 cents. However, on a year-over-year basis, adjusted earnings decreased more than 18% from 22 cents
On a GAAP basis, the company reported earnings of 17 cents as against a loss of 3 cents posted in the year-ago period.
Quarter in Detail
Adjusted revenues (excluding the net effect from deferral of net revenue) were $1.04 billion, which surpassed the Zacks Consensus Estimate of $947 million. However, adjusted revenues declined over 11% from $1.17 billion reported in the year-ago quarter.
On a GAAP basis, Activision’s revenues were $990 million compared with $753 million in the third quarter of 2014. The strong year-over-year performance was mainly driven by robust catalogue sales of its most popular game series including Call of Duty, Skylanders, Hearthstone and World of Warcraft.
Product sales were $425 million, up from $337 million. Subscription, licensing and other revenues increased from $416 million in the year-ago quarter to $565 million.
On the basis of distribution channels, Activision reported retail channel sales of $281 million (up 64% year over year) and digital online revenues of $629 million (approximately 25% jump from the year-ago quarter), contributing 64% to total revenue.
On a geographical basis, revenues from North America increased 41%, while that from Europe and Asia Pacific increased 16% and 47%, respectively, year over year.
GAAP gross profit for the quarter increased 30.6% year over year to $653 million. However, gross margin contracted 40 basis points to 66% due to higher cost of sales, as a percentage of sales. Total operating expenses declined to $457 million from $492 million reported in the year-ago period.
Operating income on a GAAP basis increased year over year to $196 million from $8 million. Therefore, operating margin came in at 19.9% as against 1.1% a year ago.
Balance Sheet
Activision exited the quarter with $4.52 billion in cash and short-term investments, flat sequentially. Long-term debt stood at $4.08 billion, same as the previous quarter.
Outlook
Buoyed by better-than-expected third-quarter performance, Activision raised the 2015 outlook. The company now expects non-GAAP revenues of $4.65 billion, up from previous expectations of $4.53 billion. The Zacks Consensus Estimate is pegged at $4.651 billion. Non-GAAP earnings are expected to be $1.31 per share, up from $1.30 projected earlier. The Zacks Consensus Estimate is pegged at $1.23. Shares outstanding are likely to be around 750 million.
For fourth-quarter 2015, Activision expects non-GAAP net revenue of $2.148 billion. The Zacks Consensus Estimate stands at $2.243 billion. Earnings are expected to be 82 cents per share, while the Zacks Consensus Estimate is 84 cents. Share count is expected to be roughly 753 million.
Activision to Acquire King Digital
Concurrent with the earnings release, Activision announced a deal to acquire Candy Crush maker King Digital Entertainment plc KING for $5.9 billion. The deal, anticipated to close by spring 2016, will expand Activision’s presence in the fast growing mobile gaming business.
Additionally, Activision, which has primarily male gamer dominated user base, will gain a sizeable female user base as King Digital’s iconic games Candy Crush and Candy Crush Soda Saga are hugely popular among women. With over 500 million users, Activision Blizzard has exceeded Twitter Inc. TWTR and Instagram and is inching closer to YouTube and Facebook Inc. FB.
Our Take
We believe that Activision’s superior product portfolio offers it a competitive advantage over the likes of Electronic Arts, Take-Two Interactive Software and Glu Mobile. Further, with the acquisition of King Digital, the company will be able to grab more market traction in the mobile gaming business.
However, higher adoption of free-to-play games and significant competition remain the near-term headwinds. 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.
Currently, Activision sports a Zacks Rank #1 (Strong Buy).
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