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How Are EA and Activision Improving Profit Margins?

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Jan. 30 2017, Updated 7:36 a.m. ET

Rise in digital revenue for Activision

In 3Q16, Activision Blizzard’s digital revenues accounted for 85.7% of its total revenues, an increase from 63.5% in 3Q15 and 72.7% in 2Q16. Digital revenues rose to ~$1.1 billion in 2Q16, touching the billion dollar mark during a quarter for the first time. In 3Q16, the company’s digital revenue was ~$1.3 billion.

The rise in digital revenues for Activision Blizzard (ATVI) was one of the company’s major highlights in 3Q16. Driven by digital performance, the operating margin for Activision rose to 37% in 3Q16 from 26% in 3Q15.

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EA’s gross margin to reach 71% in fiscal 2017

Electronic Arts’ (EA) digital revenues accounted for 63.0% of its GAAP (generally accepted accounting principles) revenue in fiscal 2Q17. Revenues rose 62.0% in fiscal 2Q16 and 54.0% in fiscal 1Q17. Its digital revenues rose 13.0% YoY (year-over-year) to $566.0 million in fiscal 2Q17 compared to $502.0 million in fiscal 2Q16.

Electronic Arts expects its gross margin to be 71.0% by the end of fiscal 2017. It was 69.2% in fiscal 2016 and 68.3% in fiscal 2015. EA’s gross margin has steadily improved over the years from 63.4% in fiscal 2014.

One of the key drivers for an improvement in gross margin is growth of digital revenues. In fiscal 2012, EA’s Digital Business segment accounted for 29.3% of total revenues. Gross margin was 63.1%, and operating margin was 9.5%.

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