Activision Blizzard’s (ATVI) CEO Bob Kotick on Q2 2014 Results – Earnings Call Transcript

August 6, 2014 6:32 am | By More

Source: Seeking Alpha

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Activision Blizzard (NASDAQ:ATVI)

Q2 2014 Earnings Call

August 05, 2014 4:30 pm ET

Executives

Kristin Mulvihill Southey – Former Vice President of Investor Relations

Robert A. Kotick – Chief Executive Officer, President and Director

Dennis Durkin – Chief Financial Officer

Eric Hirshberg – Chief Executive Officer of Activision Publishing, Inc

Michael Morhaime – Chief Executive Officer of Blizzard Entertainment, Inc and President Blizzard Entertainment, Inc

Analysts

A. Justin Post – BofA Merrill Lynch, Research Division

Brian J. Pitz – Jefferies LLC, Research Division

Daniel Ernst – Hudson Square Research, Inc.

Michael Hickey – The Benchmark Company, LLC, Research Division

Stephen Ju – Crédit Suisse AG, Research Division

Colin A. Sebastian – Robert W. Baird & Co. Incorporated, Research Division

Michael J. Olson – Piper Jaffray Companies, Research Division

Neil A. Doshi – CRT Capital Group LLC, Research Division

Arvind Bhatia – Sterne Agee & Leach Inc., Research Division

Operator

Good day, and welcome to the Activision Blizzard’s Quarter 2 2014 Results Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President of Investor Relations and Treasurer, Ms. Kristin Southey. Please go ahead.

Kristin Mulvihill Southey – Former Vice President of Investor Relations

Good afternoon, and thank you for joining us today for Activision Blizzard’s second quarter 2014 conference call.

With me today are Bobby Kotick, CEO of Activision Blizzard; Thomas Tippl, COO of Activision Blizzard; Dennis Durkin, CFO of Activision Blizzard; Eric Hirshberg, CEO of Activision Publishing; and Mike Morhaime, CEO of Blizzard Entertainment.

I would like to remind everyone that during this call, we will be making statements that are not historical facts. These are forward-looking statements that are based on current expectations and assumptions that are subject to risks and uncertainties.

A number of important factors could cause the company’s actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements, including the factors discussed in the Risk Factors section of our SEC filings, including our 2013 Annual Report on Form 10-K, which is on file with the SEC, and those indicated on the slide that is showing.

The forward-looking statements in this presentation are based on information available to the company as of the date of this presentation. And while we believe them to be true, they ultimately may prove to be incorrect. The company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today, August 5, 2014, or to reflect the occurrence of unanticipated events.

I would like to note that certain numbers we will be presenting today will be made on a non-GAAP basis, excluding the impact of the change in deferred net revenues and related cost of sales with respect to certain of our online-enabled games, expenses related to stock-based compensation, the amortization of intangible assets, expenses related to the purchase transaction and related debt financing and the associated tax benefits. Please refer to our earnings release, which is posted on www.activisionblizzard.com for a full GAAP to non-GAAP reconciliation and further explanation.

There’s also a PowerPoint overview, which you can access with the webcast and which will be posted to the website following the call. In addition, we will also be posting a financial overview highlighting both GAAP and non-GAAP results in a 1-page summary sheet.

And now, I’d like to introduce our CEO, Bobby Kotick.

Robert A. Kotick – Chief Executive Officer, President and Director

Thank you, Kristin, and thank you all for joining us today. I’m pleased to report that Activision Blizzard delivered better-than-expected Q2 results. On a non-GAAP basis, we generated $658 million in revenues, with a record 73% from digital channels and earnings per share of $0.06.

For the first half of the year, we generated strong earnings and cash flow, we repaid $375 million of principal to reduce our term loan and we paid our highest ever dividend of $0.20 per share.

Based on our strong results this quarter and better visibility for the balance of the calendar year, we’re raising our full-year outlook and expect to grow our non-GAAP revenues year-over-year and deliver record non-GAAP earnings per share this year.

We control some of the most valuable and iconic entertainment franchises, and we maintain some of the largest and most engaged online communities in the world, including Call of Duty, Skylanders, World of Warcraft, Diablo, StarCraft, and now, Hearthstone. And all of these franchises are leaders in their respective categories.

Our teams continue to be among the very best in the world at innovating within our known franchises and creating exciting new franchises like Hearthstone and Destiny. We’re seeing more opportunities to create great content for new platforms, new higher-margin business models and new geographies. And we’re embracing these opportunities for growth with the same commitment to excellence we have demonstrated over the last 20 years.

As the world’s most successful interactive entertainment company, we’ll remain focused on the creation of the most compelling, engaging games for our dedicated committed audiences and providing superior returns for our shareholders, as we have for more than 2 decades.

I’m grateful for the continued determination and extraordinary efforts of our employees around the world and the continued support of our audiences and shareholders. And now, Dennis will share the results of our second quarter and provide an update on our view with the balance of 2014, which is shaping up to be an extraordinary year for Activision Blizzard.

Dennis Durkin – Chief Financial Officer

Thanks, Bobby. Good afternoon, everyone. Today, I’ll review our better-than-expected Q2 financial results and then our outlook for Q3 and our increased outlook for 2014.

Starting with our financial results. Please refer to our earnings release for full non-GAAP to GAAP reconciliations. Also the numbers I’ll be quoting are compared to the prior year, unless otherwise noted.

For the quarter, on a GAAP basis, we generated better-than-expected revenues of $970 million, and operating margin of 32% and EPS of $0.28. On a non-GAAP basis for the quarter, we generated revenues of $658 million, including a record 73% from digital channels, which drove an overall operating margin of 17% and EPS of $0.06.

Our strong performance was driven by 5 distinct franchises, which highlights the increasing breadth and depth of our expanding portfolio. Blizzard Entertainment’s strong results were driven by World of Warcraft subscriptions, Warlords of Draenor prepurchases and paid character boost, Diablo III: Reaper of Souls expansion pack sales and sales of Hearthstone cards.

On the Activision Publishing side, performance was driven by Call of Duty: Ghosts, and Skylanders SWAP Force.

Turning to specific P&L items. Please note, all percentages are based on revenues except for the tax rate. For Q2, GAAP product costs were 25%, operating expenses were 43%, and operating margin was 32%, above our outlook, driven by higher-than-expected revenues and the timing of expenses. GAAP and non-GAAP interest expense was $52 million and our GAAP tax rate was 22%. Our GAAP and non-GAAP weighted average share count was 725 million, and for EPS purposes, we also include 16 million of participating securities for a total of 741 million fully diluted shares.

On a non-GAAP basis for the quarter, product costs were 27%, slightly higher than expected due to over performance in our low-margin distribution business. Operating expenses were 56%, better than expected, and operating margin was 17%, above our outlook for the same reasons I mentioned for GAAP.

Our adjusted EBITDA margin was 20%, and our non-GAAP tax rate was 29%.

In terms of EBITDA and cash flow, in Q2, we generated non-GAAP adjusted EBITDA of $131 million, which we define as non-GAAP operating income and then add back depreciation, as well as strong operating and free cash flow of $106 million and $81 million, respectively.

On a trailing 12-month basis, we generated nearly $1.1 billion of operating cash flow. We also paid out approximately $147 million related to our $0.20 per share dividend in May.

Turning to the balance sheet. As of June 30, we had $4.2 billion in cash and investments, of which over $650 million was held domestically. With total debt of $4.4 billion, our net debt was approximately $150 million.

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