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Activision (ATVI) Q3 Earnings and Revenues Decrease Y/Y

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Activision Blizzard (ATVI - Free Report) reported third-quarter 2018 non-GAAP earnings of 42 cents per share. Earnings declined 5% from the prior-year quarter.

Net revenues (including deferrals) declined 6.6% year over year to $1.51 billion.  

The Zacks Consensus Estimate for earnings and revenues was pegged at 51 cents and $1.69 billion, respectively.

The company’s top line was negatively impacted by King Digital segment’s partner network disruption and the underperformance of some of its well-known franchises including Destiny.   

Quarter Details

Activision’s net bookings decreased 12.6% year over year to $1.66 billion. Net bookings from digital channels were $1.44 billion, compared with $1.47 billion in the year-ago quarter.
   
Activision earned $1 billion in in-game net bookings in the quarter driven by King’s Candy Crush Saga. Moreover, in-game net bookings were a record $3 billion till the third quarter of 2018.

Segment wise, product sales (17.4% of total net revenues) were $263 million, down 31.5% year over year. Subscription, licensing and other revenues (82.6% of total net revenues) increased 1.2% to $1.25 billion.
 

Activision Blizzard, Inc Price, Consensus and EPS Surprise

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

The company had over 345 million monthly active users (MAUs) at the quarter end, a decrease of 2% sequentially.

Activision Publishing’s revenues decreased 47.7% year over year to $397 million, with Destiny 2: Forsaken underperforming the company’s expectations. Activision had 46 million MAUs, up 2.2% sequentially.

Blizzard’s revenues of $635 million increased 19.6% from the year-ago quarter due to investment in initiatives like Overwatch League. The company now has 20 teams participating in the league, out of which 9 teams are from overseas.

King Digital’s total revenues of $506 million decreased 4.2% year over year due to partner network disruption. King Digital reported MAUs of 262 million, down 2.9% sequentially but overall engagement remained strong and grew year over year.

On the basis of distribution channels, Activision reported retail channel sales of $76 million (down 54.8% year over year) and digital online revenues of $1.28 billion (down 5.8%). Digital revenues contributed 84.4% of total revenues in the quarter. Other revenues surged 66.7% year over year to $160 million.

On the basis of platforms, revenues from mobile and ancillary (34.6% of total revenues) declined 2.1% year over year to $523 million and revenues from console (22.9% of total revenues) declined 34.2% year over year. However, PC (31.9% of total revenues) increased 4.6% year over year to $482 million

On a geographical basis, revenues from America (51.2% of total revenues) decreased 3% year over year to $774 million, while that from EMEA (35.3% of total revenues) declined 9.9% year over year to $534 million. Revenues from Asia Pacific (13.5% of total revenues) fell 10.1% to $204 million.

Notably, across all the company’s franchises, daily time spent per user playing games reached a new record of 52 minutes. Further, the company continues to ramp up advertising with the number of video ads on the platform increasing significantly compared with the previous quarter.

Operating Details

On a non-GAAP basis, operating income was $403 million compared with $493 million reported in the year-ago quarter. Operating margin of 26.7% contracted 380 basis points (bps) on a year-over-year basis

Reported product development (16.3% of revenue) and sales and marketing (17.2 % of total revenue) expenses declined 4.7% and 2.3% respectively, year over year to $246 million and $260 million.

However, general and administrative (11.6% of total revenue) expense increased 9.4% year over year to $175 million.

Balance Sheet & Cash Flow

As of Sep 30, 2018, Activision had $3.31 billion in cash and cash equivalents compared with $4.86 billion as of Jun 30, 2018. Activision exited the quarter with long-term debt of $2.67 billion.

Operating cash flow for the quarter was $253 million.

Guidance

For the fourth quarter, Activision expects non-GAAP revenues of $2.24 billion and earnings of 64 cents per share. As percentage of revenues, the company anticipates product costs, game operations, and distribution expenses to be 23%.

For 2018, Activision anticipates non-GAAP revenues of $7.35 billion, earnings $2.46 per share. As percentage of revenues, product costs, game operations, and distribution expenses are expected to be 23%.

Zacks Rank & Stocks to Consider

Activision currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader consumer discretionary sector include Crocs, Inc. (CROX - Free Report) , Roku, Inc. (ROKU - Free Report) and Hudson Ltd. (HUD - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Crocs, Roku and Hudson is projected to be 15%, 21% and 29.4%, respectively.

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