OK...don't read post #841 as it has this glitch in it....I should have
beta tested my reply before I sent it out ;) Read this one instead, if you choose!
All,
Huge numbers! OK, I settled in a little to look closer at the numbers. Here's what I get. (forgive me if I
missed something, but this IS the middle of the workday and I can't spend a lot of time on this.)
First of all, the P/E...Adding on the $4.3 million in last year's 4th quarter to the $7.2 million earned in the past
9 months (minus the one time merger expnse this quarter) and we get $11.5 million or $0.58 EPS (diluted) for
the last 12 months and a P/E of 29. Not bad for a company growing revs more than 100% and income at 76%
(for the past 9 months, excluding one time charge).
Second: Jump in receivables and inventory not surprising for this quarter.
Third: Gross margins (9mths) at 36% are not great. Compare to ERTS gross margins at 47%. Net margins (9
mths) are 3.4%, poor compared to ERTS (around 7%, excluding one time charges/gains).
What does this mean? ATVI is operating inefficiently...could be due to it's relative small size, but more likely
to do with too much emphasis on growing the business larger and not focusing on internal matters. Some have
said that ATVI is growing so quickly that they are experiencing "uncontrolled growth". Given the overall
growth rate for this year (76%), the following look reasonable: Administrative expense increased 40% (not
bad), marketing increased 78% (not great), and product development (57%....keep this going!).
So the real culprit is gross margins holding the company down. 36% is downright poor. If they were able to
increase margins to ERTS rate, they would have $29 million pre-tax (9 mths) in income and assuming a 30%
tax rate would have come out with $19 million net or almost $1.00
per share in earnings in 9 mths alone! Tack on the $4.3 million and get an net income of $23 million or $1.10
for 12 months. A 12 mth backward P/E of 30 brings the price of ATVI stock to $33!!!
But then again, not everyone is an ERTS!
Of course, gross margins invlove a lot of factors....aggressive price marketing, royalty/licensing deals, etc.
But the bigger you are, generally the
better it is for you because of leverage, economies of scale, etc.
Fourth: Looking at geographic mix, Europe is huge. This probably takes into account 4th quarter revs for the
new distributors in Germany and England. But a nice mix. There's still plenty of room for growth overseas.
Final conclusions????
1) ATVI had a blowout quarter! BUT it still has a lot of room for improvement.
2) We ain't seen nothin' yet! QII has only been on the market for 6 weeks! AND it's number 1 and holding!
We are going to get a lot more follow on orders for Q2, and some returns on the other stuff. Battlezone is
coming out this quarter as is Pitfall 3D (Consoles!). I76 nitro, QII expansion pack...plus re-orders from
Christmas.
I predict that we can EASILY surpass $0.21 per share for the 4th quarter. 4th quarter has traditionally been
strong for ATVI. I'll say $0.30 EPS, putting our EPS to $0.59 (including charges) and a forward P/E of 29
(Excluding charges, $13 million or $0.65 EPS for a forward P/E of 26.
3) ATVI has LOTS of room to grow. Definitely increase in console presence. Improvement of gross margins.
Increased stable of games. Increase international distribution.
Althought the stock looks weak today, we WILL see better days!
Imagine ERTS buying out ATVI and eliminating redundancies? They could squeeze a lot of profit out of
ATVI. I think this can happen.
Tom C. |
