Activision Beats, Raises Outlook - Analyst Blog

Activision Blizzard Inc. (ATVI) reported strong third quarter 2010 results, beating the Zacks Consensus Estimate by 3 cents.

Earnings, including stock based compensation and excluding one-time items, were 10 cents per share, up from 2 cents reported in the prior-year quarter. This was well above Activision's earnings guidance of 8 cents per share. The year-over-year growth was primarily driven by a robust revenue growth and operating margin expansion.

Revenue

Revenues on a non-GAAP basis were $857.0 million, up 13.5% year over year from $755.0 million. This was well above Activision's guidance of $725.0 million.

The year-over-year growth was primarily driven by strong sales from the PC and other games segment and higher distribution revenues, which fully offset weak results from consoles (down 25.0% year over year) and handheld devices (down 23.0% year over year).

During the quarter, strong performance from Activision Publishing's Call of Duty franchise and Blizzard Entertainment's World of Warcraft and StarCraft II: Wings of Liberty also contributed significantly to the revenue growth.

During the quarter, Call of Duty: Modern Warfare 2 remained a top-10 franchise overall in the U.S. and Europe, according to research firm NPD Group.

Activision released StarCraft II: Wings of Liberty in the third quarter, which sold more than one million copies within the first 24 hours of its release, instantly making it the best-selling PC game of 2010, and more than 1.5 million copies within the first 48 hours of its release, making it the fastest-selling strategy game of all time.

StarCraft II: Wings of Liberty sold more than three million copies worldwide in the first month of its release.

On a geographic basis, revenues from North America (52.0% of total revenue) increased 11.0% year over year to $447.0 million while revenues from Europe (38.0% of total revenue) were up 8.0% year over year to $334.0 million. Although  the Asia-Pacific region contributed only 7.0% of total revenue, revenues from the region leaped 81.0% on a year-over-year basis to $76.0 million in the quarter.

Operational Performance

Total costs and expenses on a non-GAAP basis were $687.0 million in the third quarter, down 4.1% from $716.0 million in the prior-year quarter. This was primarily driven by lower sales and marketing costs in the quarter.

Operating margin escalated to 19.8% from 5.2% in the prior-year quarter, driven by strong revenue growth.

Balance Sheet

As of September 30, 2010, Activision had no debt on its balance sheet. Cash and short-term investments were $2.85 billion as compared with $2.84 billion at the end of June 30, 2010.

Under its $1.0 billion authorization, Activision repurchased approximately 55 million shares worth $600.0 million during the quarter.

Outlook

Activision expects to release six new titles in the fourth quarter of 2010,  which include Guitar Hero: Warriors of Rock, D J Hero, Tony Hawk: SHRED, Spider-man: Shattered Dimensions, GoldenEye 007 and Bakugan.

Activision will also publish its much hyped game Call of Duty: Black Ops on November 9, 2010. On December 7, 2010, Activision expects to release World of Warcraft: Cataclysm, the much awaited third expansion of the most popular subscription-based multi-player game, World of Warcraft.

For the fourth quarter of 2010, Activision forecasts non-GAAP net revenues of $2.2 billion and earnings of 47 cents per share. For full year 2010, Activision raised its non-GAAP revenue guidance to $4.45 billion and earnings per share to 74 cents, primarily  based on expectations of strong sales growth and record operating margins from the upcoming Call of Duty: Black Ops release.

For the calendar year, Activision expects a record non-GAAP operating margin of 29%.

For fiscal year 2011, Activision expects to benefit from the growing installed base of consoles and increased online sales, especially for the core game of platforms. 

Activision also expects to release the hero brand, Spider-Man, X-Men, Transformers, and True Crime: Hong Kong in fiscal 2011.

Our Take

We maintain a Neutral rating on the shares on a long-term basis (6-12 months); primarily based on the apprehension that Activision remains over dependent on the Call of Duty franchisee for a strong 2010 performance.

Although Call of Duty: Black Ops is expected to boost Activision's revenues post launch, we expect stiff competition from the Electronic Arts Inc. (ERTS) title Medal of Honor, which was released in the month of October.

We continue to believe that Activision will have one of the strongest product pipelines over the long term. This includes Blizzard Entertainment's two expansion packs to StarCraft II, the highly-anticipated next generation of the Diablo series, and Blizzard's yet to be announced MMO title.

Currently, Activision has a Zacks #2 Rank, which implies an Outperform rating on a short-term basis (1-3 months).

 
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