Why Is Activision Blizzard (ATVI) Down 24.8% Since Last Earnings Report?

A month has gone by since the last earnings report for Activision Blizzard (ATVI). Shares have lost about 24.8% 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 drivers.

Destiny 2’s Underperformance Hurts Activision’s Q3 Results

Activision Blizzard 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.   

Quarter Details

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, down from 352 million at the end of the previous quarter.

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.

Operating Details

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.

Guidance

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%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -9.08% due to these changes.

VGM Scores

At this time, Activision Blizzard has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Activision Blizzard has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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