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Why Is Activision Blizzard (ATVI) Up 6.1% Since Its Last Earnings Report?

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It has been about a month since the last earnings report for Activision Blizzard, Inc (ATVI - Free Report) . Shares have added about 6.1% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is ATVI due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Activision Blizzard posted first-quarter 2018 non-GAAP earnings of 78 cents per share, which increased 8.3% from the year-ago quarter.

Including GAAP deferrals, adjusted earnings of 38 cents per share surpassed the Zacks Consensus Estimate by 3 cents and increased 22.6% from the prior-year quarter.
   
Revenues (including deferrals) of $1.38 billion surpassed the Zacks Consensus Estimate of $1.32 billion.

Activision is primarily riding on its well-known franchises like Call of Duty and Overwatch, which fueled top-line improvement in the quarter. King Digital’s Candy Crush continues to contribute significantly to the company’s revenues.

Quarter Details

Excluding deferral revenues, Activision reported sales of $1.97 billion, up 13.9% year over year.
   
Segment wise, product sales (36.6% of total net revenues) were $720 million, up 41.5%. Subscription, licensing and other revenues (63.4%) increased 2.3% to $1.245 billion.

Activision earned $1 billion in-game net bookings in the quarter. The company had over 374 million monthly active users (MAUs) at quarter end.

Activision Publishing’s revenues increased 31% year over year to $312 million.  Activision had 51 million MAUs, up 7% year over year but up 12% sequentially, driven by the Call of Duty: WWII, Destiny 2 and Crash Bandicoot. The release of Call of Duty: Black Ops 4 will drive engagement further.

Blizzard’s revenues of $480 million increased 8% from the year-ago quarter driven by in-game content, strong presales of World of Warcraft, and Overwatch League. Blizzard had 38 million MAUs, backed by World of Warcraft, Overwatch and Hearthstone. The company’s presence is also being strengthened in the lucrative e-sports market with Overwatch League driving viewership and engagement.

King Digital’s mobile business recorded highest quarterly net bookings in history. King’s total revenues of $534 million increased 3% sequentially and 13% year over year to set a record level since the first quarter of 2015. King Digital reported MAUs of 290 million, slightly down sequentially but overall engagement remained strong. MAUs for Candy Crush increased sequentially, setting time spent per player at a record level. King also has some new releases scheduled for the later part of the year in order to grow its network further.

On the basis of distribution channels, Activision reported retail channel sales of $409 million (up 51% year over year) and digital online revenues of $1.63 billion (up 6%). Digital revenues contributed 74% of total revenues in the quarter. Other revenues grew 33% year over year to $93 million.

On the basis of platform, revenues from console (42%) grew 33% to $817 million. Mobile and ancillary revenues (27%) increased 13% to $536 million. However, revenues from PC (26%) declined 8% to $519 million.

On a geographical basis, revenues from North America (54%) increased 15% to $1.065 billion, while that from EMEA (35%) grew 24% to $687 million. Revenues from Asia Pacific (11%) fell 12% to $213 million.

Operating Details

On a non-GAAP basis, operating income was $767 million compared with $747 million reported in the year-ago quarter.

Operating margin of 39% contracted 420 basis points (bps) on a year-over-year basis due to increase in marketing expenses.

Margins for King and Activision improved on a year-over-year basis while that of Blizzard declined. Blizzard’s continuous investment in Overwatch League, MLG Network, Battle.net and other mobile offerings is an overhang on margins in the near term.

Balance Sheet & Cash Flow

As of Mar 31, 2018, Activision had $5.2 billion in cash and cash equivalents, compared with $4.7 billion as of Dec 31, 2017. Activision exited the quarter with long-term debt of $4.392 billion.

Operating cash flow for the quarter was $529 million while free cash flow was $498 million.

Outlook

Activision has a strong gaming lineup for the second half of the year, which includes World of Warcraft’s Battle for Azeroth, Call of Duty: Black Ops 4, Spyro the Dragon: Reignited Trilogy, Destiny 2's major expansion and new launches by King. The company is also focused on ramping up advertising.

For 2018, Activision expects GAAP revenues of $7.36 billion and earnings per share of $1.79, compared with an earlier projection of revenues of $7.35 billion and earnings of $1.78. On a non-GAAP basis, revenues and earnings are expected to be $7.36 billion and $2.46 per share, respectively, compared with the previous projection of $7.35 billion and $2.45.

The company anticipates product costs of 22% and operating expenses of 44% in 2018.

For second-quarter 2018, Activision anticipates GAAP revenues of $1.555 billion and earnings per share of 26 cents. On a non-GAAP basis, revenues and earnings are likely to be $1.555 billion and 46 cents per share, respectively.

The company anticipates product costs of 22% and operating expenses of 48% in the second quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been eight revisions lower for the current quarter. Last month, the consensus estimate has shifted downward by 9.9% due to these changes.

Activision Blizzard, Inc Price and Consensus

 

VGM Scores

At this time, ATVI has a nice Growth Score of B, though it is lagging a lot on the momentum front with a D. Following the exact same course, the stock was also allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, ATVI has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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