Activision Blizzard reports higher-than-expected sales as Microsoft close awaited Last Updated Aug. 2, 2022 at 2:23 p.m. ETFirst Published: Aug. 1, 2022 at 4:22 p.m. ET By Wallace Witkowski Activision Blizzard ATVI, -0.29% shares declined less than 1% Tuesday after hitting an intraday low of $79.17. The company will not be issuing an earnings presentation or holding a conference call with analysts given Microsoft Corp.'s MSFT, -2.03% $69 billion, $95-a-share offer to acquire the publisher that has yet to close. In fact, the highest shares have closed since the offer was announced is $82.31, the closing price after the offer was announced in mid-January. The last time shares closed north of $95 was June 30, 2021. The company reported second-quarter net income of $280 million, or 36 cents a share, compared with $876 million, or $1.12 a share, in the year-ago period. Activision Blizzard said adjusted earnings, which exclude share-based compensation expenses and other items, were 48 cents a share, down from $1.20 a share in the year-ago period. Revenue declined to $1.64 billion from $2.3 billion in the year-ago quarter, for the third quarter in a row of declining year-over-year sales. Net bookings fell to $1.64 billion from $1.92 billion last year. Bookings represent the value of digital products and services sold during a quarter, but part of the revenue from those purchases is often recognized in future quarters. Analysts surveyed by FactSet had forecast earnings of 48 cents a share on revenue of $1.57 billion. "Even in a challenging economic environment, with so many companies announcing hiring freezes and layoffs, our development headcount grew 25% year-over-year as of the end of the second quarter," said Bobby Kotick, Activision Blizzard's chief executive, in a statement. "GAAP revenue and EPS declined year over year in the second quarter, and the company expects GAAP revenue and earnings per share to remain lower year over year in the second half of the year," the company said in a statement. In early July, U.K. regulators opened up an antitrust probe into the deal. The acquisition is scheduled to close at the end of Microsoft's fiscal year ending June 30, 2023. In an odd posturing, Microsoft reportedly told regulators in New Zealand back in June that Activision Blizzard does not produce any "must have" games. Specifically, the filing stated "with respect to Activision Blizzard videogames, there is nothing unique about the videogames developed and published by Activision Blizzard that is a 'must have' for rival PC and console videogame distributors that could give rise to a foreclosure concern." Microsoft, however, clarified to MarketWatch after this article was originally published that it values all of Activision Blizzard's games, and that "must have" was a piece of legalese it had to use in the filing. "'Must have' is a legal term of art and not a statement about the value we place on Activision Blizzard's gaming portfolio," Microsoft said in emailed comments to MarketWatch. "We love every one of their games and have enormous admiration and respect for the creative talent behind them." Activision Blizzard publishes such games as "Call of Duty" through its Activision label; "World of Warcraft," "Overwatch," and "Diablo" through its Blizzard label; and "Candy Crush" through its King label. Activision shares are off nearly 5% over the past 12 months, while Microsoft shares are off 2.5%. In comparison, the iShares Expanded Tech-Software Sector ETF IGV, -1.70% is down 27%, the S&P 500 index SPX, -1.44% is down 6%, and the tech-heavy Nasdaq Composite Index COMP, -2.00% is down 15%

 

Explicitly using concepts from the course to date and the attached article Activision Blizzard reports higher-than-expected sales as Microsoft close awaited, answer the following questions: (a) What were prior expectations for earnings for Activision Blizzard for the second quarter?

(b) What was the unexpected component of earnings for the second quarter?

(c) What aspects of the details underlying earnings should have more permanent cash flow implications, and which should be more transitory?

(d) Given your answer for (b) and (c), does the stock market response to the announcement seem appropriate? Very briefly explain your answer.