Activision Blizzard Inc.
(
ATVI
) reported better-than-expected second quarter 2012 earnings, which
surpassed the Zacks Consensus Estimate by a dime. The quarterly
revenues were well ahead of the Zacks Consensus Estimate of $893.0
million.
Quarter Details
Revenues on non-GAAP basis (excluding revenues from deferral and
related cost of sales) surged 50.8% year over year to $1.05 billion
and comfortably exceeded the company's guidance of $805.0 million.
The significant year-over-year growth was driven by strong
performances from
Diablo III
,
Skylanders
,
World of Warcraft
and
Call of Duty
franchises.
The quarterly revenues were also positively impacted by strong
retail (up 141% year over year) as well as digital online revenues
(up 17% year over year), which more than offset the decline in
revenue from the distribution segment (down 25% year over
year).
On operating basis, revenues from Activision Publishing
increased 15.0% from the previous-year quarter to $373.0 million.
Blizzard Entertainment and its subsidiaries' revenue jumped a
staggering 103.0% from the prior-year quarter to $634.0 million,
primarily driven by
Diablo III
's strong performance.
On a geographical basis, revenues from North America, Europe and
Asia Pacific reported yearly increase of 46.0%, 38.0% and 116.0%,
respectively.
Total costs and expenses on non-GAAP basis escalated 41.2% year
over year basis to $754.0 million, due to 32.4% rise in the product
development cost coupled with 51.7% increase in sales and marketing
expenses and 44.8% jump in the general and administrative
expenses.
Operating income on a non-GAAP basis (excluding stock based
compensation and amortization and net effect of deferrals) soared
81.8% to $300.0 million from the year-ago quarter. Operating margin
expanded 490 basis points ("bps") annually to 28.5%, driven by
productivity improvements.
However, stock-based compensation of $31.0 million dragged down
operating income to $269.0 million in the quarter. Operating margin
improved 480 bps to 25.5%.
Net income on non-GAAP basis (excluding stock based compensation
and amortization and net effect of deferrals) was $224 million or
20 cents per share in the quarter, up from $116 million or 10 cents
per share in the prior-year quarter.
However, including stock-based compensation of $21.0 million net
income was $203.0 million or 18 cents compared with $103.0 million
or 9 cents in the year-ago quarter.
Activision exited the second quarter with $3.19 billion in cash
and cash equivalents and short-term investments, versus $3.48
billion in the previous quarter. The company did not have any
long-term debt in its balance sheet. During the quarter Activision
generated $92.0 million. During the quarter, Activision repurchased
4.4 million shares for an estimated price of $204.0 million.
Outlook
For the third quarter, Activision expects non-GAAP earnings of 7
cents per share on revenues of $690 million. For fiscal 2012,
Activision raised its non-GAAP revenues and earnings estimate.
Activision now expects to earn 99 cents (up from 95 cents) on total
revenues of $4.63 billion (up from $4.53 billion) for the full
year.
Management expects the availability of
Transformers: Fall of Cybertron, Call of Duty: Modern Warfare 3
Content Collection #3
and
Call of Duty: Modern Warfare 3 Content Collection #4
to positively impact the upcoming quarter results. Moreover, the
expected release of
Ice Age Continental Drift - Arctic Games
,
Wipeout 3
and
Angry Birds Trilogy
will be beneficial for the company's top line.
In addition, aided by the continued strong performance of the
Skylanders
franchise, Activision expects to simultaneously gain traction in
both the toy market and video game market. Activision's expansion
plans in China will also be incrementally beneficial for the
company over the long term.
Recommendation
We believe that Activision is focusing on expanding its product
portfolio by developing new games in partnership with Bungie
.
Moreover, the company is reviving its popular old franchises such
as
StarCraft
, in order to drive customer engagement going forward. We believe
that portfolio expansion will reduce Activision's dependency on
Call of Duty
and
World of Warcraft
for top-line growth over the long term.
Activision recently entered into a partnership with Tencent to
run
Call of Duty Online
in China. We believe that Activision has strong growth potentials
in China due to the significant presence of Tencent. We also
believe that Activision's foray into the mobile gaming market is
expected to be a long-term positive.
Meanwhile, Activision continues to strengthen its
World of Warcraft
,
Call of Duty
and
Skylanders
franchises through the launch of new versions and content packs,
which are expected to boost top-line growth in the near term.
However, softness in the video game industry and Activision's
limited presence in the online gaming market coupled with
significant competition from
Electronic Arts Inc.
(
EA
) and
Take-Two Interactive Software Inc.
(
TTWO
) are the major headwinds going forward. Moreover, increasing
investment related to new product developments may hurt
profitability in the near term.
We prefer to remain on the sidelines due to these concerns and
maintain our Neutral recommendation over the long term (6-12
months). Currently, Activision Blizzard has a Zacks #3 Rank, which
implies a 'Hold' rating in the short term.
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