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Activision Blizzard (ATVI) Down 2% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Activision Blizzard (ATVI - Free Report) . Shares have lost about 2% in that time frame, underperforming the S&P 500.

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

Black Ops 4’s Solid Engagement Aided Activision’s Q4 Results

Activision Blizzard reported fourth-quarter 2018 non-GAAP earnings of 90 cents per share that surged 83.7% year over year. The figure also came well above the guided figure of 64 cents.

Net revenues (including deferrals) increased 7.4% year over year to $2.84 billion. Net revenues on a GAAP basis increased 16.5% year over year to $2.38 billion.

The Zacks Consensus Estimate for earnings and revenues was pegged at $1.29 per share and $3.05 billion, respectively.

Increased time spent per player on Call of Duty: Black Ops 4 owing to its three different modes along with increased monetization and retention from Candy Crush Friends Saga aided fourth-quarter 2018 results.

Investors should note that fourth-quarter 2018 results were reported per revenue recognition standard 606 while fourth-quarter 2017 results had been in compliance with revenue recognition standard 605.

Quarter Details

Activision’s net bookings increased 7.6% year over year to $2.84 billion. Net bookings from digital channels were $1.88 billion, up 16% from the year-ago quarter.
  
Activision earned $1.2 billion in in-game net bookings in the quarter. Moreover, in-game net bookings were a record $4.2 billion at the end of 2018.

Segment wise, product sales (33.9% of total net revenues) were $808 million, up 9.6% year over year. Subscription, licensing and other revenues (66.1%) increased 20.4% to $1.57 billion.

The company had over 356 million monthly active users (MAUs) at quarter end, up 3.2% sequentially.

Activision Publishing’s revenues increased 6% year over year to $1.41 billion due to the launch of Call of Duty: Black Ops 4. Activision had 53 million MAUs, up 15.2% sequentially.

Notably, Call of Duty: Black Ops 4 sold more units than Call of Duty: Black Ops III and the PC units sold were three times more in the quarter the game was launched. Additionally, full- game downloads of Call of Duty: Black Ops 4 were 40% more than the console platform.

Management stated that average time spent per player increased due to three different modes, Multiplayer, Zombies and Blackout, which is a positive. Further, Activision continues to cash in on the Call of Duty franchise as it was again the top selling console franchise in 2018. Notably, Call of Duty was the top selling franchise in nine of the 10 years.

However, Call of Duty: Black Ops 4 sales were lower than management’s expectation in the second half of the quarter due to lower retail demand and pricing. Moreover, in-game net bookings for the game were low initially. Bookings picked up only when Activision introduced exciting content at the end of fourth-quarter 2018. Notably, the company stated that on Feb 19, it will release major in-game content across all modes.

The release of Spyro Reignited Trilogy in the reported quarter and the continued contribution from Crash Bandicoot N.Sane Trilogy also aided Activision Publishing revenues. Notably, Crash Bandicoot N.Sane Trilogy has sold more than 10 million units following its release in 2017.

Moreover, Activision stated that its decision to end its partnership and give up publishing rights of the Destiny franchise to Bungie, its developer, did not have any impact on the segment operating income.

Blizzard’s revenues of $686 million increased 15% from the year-ago quarter due to the successful partnership with NetEase. In the current quarter, Blizzard and NetEase extended their agreement till January 2023. The agreement, which began in 2008, will allow Blizzard to publish its games including Overwatch, World of Warcraft, Hearthstone, the StarCraft series, Heroes of the Storm and the Diablo series for Chinese users.

Blizzard had 35 million MAUs, down 5.4% sequentially, due to decline in World of Warcraft after launch of expansion pack offset by stable performance of Overwatch and Hearthstone. However, in-game net booking for both Overwatch and Hearthstone declined sequentially.

King Digital’s total revenues of $543 million increased 5% year over year. King Digital reported MAUs of 268 million, up 2.3% sequentially due to increased monetization and retention with Candy Crush Friends Saga that was launched in the reported quarter. Notably, King Digital MAUs increased sequentially for the first time after the business was acquired in first-quarter 2016.

Given the strong performance of Candy Crush Friends Saga, King Digital is expected to boost its marketing initiatives in 2019.

Additionally, King had two of the top 10 highest-grossing titles on U.S. mobile app stores for 21 quarters in a row. Candy Crush Saga was the number one grossing game on mobile in the United States in the reported quarter. Moreover, the company’s advertising initiatives helped net bookings grow 50% sequentially.

On the basis of distribution channels, Activision reported retail channel sales of $343 million (up 2% year over year) and digital online revenues of $1.79 billion (up 25%). Digital revenues contributed 75% of total revenues in the quarter. Other revenues declined 10% year over year to $250 million.

On the basis of platforms, revenues from mobile and ancillary (25% of total revenues) increased 3% year over year to $596 million and revenues from console (34%) increased 19% year over year to $808 million. Additionally, PC (31%) surged 43% year over year to $727 million.

On a geographical basis, revenues from America (48% of total revenues) increased 12% year over year to $1.14 billion, and Europe, Middle East and Africa (EMEA) (35%) increased 8% year over year to $844 million. Revenues from Asia Pacific (17%) surged 64% to $397 million.

Operating Details

Product development (13.6% of revenues) increased 2.2% year over year to $325 million. However, sales and marketing (13.5%) and general and administrative (8.8%) expenses decreased 33% and 5.9% respectively year over year to $321 million and $209 million.

On a non-GAAP basis, operating income was $838 million compared with $511 million reported in the year-ago quarter. Operating margin of 35.2% is significantly higher than 25% in the year-ago quarter.

Balance Sheet & Cash Flow

As of Dec 31, 2018, Activision had $4.23 billion in cash and cash equivalents compared with $3.31 billion as of Sep 30, 2018. Activision exited the quarter with long-term debt of $2.67 billion similar to the third-quarter 2018 figure.

Operating cash flow for 2018 was $1.79 billion, down from $2.21 billion in the year-ago period.

Guidance

First-Quarter 2019

Activision expects non-GAAP revenues of $1.72 billion and earnings of 63 cents per share. As a percentage of revenues, the company anticipates product costs, game operations, and distribution and operating expenses to be 20% and 43% respectively. Operating margin is expected to be 37%.

Activision Publishing will release Sekiro in first quarter.

2019

Activision anticipates non-GAAP revenues of $6.03 billion and earnings $2.46 per share. As a percentage of revenues, product costs, game operations, and distribution and operating expenses are expected to be 24% and 46% respectively. Operating margin is expected to be 30%.

The company expects in-game monetization to be lower owing to limited major game releases. Headcount is expected to decline 8% owing to Activision’s restructuring plans. The company expects to deploy more resources (about 20%) in its franchises including Call of Duty, Overwatch, Candy, Warcraft, Diablo and Hearthstone. Moreover, for Call of Duty, Activision will give frequent content updates and expand the franchise’s presence across platforms and geographies.

Activision Publishing results are expected to benefit from Call of Duty franchise. Activision is looking to boost the game’s in-game content to drive user engagement. Additionally, the company will soon bring the game to mobile platform by partnering with Tencent Holding. Moreover, Activision stated that it is looking to build a city-based Call of Duty league deriving its experience from the Overwatch league.

Blizzard revenues are expected to decline owing to no major releases. Moreover, management expects softness in in-game revenues. King Digital revenues are expected to grow year over year owing to Candy Crush franchise and advertising business. Moreover, King Digital will emphasize on growing Candy Crush’s reach and monetize the game by providing exciting in-game content.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.




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