It is anticipated that gaming software revenue would be around $64 billion in the year 2014. Market research companies also expect the gaming software industry to hit $100 billion mark by 2018. Activision Blizzard, Inc. (ATVI, Financial) is one such company which is focused in the domain of entertainment and interactive gaming software segment. In this article, I have tried to explain various reason that influence the growth of this company.
Quarter Overview
The company recently released its second quarter results for fiscal 2014 and was much better than expected. Consolidated revenues were up 8% year over year, to record $658 million as compared to $608 million in the same quarter last year. The revenue also surpassed the consensus estimate of $607 million. In the second quarter, digital segment contributed 73% of the consolidated revenue which is a record percentage for the company. Revenues from products recorded $587 million, down by 19.5% year over year. Revenues from licenses and subscription recorded $583 million, up 18.6% year over year.
The company performed well in personal computer and console games to leverage revenue growth. It witnessed a robust sales performance for “Diablo: Reaper of the souls” which is a personal computer games. In the console gaming segment, “Call of Duty” had strong sales. Heroes of Warcraft, that was launched for the iPad witnessed tremendous global response. All in all, we can say that Activision recorded strong sales for all its gaming software’s, and the sales continues to grow even in the current quarter (third quarter) which will have a positive impact in the third call earning for current fiscal.
Acquisition Can Further Add Growth Momentum
The news has been spreading, that Activision is keen to acquire Take-Two Interactive and this acquisition would further enable Activision to have a stronger grip of the gaming and the entertainment industry market. The news originated from a note made by Benchmark investigator Mike Hickey. This can be a win-win situation for both the companies and would certainly shake up the gaming market.
Such a takeover bodes well for Activision. Take-Two is a cash rich company with healthy balance sheet which records over $1 billion cash, and low operational expenses. The company holds one of the famous gaming portfolios under its belt. That incorporates Grand Theft Auto, Borderlands, Rockstars, Bioshock, and Civilization to name yet a couple. I’m sure, that every industry in this segment, would love to have control of these mentioned gaming series. If we recall, Take-Two were already approached by EA with $2 billion, but was turned down by Take-Two. So it is to be seen, how much does it take for Activision that can invoke a “yes” from Take-Two.
Blockbuster Hits
Recently, Activision released its latest game “Destiny”. It has been reported that company had spend over $500 million to launch this game and the result post launch was a blockbuster hit for the company. I would say, it was a worthy investment of $500 million by Activision which is illustrated with the mega response that it got post launch. On the day of the launch, it recorded global sale of around $500 million setting up a new records in the history of the gaming industry. Bungie had developed this game, and “Destiny” was the most preordered video game not part of an existing franchise in history. The game was released for console gamers for various versions of Xbox (Xbox 360 and Xbox One) and PlayStation (PS3 and PS4). Although the total number of copies sold is not yet recorded to endorse the success, but sale of $500 million certainly talks a lot about the success.
Journey Ahead
During the second quarter call earning release, the company had a clearer view of its game pipeline, and it raised its 2014 non-GAAP earnings per share forecast to $1.27, earlier it was $1.26. The company anticipates non-GAAP revenues to be around $975.0 million, this again much higher than the Consensus Estimate of $910.0 million.
In next two months, Activision plans some more new releases; this will have a positive impact on the top and bottom line. This month, Activision plans to release SkyLanders: Trap Team and next month will be launch of Call of Duty: Advanced Warfare.
Conclusion
The company has a strong balance sheet with around $4.20 billion in cash, as recorded in the end of second quarter. The debt also seems to be decreasing, which will leverage the EPS, currently debt is around $4.32 billion as against $4.37 in the same quarter last year, down by $0.05 billion.
Looking into it recent success of Destiny and the upcoming releases, I feel, Activision is not just a favorite company for gamers, but even investors would also love to play long for high returns in future. I suggest a buy for this stock.
