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Activision (ATVI) Q2 Earnings Beat Estimates, View Raised

Activision Blizzard Inc. ATVI posted second-quarter 2017 adjusted earnings of 51 cents and revenues (excluding deferrals) of $1.418 billion, easily beating the respective Zacks Consensus Estimate of 25 cents and $1.214 billion. However, on a year-over-year basis, revenues were down approximately 10%. Shares were down over 2% in the aftermarket trading.

Quarterly Numbers

Including deferral revenues, Activision reported sales of $1.631 billion, up 3.9%. The top line was driven by continued strength in digital revenues, success of Overwatch and the buyout of King Digital Entertainment.

Activision earned $1 billion of in-game revenues in the quarter. Also, the company announced the first seven-team sales for its Overwatch league.

Activision Blizzard, Inc Price, Consensus and EPS Surprise

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

Segment wise, product sales were $481 million, down 4%, whereas subscription, licensing and other revenues grew 7.6% to $1.150 billion.

On the basis of distribution channels, Activision reported retail channel sales of $260 million (down 30% year over year) and digital online revenues of $1.309 billion (up 15%). Digital revenues contributed 80% of total revenue in the quarter. Other revenues grew 13% year over year to $62 million.

On a geographical basis, revenues from North America were flat at $858 million, while that from EMEA grew 6% to $538 million. Revenues from Asia Pacific grew 16% to $235 million.

On a non-GAAP (redefined) basis, operating income was $576 million compared with $480 million reported in the year-ago quarter.

Notably, Activision and a host of other video-game companies have changed the way they report their non-GAAP fiscal results to meet stricter guidelines imposed by the SEC. The company will no longer include the impact from revenue deferrals accounting treatment on certain online-enabled products.

The company had over 407 million monthly active users (MAUs) at quarter end.

Activision and Blizzard divisions’ online player community MAUs were 47 million and 46 million, respectively. King Digital reported MAUs of 314 million due to the absence of any big releases.

Financial Position

Activision exited the quarter with $3.278 billion in cash and cash equivalents. Long-term debt was $4.387 billion. Operating cash flow for the quarter was $265 million.

Outlook

For 2017, Activision expects GAAP revenues of $6.4 billion and earnings per share of $1.05 compared with an earlier projection of revenues of $6.1 billion and earnings per share of 88 cents. On a non-GAAP basis, revenues and earnings are expected to be $6.4 billion and $1.94 per share, respectively, against an earlier projection of revenues of $6.1 billion and earnings per share of $1.80. Deferral revenues are expected around $175 million.

The Zacks Consensus Estimate for revenues and earnings is pegged at $6.56 billion and $1.82 per share, respectively.

For third-quarter 2017, Activision anticipates GAAP revenues of $1.385 billion and earnings per share of 9 cents. On a non-GAAP basis, revenues and earnings are likely to be $1.385 billion and 34 cents per share, respectively. Deferral revenues are expected to be around $315 million.

Our Take

Activision has been benefiting from its focus on broadening its franchise portfolio, innovation and initiatives to expand to new geographies. Its offerings like StarCraft, World of Warcraft, Heroes of the Storm and Call of Duty are widely popular and should continue to contribute to the bottom line.

Activision is aggressively working on becoming a media entertainment giant, somewhere on the lines of The Walt Disney Company. Apart from launching a movie studio, the company is also strengthening its presence in the lucrative e-sports market. Recently, the company announced the launch of Overwatch e-sports league. It also introduced a new consumer product division to be spearheaded by an ex-Walt Disney executive, Tim Kiplin. 

The higher adoption of free-to-play games and significant competition from the likes of Electronic Arts EA , Take Two Interactive TTWO and Glu Mobile GLUU remain near-term headwinds. Also, an uncertain macro-economic outlook adds to its woes as video games form a part of discretionary spending. Also, the company’s dependence on a handful of mega franchises (Call of Duty, World of Warcraft) for the lion’s share of its revenues makes it highly vulnerable.

Zacks Rank & Stock Price Movement

Currently, Activision carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of Activision have registered impressive growth in the past one year. The stock generated a return of 56.7% compared with the industry’s gain of 40.3%.

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