Activision Blizzard Inc. ATVI posted first-quarter 2018 non-GAAP earnings of 78 cents per share, which increased 8.3% from the year-ago quarter.

Including GAAP deferrals, adjusted earnings of 38 cents per share surpassed the Zacks Consensus Estimate by 3 cents and increased 22.6% from the prior-year quarter.
    
Revenues (including deferrals) of $1.38 billion surpassed the Zacks Consensus Estimate of $1.32 billion.

Activision is primarily riding on its well-known franchises like Call of Duty and Overwatch, which fueled top-line improvement in the quarter. King Digital’s Candy Crush continues to contribute significantly to the company’s revenues.

Quarter Details

Excluding deferral revenues, Activision reported sales of $1.97 billion, up 13.9% year over year.
    
Segment wise, product sales (36.6% of total net revenues) were $720 million, up 41.5%. Subscription, licensing and other revenues (63.4%) increased 2.3% to $1.245 billion.

Activision earned $1 billion in-game net bookings in the quarter. The company had over 374 million monthly active users (MAUs) at quarter end.

Activision Publishing’s revenues increased 31% year over year to $312 million. Activision had 51 million MAUs, up 7% year over year but up 12% sequentially, driven by the Call of Duty: WWII, Destiny 2 and Crash Bandicoot. The release of Call of Duty: Black Ops 4 will drive engagement further.

Blizzard’s revenues of $480 million increased 8% from the year-ago quarter driven by in-game content, strong presales of World of Warcraft and Overwatch League. Blizzard had 38 million MAUs, backed by World of Warcraft, Overwatch and Hearthstone. The company’s presence is also being strengthened in the lucrative e-sports market with Overwatch League driving viewership and engagement.

King Digital’s mobile business recorded highest quarterly net bookings in history. King’s total revenues of $534 million increased 3% sequentially and 13% year over year to set a record level since the first quarter of 2015. King Digital reported MAUs of 290 million, slightly down sequentially but overall engagement remained strong. MAUs for Candy Crush increased sequentially, setting time spent per player at a record level. King also has some new releases scheduled for the later part of the year in order to grow its network further.

On the basis of distribution channels, Activision reported retail channel sales of $409 million (up 51% year over year) and digital online revenues of $1.63 billion (up 6%). Digital revenues contributed 74% of total revenues in the quarter. Other revenues grew 33% year over year to $93 million.

On the basis of platform, revenues from console (42%) grew 33% to $817 million. Mobile and ancillary revenues (27%) increased 13% to $536 million. However, revenues from PC (26%) declined 8% to $519 million.

On a geographical basis, revenues from North America (54%) increased 15% to $1.065 billion, while that from EMEA (35%) grew 24% to $687 million. Revenues from Asia Pacific (11%) fell 12% to $213 million.

Activision Blizzard, Inc Price, Consensus and EPS Surprise

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

Operating Details

On a non-GAAP basis, operating income was $767 million compared with $747 million reported in the year-ago quarter.

Operating margin of 39% contracted 420 basis points (bps) on a year-over-year basis due to increase in marketing expenses.

Margins for King and Activision improved on a year-over-year basis while that of Blizzard declined. Blizzard’s continuous investment in Overwatch League, MLG Network, Battle.net and other mobile offerings is an overhang on margins in the near term.

Balance Sheet & Cash Flow

As of Mar 31, 2018, Activision had $5.2 billion in cash and cash equivalents, compared with $4.7 billion as of Dec 31, 2017. Activision exited the quarter with long-term debt of $4.392 billion.

Operating cash flow for the quarter was $529 million while free cash flow was $498 million.

Outlook

Activision has a strong gaming lineup for the second half of the year, which includes World of Warcraft’s Battle for Azeroth, Call of Duty: Black Ops 4, Spyro the Dragon: Reignited Trilogy, Destiny 2‘s major expansion and new launches by King. The company is also focused on ramping up advertising.

For 2018, Activision expects GAAP revenues of $7.36 billion and earnings per share of $1.79, compared with an earlier projection of revenues of $7.35 billion and earnings of $1.78. On a non-GAAP basis, revenues and earnings are expected to be $7.36 billion and $2.46 per share, respectively, compared with the previous projection of $7.35 billion and $2.45.

The company anticipates product costs of 22% and operating expenses of 44% in 2018.

For second-quarter 2018, Activision anticipates GAAP revenues of $1.555 billion and earnings per share of 26 cents. On a non-GAAP basis, revenues and earnings are likely to be $1.555 billion and 46 cents per share, respectively.

The company anticipates product costs of 22% and operating expenses of 48% in the second quarter.

Zacks Rank and Stocks to Consider

Activision currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology sector include Lam Research Corporation LRCX, Micron Technology MU and Western Digital WDC, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for Lam Research, Micron and Western Digital is projected to be 17.7%, 10% and 19%, respectively.

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