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Activision Q2 Earnings Decline Y/Y, Revenues Beat Estimate

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Activision Blizzard Inc. (ATVI - Free Report) reported earnings of 4 cents in the second quarter of 2014, ahead of the Zacks Consensus Estimate of a loss of a penny. However, earnings (including stock-based compensation but excluding one-time items) declined 35.7% from the year-ago quarter.

Shares of Activision were up 4.16% ($0.93) in after-hours trading following the upbeat full-year 2014 guidance given by management.

Quarter Details  

Revenues (excluding net-effect of deferred revenues) increased 8.2% year over year to $658 million. Revenues managed to convincingly beat the Zacks Consensus Estimate of $607 million.

Robust performance of Call of Duty, World of Warcraft, Diablo III and the launch of Hearthstone: Heroes of Warcraft on Apple’s (AAPL - Free Report) iPad helped revenues to surpass the consensus mark.

Product sales revenues were down 19.3% on a year-over-year basis to $587.0 million in the reported quarter. Subscription, licensing and other revenues were up 18.6% from the year-ago quarter to $383.0 million.

Activision reported retail sales of $111 million (down 41.0% year over year) and digital online revenues of $481 million (up 25.6% from the year-ago quarter), which comprised 90% of the revenues in the quarter.

On a geographical basis, revenues from North America declined 6.4% while the same from Europe and Asia Pacific increased 17.0% and 54.7%, respectively, on a year-over-year basis.

For the first six months of 2014, Activision Publishing’s Sky Landers: Swap Force was the #2 best-selling console and handheld game.

Moreover, as of Jun 30, 2014, Blizzard Entertainment’s World of Warcraft remained the #1 subscription-based MMORPG with approximately 6.8 million subscribers worldwide.

As of Jun 30, 2014, Blizzard’s Diablo III: Reaper of Souls remained the #1 PC game both in North America and Europe with more than 20 million copies sold worldwide.

Total operating expenses (including stock-based compensation but excluding amortization and net effect of deferrals) as a percentage of revenues declined 40 basis points (bps) on a year-over-year basis to 54.7% in the last quarter. The modest decline was due to lower product development (down 310 bps) in the quarter.

Operating margin declined a modest 130 bps to 13.8% in the quarter. Net income was $31 million or 4 cents per share versus $75 million or 7 cents per share in the year- ago quarter.


Balance Sheet & Cash Flow

Activision exited the second quarter with $4.20 billion in cash and short-term investments versus $4.44 billion in the previous quarter. The long-term debt amount stands at $4.32 billion versus $4.37 in the prior quarter.

Operating cash flow was $106.0 million in the reported quarter compared with $136.0 million in the prior quarter. The company generated free cash flow of $81.0 million in the second quarter.

Future Plan

Over the upcoming months, the company expects to launch World of Warcraft: Warlords of Draenor, the newest expansion in the epic franchise, which has already been pre-purchased by over 1.5 million subscribers.

Moreover, Activision also plans to launch Diablo III: Reaper of Souls – Ultimate Evil Edition and Destiny for Sony’s PlayStation 3 & PlayStation 4 consoles as well as Microsoft’s (MSFT - Free Report) Xbox One and Xbox 360 consoles in the third quarter.

Additionally, the third quarter will also witness the release of Call of Duty: Ghosts Nemesis on platforms other than Xbox One and Xbox 360 consoles. In October, the company intends to launch SkyLanders: Trap Team while the scheduled date for launch of Call of Duty: Advanced Warfare has been set in Nov 2014.


For the third quarter, Activision expects non-GAAP revenues of $975.0 million, much higher than the Zacks Consensus Estimate of $910.0 million. Earnings are expected to be 11 cents per share, which coincides with the Zacks Consensus Estimate.

The company raised its full year revenue guidance to $4.70 billion (from the prior outlook of $4.68 billion) based on strong performance from its major franchises, strong product pipeline and expected higher consumer spending on new consoles going forward.

For full year 2014, Activision expects earnings of $1.29 per share while the Zacks Consensus Estimate is pegged at $1.18 per share. The company remains positive on 2014 as it plans to release a number of new gaming titles based on Call of Duty, Destiny and Diablo franchises.

Management believes that Destiny will be the biggest new IP launch to date. The company also believes that Call of Duty will be the most pre-ordered game of the year 2014.

Our Take

We believe that Activision is well positioned to gain from the upcoming releases on new consoles due to its superior product offering compared to rivals such as Electronic Arts (EA - Free Report) , Take-Two Interactive and Glu Mobile Inc.
Activision faces significant tough year-over-year comparison in the second half of 2014. The company released its hugely popular Call of Duty: Ghosts last year in November that helped it to report record revenues and earnings growth in the fourth quarter.
We believe that it will be difficult for the upcoming Call of Duty installment to beat last year numbers. Moreover, the company faces execution risk with its largest IP to-date, Destiny.

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 #4 (Sell).

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