Activision Blizzard Inc.
) reported earnings of 16 cents in the first quarter of 2014,
which comfortably beat the Zacks Consensus Estimate by 9 cents.
Earnings (including stock-based compensation but excluding
one-time items) improved 4.6% from the year-ago quarter.
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Revenues (excluding net-effect of deferred revenues) decreased
23.1% year over year to $772.0 million. However, revenues managed
to beat management's guidance and the Zacks Consensus Estimate of
$675.0 million and $689.0 million, respectively. The strong
performance was driven by 5 distinct franchises, highlighting the
increasing breadth and depth of the company's product portfolio.
Segment wise, revenues from Activision & Blizzard were down
18.5% from the year-ago quarter to $1.04 billion. Revenues from
Activision's Distribution segment increased 43.1% from the
year-ago quarter to $73.0 million in the reported quarter.
Activision reported retail sales of $659.0 million (down 26.5%
year over year) and digital online revenues of $379.0 million (up
0.5% from the year-ago quarter), which comprised 93.4% of the
revenues in the reported quarter.
On a geographical basis, revenues from North America declined
18.9%. Europe and Asia Pacific increased 10.0% and 75.0%,
respectively on a year-over-year basis.
In the reported quarter, in North America and Europe combined,
Activision Publishing had #1 and #2 best selling titles in the
Skylanders SWAP Force
Call of Duty: Ghosts
In the first quarter, Blizzard Entertainment had the #1 PC title
in North America and Europe combined in the form of
Diablo III: Reaper of Souls
. In the first week after its launch, it sold more than 2.7
million copies worldwide.
During the quarter, Blizzard launched its new free-to-play game
Hearthstone: Heroes of Warcraft
. Hearthstone already has over 10.0 million registered PC players
across all regions with strong engagement and monetization. Thus,
Hearthstone is all set to become Blizzard's first new franchise
since World of Warcraft.
During the quarter, Blizzard generated robust revenues through
Battle.net with the launch of Hearthstone on iPads.
Moreover, as of Mar 31, 2014, Blizzard Entertainment's World of
Warcraft remained the #1 subscription-based MMORPG with
approximately 7.6 million subscribers worldwide.
Total costs and expenses (including stock-based compensation but
excluding amortization and net effect of deferrals) as a
percentage of revenues increased 1470 basis points (bps) on a
year over year basis to 72.8% in the quarter.
The modest increase in total costs ad expenses was due to higher
product development (up 600 bps) and general & administrative
expenses (up 340 bps) in the quarter.
As a result, operating margin declined 51.0% in the quarter to
$210.0 million. Net income margin was 15.9% compared with 18.0%
in the year-ago quarter.
Balance Sheet & Cash Flow
Activision exited the first quarter with $4.3 billion in cash and
short-term investments versus $4.4 billion in the previous
quarter. Long-term debt stands at $4.37 billion versus $4.67
billion reported in the prior quarter.
Operating cash flow was $136.0 million in the reported quarter
compared to capital usage of $880.0 million in the prior quarter.
The company generated a free cash flow of $99.0 million in the
Further, the company has decided to pay a cash dividend of 20
cents per common share on May 14, 2014.
Activision in partnership with Tencent is all set to bring
Call of Duty
to China in a format especially designed for the market both on
the PC and as a free-to-play-game.
The company plans to make 4 additions to its franchise portfolio
in the near future. However, no major game release is planned for
the second quarter of 2014.
In the third quarter of 2014, the company expects to release
Destiny which is believed to be the biggest video-game IP launch
in history. However, since its marketing will involve enormous
expenditure, operating income in the quarter is expected to be
The fourth quarter of 2014 will witness the launch of
Skylanders: Trap Team
Call of Duty: Advanced Warfare
For the second quarter, Activision expects non-GAAP revenues of
$600.0 million while the Zacks Consensus Estimate for the same is
pegged at $577.0 million.
Earnings are expected to be a penny versus the Zacks Consensus
Estimate of $0.03 per share. Operating margin for the second
quarter is projected to be 10.0%. Product cost and operating
expenses are expected to be 26.0% and 45.0% respectively.
The company provided full year 2014 revenue guidance of $4.68
billion based on strong performance from its major franchises,
higher sales of
Call of Duty: Black Ops
, a strong product pipeline and expected higher consumer spending
on new consoles. The management guidance happens to be higher
than the Zacks Consensus Estimate of $4.64 billion.
For full year 2014, Activision expects earnings of $1.27 per
share while the Zacks Consensus Estimate is pegged at $1.20 per
share. Non-GAAP operating margin is expected to be 32.0%.
The company remains positive on 2014 as it plans to release a
number of new gaming titles based on the
Call of Duty
We believe that Activision is well positioned to gain from the
upcoming console releases due to its superior product offering
compared to rivals such as
Glu Mobile Inc
). However, management's cautious approach is commendable due to
volatility associated with the console transition cycle.
We believe that the new games have the potential to be among the
largest and most profitable in their respective spheres and would
enhance profitability going forward.
Additionally, 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).