Activision Blizzard Inc.  posted impressive second-quarter 2016 results driven by the overwhelming success of Overwatch (over 15 million users since its release on May 24, 2016), the buyout of King Digital Entertainment, increasing digital revenues and continued strength in the Call of Duty title. The company also raised its guidance for the year. Shares were up 2% in after-market trading.

Adjusted earnings (including stock based compensation) of 40 cents per share and non- GAAP revenues of $1.609 billion easily beat the Zacks Consensus Estimate of 37 cents and $1.496 billion, respectively. On a year-over-year basis, revenues improved 54.1%.

Activision had over 491 million MAUs at quarter end, and its online player community MAUs grew 11% year over year to 49 million. King Digital reported MAUs of 409 million due to seasonality and the absence of any big releases.

On a GAAP basis, Activision’s revenues were $1.570 billion compared with $1.044 million in the second quarter of 2015. GAAP earnings came in at 17 cents compared with 29 cents reported in the year-ago quarter. Product sales were $501 million, down 5.1%, whereas subscription, licensing and other revenues more than doubled to $1.069 billion.

On the basis of distribution channels, Activision reported retail channel sales (non GAAP) of $152 million (up 74.7% year over year) and digital online revenues of $1.402 billion (which more than doubled year over year). Digital revenues contributed 87% of total revenue in the quarter. Other revenues fell 9.8% year over year to $55 million.

On a geographical basis, revenues (non GAAP) from North America more than doubled to $836 million, while that from Europe grew 78.2% to $490 million. Revenues from Asia Pacific grew two fold to $283 million.

On a non-GAAP basis, operating income was $588 million compared with $173 million reported in the year-ago quarter.

It is to be noted that Activision and a host of other video game companies have changed the way they report their non GAAP fiscal results to meet stricter guidelines imposed by the SEC. The company will no longer include the impact from revenue deferrals accounting treatment on certain online enabled products. 

ACTIVISION BLZD Price, Consensus and EPS Surprise

ACTIVISION BLZD Price, Consensus and EPS Surprise | ACTIVISION BLZD Quote

Financial position

Activision exited the quarter with $2.27 billion in cash and cash equivalents. Long-term debt was $4.98 billion. Operating cash flow was $479 million

Outlook

For 2016, Activision expects non-GAAP (redefined) revenues of $6.40 billion. Non-GAAP earnings are expected to be $1.83 per share.

For third quarter 2016, Activision expects non-GAAP (redefined) net revenue of $1.490 billion while earnings are expected to be 39 cents per share.

Our Take

Activision has been benefiting from its 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 are widely popular and should continue to contribute to the bottom line.

The company’s strong pipeline of new games should keep investors interested in the stock. It will release an expansion pack for Destiny in Sep 2016 and will launch the full game sequel in 2017. It launched “Summer Games content” for Overwatch a few days back. Moreover, Activision will release the much awaited expansion for World of Warcraft, Legion, on Aug 30, 2016. It also launched the third of four map packs for Call of Duty: Black Ops III in July this year.

Skylanders: Imaginators is scheduled to release in October while TV series, Skylanders Academy debuts on Netflix this fall. Call of Duty: Infinite Warfare will release ahead of holidays on Nov 4, 2016. King Digital also plans to launch a non-Candy Crush franchise toward the end of the year.

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 is hosting a 3-dayCall of Duty World League event in Orlando with $100,000 prize money beginning today.

For Activision, the acquisition of Candy Crush maker King Digital Entertainment (it had announced the acquisition in Nov 2015 for $5.9 billion) seems to have paid off as reflected in its solid quarterly results. The buyout was a ploy to enter the lucrative mobile games market where so far Activision has had a limited presence. Moreover, it adds a sizeable female user base to its hardcore male dominated gamer base.

However, higher adoption of free-to-play games and significant competition from the likes of Electronic Arts (EA Quick QuoteEA - Free Report) , Take Two Interactive (TTWO Quick QuoteTTWO - Free Report) 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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