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Activision Reports Dismal Q4 Earnings, Shares Fall 14%

Activision Blizzard Inc.ATVI shares tanked 14% in the aftermarket hours following a dismal fourth quarter earnings report. Adjusted earnings of 81 cents per share and non GAAP revenues of $2,118 million fell below the Zacks Consensus Estimate of 83 cents and $2201.3 million, respectively.

Analysts observe that the success of Call of Duty: Black Ops 3 was overshadowed by weakness in other titles while forex fluctuations continued to add to troubles.

Quarter in Detail

On a GAAP basis, Activision's revenues were $1,353 million compared with $1,575 million in the fourth quarter of 2014. Product sales were $711 million, down from $1,094 million. Subscription, licensing and other revenues increased from $481 million in the year-ago quarter to $642 million.

On the basis of distribution channels (GAAP), Activision reported retail channel sales of $462 million (down 45% year over year) and digital online revenues of $724 million (up 34.3%). Digital revenues contributed to 53.5% of revenues in the quarter.

On a geographical basis, revenues from North America decreased 18% to $659 million, while that from Europe slumped 20% to $ 522 million. Revenues from Asia Pacific registered growth of 48% to $172 million driven by strong performance in China where revenues grew 87% year over year.

Total cost and expenses declined 3% to $1,103 million. Operating income on a GAAP basis decreased 43% year over year to $250 million. Therefore, operating margin came in at 18.5% compared with 27.8% a year ago.

Balance Sheet

Activision exited the quarter with $5.39 billion in cash and short-term investments, up 11% year over year. Long-term debt was $4.08 billion as against $4.3 billion in the year ago quarter.

Outlook

For 2016, Activision expects non-GAAP revenues of $6.25 billion as against the Zacks Consensus Estimate of $5.539 billion. Non-GAAP earnings are expected to be $1.75 per share as against the Zacks Consensus Estimate of $1.55.

For first quarter 2016, Activision expects non-GAAP net revenue of $800 million. The Zacks Consensus Estimate stands at $761 million. Earnings are expected to be 11 cents per share.

King Digital Q4 Performance

Concurrent with Activision's quarterly report, King Digital Entertinment KING declared its fourth quarter results. Adjusted earnings per share (including stock based compensation but excluding other items) came in at 34 cents, surpassing the Zacks Consensus Estimate of 32 cents. Total GAAP revenues reported were $460.7 million while gross bookings came in at $508.8 million.

Our Take

Activision has been benefiting from its deep focus on broadening its franchise portfolio, innovation and initiatives to expand to new geographies. Activision's offerings like StarCraft, World of Warcraft, Heroes of the Storm and Call of Duty have been widely popular and should continue to contribute to bottom-line growth.

The company's strong pipeline of new games should keep investor interested in the stock. It will release expansion pack for Destiny in 2016 while bringing the full game sequel in 2017. It will be launching its first new franchise, Overwatch in spring of 2016. Moreover, Activision will releasing Warcraft movie in June and following that, it will launch the much awaited expansion, Legion, in summer of 2016.

Also, analysts observe that the company has been trying to improve its engagement levels by adopting a year-round model instead of a launch based model in which earnings and profits are derived only in a week. This should help to drive long term performance.

Of late, Activision has been making giant strides in its attempts to become a broad based media company. Apart from launching a movie studio, the company is also strengthening its presence in the lucrative e-sports market. It recently acquired Major Gaming League for $46 million to boost its newly established e-sports division.

Activision is also in the process of completing the acquisition of Candy Crush maker King Digital Entertainment (it had announced the acquisition in Nov 2015 for $5.9 billion). The company announced it is likely to close the acquisition in the February 2016. Moreover, with the acquisition of King Digital, Activision Blizzard, which has a strong male gamer dominated base, will now have a sizeable female user base. King Digital's iconic games Candy Crush and Candy Crush Soda saga are hugely popular with women. With over 500 million users, Activision Blizzard has exceeded Twitter TWTR and Instagram.

However, higher adoption of free-to-play games and significant competition from the likes of Electronic Arts, Take Two Interactive TTWO and Glu Mobile, remain the near-term headwinds. Also, an uncertain macro-economic outlook is adding to its woes as video games form a part of discretionary spending. Also, the company's dependence on a handful of mega franchises (Call of Duty, World of Warcraft) for the lion's share of its revenues makes it highly susceptible to the success of these games.

Currently, Activision has a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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