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.
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.
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.
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.
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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