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 strong and gradually growing in the past two years primarily driven by increase in live service, digital download, and mobile platform. Demand for packaged games seems to have gone down quickly during the same period of time.
The fiscal 2018 compared with 2017 (ended March 31 2018)
Net revenue increased 6%.
Digital channel revenue increased 20% primarily due to increase of 31% in live service.
Digital channel revenue increased 19% primarily due to increase of 42% in download and increase of 14% in live service.
Retail channel revenue decreased 1%.
Fiscal 2016 compared with fiscal 2015
Net revenue decreased 3%.
Its gross margin went up from 69% to 75% in 2018 primarily due to shifting of sales to digital products and service (higher margins). Due to improved SG&A as percentage of sales (down to 22% and flat R&D spending, we see a much improved operating margin (up to 28% in 2018).
Its average EBI/share significantly increased in the past three years.
Stock performance
This company is having an enterprise price/cash flow ratio of 47. We think that its stock is being relatively fairly undervalued compared with its peers - Activision Blizzard and TAKE-TWO INTERACTIVE SOFTWARE.
