Activision Blizzard Inc. (ATVI) reported robust fiscal first quarter 2011 results that beat the Zacks Consensus Estimate on both the top and bottom lines.
Activision earned 12 cents per share (including stock-based compensation but excluding one-time items), way ahead of the Zacks Consensus Estimate of 6 cents and management’s guidance of 7 cents. Reported earnings rose 71.4% from the year-ago quarter.
First quarter results were driven by its top franchises, like Call of Duty and World of Warcraft along with strong revenue derived from its digital channel.
Revenues on a non-GAAP basis (excluding revenues from deferral and related cost of sales) surged 5.7% year over year to $755.0 million, easily surpassing the Zacks Consensus Estimate of $667.0 million and management’s guidance of $640.0 million.
The quarter’s robust revenues were derived from Activision’s focus on the digital channel, which is a higher margin and high potential business. This business generated 58% of the revenues, growing 30% on a year-over-year basis. Revenue from distribution grew 6.0% on a year-on-year basis, while the retail distribution channel revenue was down 21.0% from the previous-year quarter.
On a segment basis, Massively Multiplayer Online Role-Playing Game (MMORPG) accounted for 45% of the revenues and was up 12% from the previous year. Sales from PC accounted for 4% of revenues and increased 48% from the year ago quarter, while revenues from total console (36.0% of the revenue) and handheld devices (5.0% of revenue) contracted 1.0% and 26.0%, respectively.
On a geographical basis, revenues from North America (48.0% of total revenue) decreased 6.6% year over year to $365.0 million, while revenues from Europe (43.0% of the total revenue) were up 20.0% year over year to $323.0 million. Although the Asia-Pacific region contributed only 9.0% to the total revenue, revenues from the region jumped 26.0% on a year-over-year basis to $67.0 million in the quarter.
During the quarter, Call of Duty: Black Ops was the best-selling game across Microsoft (MSFT) Xbox 360 gaming consoles, the PlayStation3 and the PC in the U.S. and Europe. It was also the #1 game in the U.S. and Europe for the quarter.
During the quarter, Activision Blizzard had three top-10 PC titles, namely World of Warcraft: Cataclysm, StarCraft II: Wings of Liberty and Call of Duty: Black Ops.
Compared to the digital downloads of the Call of Duty: Modern Warfare 2 Stimulus Pack in the year-ago quarter, digital downloads of the Call of Duty: Black Ops First Strike content pack surged over 20% in this quarter.
Operating Performance
Total costs and expenses on a non-GAAP basis were $537.0 million, down 2.2% on a year-over-year basis. Operating income increased 61.2% to $195 million from the year-ago quarter and operating margin was 25.8% compared to 16.9% in the prior–year quarter, driven by strong digital top-line performance.
Net income for Activision was $141.0 million in the last quarter, up from $86 million in the prior-year quarter.
Balance Sheet
Exiting the first quarter of 2011, Activision had $3.4 billion in cash and cash equivalents and short-term investments compared to $3.5 billion in the previous quarter. During the quarter, Activision generated operating cash flows of $134.0 million. Activision has a debt-free balance sheet.
Share Repurchase and Dividend
As of March 31, 2011, Activision Blizzard purchased approximately 31 million shares of its common stock, for approximately $344 million, under the $1.5 billion share repurchase program authorized by its Board of Directors on February 9, 2011.
Activision Blizzard declared a cash dividend of 16 cents per share on May 11, 2011 to shareholders of record as of March 16, 2011. The dividend represents a 10% increase over the dividend that was issued in 2010.
Outlook
For the forthcoming quarter, Activision expects an EPS of 4 cents on a non-GAAP basis and revenues of $575.0 million. The Zacks Consensus Estimate was for EPS of 7 cents for the second quarter.
For full-year 2011, Activision raised its outlook both for EPS and revenues. EPS (non-GAAP) is expected to be 73 cents, up from the prior outlook of 70 cents and was above the Zacks Consensus Estimate of 64 cents. Total revenue (non-GAAP) is estimated to be $3.95 billion, up from prior guidance of $3.90 billion but was still below the Zacks Consensus Estimate of $3.99 billion.
On May 3, 2011, Activision Publishing released the Call of Duty: Black Ops Escalation content pack for Microsoft Xbox 360 video game. During the second quarter, the pack will also to be available on Sony’s PlayStation3 computer entertainment system and also on the PC.
During the quarter, Activision Publishing also plans to release Transformers: Dark of the Moon and Wipeout In The Zone.
Our Take
Activision Blizzard has posted better than expected results on the back of top-line growth. We expect the company’s initiatives to expand in the high-margin digital business segment will pay rich dividends, in the forthcoming quarters. Additionally, the title releases scheduled in the forthcoming quarter will prove beneficial for Activision.
However, Activision continues to face tough competition from Electronic Arts Inc. (ERTS) and Take-Two Interactive Software Inc. (TTWO), which will act as a headwind going forward.
Moreover, Activision does not have any exposure in the social gaming platform as compared to Electronic Arts, which may hurt its competitive position over the long term.
In the long run, we maintain our Neutral rating.
However, we currently have a Zacks #2 Rank for Activision Blizzard Inc., which implies a Buy rating in the short term (1-3 months) on the back of strong quarterly results and a raised outlook.
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