ATVI Activision Blizzard
Sector financial performance:
This company, which primarily develops and publishes interactive entertainment content and services on video game console, personal computers, and mobile devices, has been grouped into console and PC game sector in toys and gaming industry.
It seems that the demand for interactive gaming products provided by companies in this sector has been strong and increasing in the past several years as indicated by average 5-10% annual growth in organic revenue of typical companies in this sector. Sales’ shifting to digital retail channel and online service has been apparent as indicated by about 12-20% annual growth in digital related revenue. Demand for physical retail products decreased quickly (down by about 20% annually and roughly consistent with growth in digital channel). The growth has also been reflected in mobile platform. Performance in console platform is better than that in PC platform.
Leveraging brought by increase in revenue, lower development costs, and shifting of sales to digital sales channel of higher margin help improve profitability of companies. The typical gross margin is about 62%, SG&A is about 27%, and operating margin is about 19% in 2018. The typical enterprise cash flow/EBI ratio is 83. The average annual increase in EBI/share is more than 40% in the past two years.
It seems that the demand for interactive gaming product of this company has been stable and gradually growing in the past several years primarily attributable to increase in mobile platform. Demand for console and PC based gaming grows slowly and decreasing. Revenue seems to have primarily come from digital download retail channels and retail channel revenue went down.
Revenue increased quickly in the first three months in 2018.
The first three months of fiscal 2018 compared with the same period of 2017 (ended March 31 2018)
Net revenue (excluding effect of deferred revenue and currency) increased 4.3%.
Digital online channel revenue increased 6%.
Retail channel revenue increased 51%.
Console game revenue increased 33%.
PC game revenue decreased 8.3%
Mobile game revenue increased 13%.
Fiscal 2017 compared with fiscal 2016
Net revenue (excluding acquisition, effect of deferred revenue and currency) increased 2%.
Digital online channel revenue increased 13% (including acquisition)
Retail channel revenue decreased 25%.
Console game revenue decreased 2.6%.
PC game revenue decreased 3.9%
Mobile game revenue increased 24%. (Including acquisition).
Fiscal 2016 compared with fiscal 2015
Net revenue (excluding acquisition, effect of deferred revenue and currency) increased 10%.
Digital online channel revenue increased 94% (including acquisition)
Retail channel revenue decreased 23%.
Console game revenue increased 2.6%.
PC game revenue increased 42% (including acquisition)
Mobile game revenue increased 300%. (Including acquisition)
Its gross margin was down from 66% to 64.5% in 2018 primarily due to lower margin of acquired business. Due to increase in its SG&A as percentage of sales (up to 30% due to acquisition and increased spending), we see a shrink in operating margin (down to 19% in 2018).
However, the average EBI/share (after consolidation) increased in the past three years.
This company is having an enterprise price/cash flow ratio of 67. We think that its stock is being relatively overvalued compared with its peers ELECTRONIC ARTS INC and its performance may depend on performance in sales growth and cost control of its recently acquired mobile platform.
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