Activision Blizzard, Inc. (NASDAQ:ATVI) is destined for growth in 2014, driven by strong momentum on next-gen consoles, several of the industry's top blockbuster franchises, and new franchises slated to launch this year.
Headquartered in Santa Monica, California, Activision Blizzard is a worldwide online, PC, console, handheld and mobile game publisher with leading positions across every major category of the interactive entertainment software industry. The company's key titles include Call of Duty, Skylanders, World of Warcraft and Diablo.
The key factor that currently benefits ATVI is that the Call of Duty has moved from a two-year development cycle to a three-year development cycle, starting with this year's upcoming title from Sledgehammer Games. The change will provide the company more time to release higher-quality titles while also focusing on higher-margin accompanying downloadable content (DLC).
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BMO Capital Markets analyst Edward Williams believes that growth for the company will be driven by continued exploitation of its existing franchises, including World of Warcraft, Call of Duty, and Skylanders, as well as investment in new intellectual properties such as Destiny.
The first quarter 2014 will be driven by Blizzard's Diablo III: Reaper of Souls expansion as sales of Diablo III have exceeded 15 million units across all platforms, which augers well for the upcoming PC launch on March 25.
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Over the next two years, Williams expects operating margins to expand driven by a greater contribution from Blizzard properties and growth of its direct-to-consumer digital platforms, along with inroads into the lucrative Asian market.
In the meantime, the company consistently generates a significant level of cash that can be returned to shareholders through dividends, debt repayments, and stock buybacks.
Activision Blizzard continues to leverage its pillar franchises while opportunistically investing in new intellectual property for growth. World of Warcraft and Call of Duty drive the bulk of the company's revenues and profitability with tens of millions of players around the world.
In addition, the combined software and toy sales of Skylanders have propelled the series to be one of the industry's best-selling video game franchises over the past two years.
One of the key catalyst includes upcoming commercial launch of Call of Duty Online in China this year and a Warcraft movie set for 2016. Activision is also investing heavily in new intellectual property – Destiny arrives on Sept. 9, 2014, with a beta testing phase planned for this summer.
Williams noted that the company continues to enjoy high margins, boosted by Blizzard's digital revenue stream. On a trailing 12-month basis, digital sales accounted for 36 percent of total revenues versus 32 percent a year ago.
In general, digital revenues are expected to grow with an increasing number of direct-to-consumer digital sales on PCs and next-gen consoles.
Looking ahead. Activision Blizzard has several key properties slated to come out in 2014 that could expand the company's product portfolio and provide additional growth vectors.
Williams says his channel checks suggest Destiny, from the highly acclaimed Bungie Studios, could be a material driver for 2014 and beyond. Other future titles include Diablo III: Reaper of Souls, Hearthstone: Heroes of Warcraft, Heroes of the Storm, World of Warcraft: Warlords of Draenoras, and Call of Duty Online for China.
Activision set to release the Kraken with Devastation - the second DLC pack for Call of Duty: Ghosts, exclusively on Xbox Live on April 3. The company would also release Activision Transformers: Rise Of The Dark Spark this June on all current and next-gen consoles.
Meanwhile, Activision Blizzard generates tremendous operating cash from sales of hit titles and recurring subscription revenue from World of Warcraft. The company consistently generates over $1 billion in operating cash flow annually.
The company has a strong balance sheet with $4.443 billion in cash. Although Activision Blizzard now has $4.693 billion of loans on its balance sheet, the company should be able to pay down its debt in a timely manner given its strong cash flows.
The company posted $880 million in operating cash and $864 million in free cash flow for the December quarter, versus $976 million and $949 million, respectively, a year ago. In 2013, the company generated $1.264 billion in operating cash and $1.190 billion in free cash flow versus operating cash of $1.345 billion and free cash flow of $1.272 million last year.
For 2014, the company sees non-GAAP revenues of $4.6 billion and non-GAAP EPS of $1.26. For the first quarter, the company expects non-GAAP revenue and EPS of $675 million and 9 cents, respectively.
Wall Street expects earnings of $1.30 a share for the full year and 10 cents for the first quarter, according to analysts polled by Thomson Reuters. The Street forecast revenue of $4.67 billion for the year, while quarterly revenue is estimated at $691.51 million.
ATVI shares, which trade 14.5 times its forward earnings, have traded between $13.27 and $20.35 during the past 52-weeks. They have gained 35 percent in the last one year and outperformed the broader market by 14 percent.
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