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Activision (ATVI) Q2 Earnings Beat, Revenues Inch Up Y/Y

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Activision Blizzard (ATVI - Free Report) reported second-quarter 2018 non-GAAP earnings of 62 cents per share, which comfortably surpassed the Zacks Consensus Estimate of 36 cents. Earnings increased 12.7% from the prior-year quarter.
    
Net revenues (including deferrals) increased 0.6% year over year to $1.6 billion.

Activision’s net bookings, excluding deferrals, decreased 2.8% year over year to $1.38 billion. Net bookings from digital channels were $1.20 billion, as compared with $1.28 billion in the year-ago quarter.  

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

Quarter Details

Segment wise, product sales (28.3% of total net revenues) were $464 million, down 3.5% year over year. Subscription, licensing and other revenues (71.7% of total net revenues) increased 2.3% to $1.2 billion.
 

Activision Blizzard, Inc Price, Consensus and EPS Surprise

Activision Blizzard, Inc Price, Consensus and EPS Surprise | Activision Blizzard, Inc Quote

Activision earned $1 billion from in-game net bookings in the quarter driven by Call of Duty: WWII, Black Ops 3 and Destiny 2. Moreover, in-game net bookings were a record $2 billion in the first half of 2018.

The company had over 352 million monthly active users (MAUs) at quarter end, a decrease of 5.9% sequentially.

Activision Publishing’s revenues increased 7% year over year to $338 million, driven by in-game bookings of Call of Duty: WWII and Destiny 2: Warmind. Activision had 45 million MAUs, down 11.8% sequentially.

Blizzard’s revenues of $489 million declined 13.6% from the year-ago quarter due to investment in initiatives like Overwatch League. Blizzard had 37 million MAUs, a decline of 2.6% sequentially.

King Digital’s total revenues of $502 million increased 4.6% year over year driven by continued investments in live services, features and content. King Digital reported MAUs of 270 million, down 5.3% sequentially but overall engagement remained strong. MAUs for Candy Crush remained stable sequentially, while time spent per player remained strong at 36 minutes.

On the basis of distribution channels, Activision reported retail channel sales of $278 million (up 6.9% year over year) and digital online revenues of $1.3 billion (down 3.8%). Digital revenues contributed 76.7% of revenues in the quarter. Other revenues surged 67.7% year over year to $104 million.

On the basis of platform, revenues from mobile and ancillary (31.7% of revenues) increased 5.7% year over year to $521 million. However, revenues from console (34.4% of revenues) and PC (27.5% of revenues) declined 0.5% and 11.2% respectively, year over year to $565 million and $451 million.

On a geographical basis, revenues from America (54.8% of revenues) increased 4.9% year over year to $900 million, while that from EMEA (33.6% of revenues) grew 2.6% year over year to $552 million. However, revenues from Asia Pacific (11.5% of revenues) fell 19.6% to $189 million.

Operating Details

Reported product development and sales & marketing expenses declined 0.4% and 2.2% respectively, year over year to $237 million and $221 million. However, general and administrative expense increased 23.8% year over year to $182 million.

On a non-GAAP basis, operating income was $568 million compared with $576 million reported in the year-ago quarter.

Operating margin of 34.6% contracted 70 basis points (bps) on a year-over-year basis due to increase in general and administrative expenses.

Balance Sheet & Cash Flow

As of Jun 30, 2018, Activision had $4.9 billion in cash and cash equivalents, compared with $5.2 billion as of Mar 31, 2018. Activision exited the quarter with long-term debt of $4.394 billion.

Operating cash flow for the quarter was $9 million while free cash flow was negative $21 million.

Guidance

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, and Destiny 2's major expansion. The company is also focused on ramping up advertising.

For 2018, Activision expects GAAP revenues of $7.36 billion and earnings of $1.84 per share. On a non-GAAP basis, revenues and earnings are expected to be $7.36 billion and $2.46 per share, respectively.

The company anticipates product costs of 24% and operating expenses of 52% in 2018.

For third-quarter 2018, Activision anticipates GAAP revenues of $1.49 billion and earnings of 16 cents per share. On a non-GAAP basis, revenues and earnings are likely to be $1.49 billion and 37 cents per share, respectively.

The company anticipates product costs of 27% and operating expenses of 59% in the third quarter.

Zacks Rank & Other Stocks to Consider

Activision currently carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the broader consumer discretionary sector include AMC Networks (AMCX - Free Report) , Weight Watchers International (WTW - Free Report) and Penn National (PENN - Free Report) . While Weight Watchers International sport a Zacks Rank #1 (Strong Buy), both AMC Networks and Penn National carries a Zacks Rank #2. You can see the complete list of today’s Zacks Rank #1  stocks here.

Long-term earnings growth rate for AMC Networks, Weight Watchers International and Penn National is 7.16%, 17.5% and 10%, respectively.

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