Activision Blizzard Inc. (ATVI - Free Report) posted third-quarter 2016 results wherein adjusted earnings of 46 cents beat the Zacks Consensus Estimate of 39 cents but revenues of $1.568 billion marginally missed the consensus mark of $1.575 billion. Shares were down nearly 4% in aftermarket trading.
On a year-over-year basis, revenues were up nearly 59%. Revenues were driven by the overwhelming success of Overwatch (over 20 million users since its release on May 24, 2016), World of Warcraft: Legion (sold 3.3 million copies on the first day), King Digital Entertainment, increasing digital revenues and continued strength in the Call of Duty title. The company also raised its guidance for the year.
Activision had over 482 million monthly active users (MAUs) at quarter end and Blizzard’s online player community MAUs grew 50% year over year to 46 million. King Digital reported MAUs of 394 million due to seasonality and the absence of any big releases.
Segment wise, Product sales were $355 million, down 16.5%, whereas subscription, licensing and other revenues more than doubled to $1.213 billion.
On the basis of distribution channels, Activision reported retail channel sales of $157 million (down 44% year over year) and digital online revenues of $1.344 billion (which more than doubled year over year). Digital revenues contributed 86% of total revenue in the quarter. Other revenues fell 16% year over year to $67 million.
On a geographical basis, revenues from North America grew 61% to $796 million, while that from Europe grew 36% to $499 million. Revenues from Asia Pacific grew over one fold to $273 million.
On a non-GAAP (redefined) basis, operating income was $542 million compared with $225 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 exited the quarter with $4.09 billion in cash and cash equivalents. Long-term debt was $4.88 billion. Operating cash flow for the quarter was $456 million
For 2016, Activision expects non-GAAP (redefined) revenues of $6.45 billion compared with $6.40 billion. Non-GAAP earnings are expected to be $1.92 per share compared with $1.83 per share projected earlier.
For fourth quarter 2016, Activision expects non-GAAP (redefined) net revenue of $1.856 billion while earnings are expected to be 40 cents per share.
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.
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.
However, higher adoption of free-to-play games and significant competition from the likes of Electronic Arts (EA - Free Report) , Take Two Interactive (TTWO - Free Report) and Glu Mobile (GLUU - Free Report) remain the near-term headwinds. Also, an uncertain macro-economic outlook adds 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 #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
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