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Activision Blizzard Inc. (ATVI - Snapshot Report) reported robust first quarter 2013 non-GAAP earnings of 17 cents, which increased from 6 cents reported in the year-ago quarter. Including stock-based compensation of 2 cents, earnings came in at 15 cents per share, handily beating the Zacks Consensus Estimate of 9 cents.

Revenues 

Revenues on a non-GAAP basis jumped 37.0% from the year-ago quarter to $804.0 million. Reported revenues were significantly ahead of management’s guidance of $690 million and also surpassed the Zacks Consensus Estimate of $706 million.

The better-than-expected revenue growth was primarily attributed to solid performance from the Call of Duty, Skylanders, World of Warcraft franchises. Moreover, the recently released game, StarCraft II: Heart of the Swarm, also contributed to the revenue growth.

However, subscriber loss in World of Warcraft continued. During the quarter, the game lost 1.3 million subscribers. World of Warcraft had 8.3 million subscribers at the end of the first quarter.

The quarterly revenues were also positively impacted by strong retail (up 44.6% year over year) as well as digital online revenues (up 44.0% year over year).

Segment wise, revenues from Activision Publishing increased 56.1% from the year-ago quarter to $423.0 million. Blizzard Entertainment and its subsidiaries’ revenues increased 31.5% from the prior-year quarter to $330 million. The robust performance from these segments more than offset the 21.5% decline in revenues from Activision’s Distribution segment.

On a geographical basis, revenues from North America, Europe and Asia-Pacific reported year-over-year increase of 57.0%, 22.0% and 11.0%, respectively.

Operating Results

Total costs and expenses on a non-GAAP basis (excluding stock-based compensation and amortization and net effect of deferrals) increased 12.1% year over year to $557.0 million. However, operating expenses, as a percentage of revenues, declined from 84.7% to 69.3% during the same period of time.

Including stock-based compensation, total costs and expenses came in at $583 million, up 12.5% year over year.

Robust revenues and percentage decline of total costs led to a significant rise in the operating income. For the quarter, non-GAAP operating income (excluding stock-based compensation and amortization and net effect of deferrals) shot up 174.4% to $247 million from the year-ago quarter while operating margin expanded from 15.3% to 30.7% during the same period.

However, including stock-based compensation, operating income came in at $221.0 million while operating margin was 27.5%.

Net income on a non-GAAP basis (excluding stock-based compensation and amortization and net effect of deferrals) was $199 million in the quarter compared with $67.0 million in the year-ago quarter. Including stock-based compensation, net income stood at $181.0 million.

Balance Sheet

Activision exited the first quarter with $4.62 billion in cash and short-term investments versus $4.38 billion in the previous quarter. The company did not have any long-term debt in its balance sheet.

Outlook

For the second quarter of 2013, Activision expects non-GAAP earnings of 5 cents per share on revenues of $590 million.

Activision Blizzard revised its fiscal 2013 earnings outlook from 80 cents to 82 cents. The company also revised its revenue estimates for fiscal 2013 from $4.17 billion to $4.25 billion.

Recommendation

We believe that Activision’s product portfolio will boost top-line growth over the long term. Activision’s release of Call of Duty’s latest downloadable pack, Black Ops II Uprising, for Microsoft’s (MSFT - Analyst Report) Xbox 360 will be a growth catalyst for the upcoming quarter. Moreover, Blizzard Entertainment is expected to come up with an all new MMO game in 2013.

However, continued softness in the video game industry, limited presence in the mobile gaming segment, higher adoption of free-to-play games and significant competition from Electronic Arts (EA - Analyst Report) and Take-Two Interactive Software (TTWO - Snapshot Report) are the major headwinds going forward. Moreover, continued investments in new products are expected to hurt margins in the near term.

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

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