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By: thewoof2, Christopher Gallon
Aug 06 2015 11:00am
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Setting the Stage

We have another one of those “I wish I had bought” daydreams for stock traders with Hasbro.  Over the past 52 weeks the stock has increased over 55% recently trading just over $80/share.  Taking a quick look at Hasbro’s 1 year performance as compared to the Dow Jones Indices (in red) and it is an impressive run.


Narrowing in closer to today Hasbro continues to shine, here is the same chart over the past 1 month timeframe.

Suffice it to say, Hasbro the parent company of Wizards the Coast, is doing great in its stock price.

Hasbro’s Q2 (7/20/15) Earnings Call

Helping to drive this recent 10 day stock surge was the earnings announcement on 7/20.  On 7/20 Hasbro announced their actual earnings per share beat the expected consensus earnings.  Here is what was reported:

Consensus Estimates EPS

$0.29

Adjusted Actual EPS

$0.33

EPS Difference

+0.05

This news was on the heels of their Q1 Earning results on 4/20 where they announced beating estimates by a whopping .13 per share!  Let me quickly summarize the results:

·         Q2 Net revenues up 5% absent negative $71.5M FX impact in the quarter;

·         U.S. and Canada segment up 1%; International segment up 9% (absent FX);

·         Entertainment and Licensing segment flat;

·         Emerging markets revenues declined 11% in the quarter; Up approximately 9% absent FX

·         Market share gains in 9 of 11 markets

So revenues were up, market share up and Hasbro’s largest issue is the poor Foreign Exchange rates (FX) which is largely out of their control.  It was great results and strong performance all around for Hasbro yet again.  For the Magic consumer this is at least encouraging news building from my last article that the future looks bright from a funding perspective to WOTC.

Magic’s Financial Performance

So Hasbro does not specifically report on WOTC however we did get a few pieces of information that was worthwhile to mention.  Let me give you some exact quotes from Brian D. Goldner  (President, Chief Executive Officer & Director):

“We spoke with you in April about several challenges we faced in the second quarter, including the anniversary of TRANSFORMERS: AGE OF EXTINCTION movie shipments, the shift of the release scheduled for MAGIC: THE GATHERING, and the timing of Easter. Despite these negative influences, our revenues grew absent FX and it is clear there is momentum in our brands around the world.”

“As we discussed in April, MAGIC: THE GATHERING faced a difficult comparison. Last year's major set release for the first half of the year occurred in the second quarter and this year it was in the first quarter. MAGIC: THE GATHERING revenues increased for the first half of 2015.”

Essentially he is stating that for Q2 2015 Magic did not have a major set released whereas in Q2 of 2014 we did and that this has a significant impact on earnings.  However, if we remove that difference by comparing 1H (first half) of 2015 to 1H of 2014 Magic increased revenues.

Magic Online

So let’s dive straight into what you all want to know about – Magic Online.  As I mentioned previously Magic Online is considered a key investment for Hasbro in their digital platform strategy space.  And on the earnings call we heard more encouraging news from Brian D. Goldner and the CFO.  Magic Online first came up when they talked about overall expenses.

“SG&A increased 5% in the quarter to 26.7% of revenues. This increase was driven by similar factors to the first quarter including higher equity compensation, higher depreciation and continued investment in our business including MAGIC: THE GATHERING digital platform. These increases were partially offset by favorable foreign exchange. As we said before, we believe these trends will continue and that SG&A will be higher versus 2014's level of 20.8%.”

SG&A is Selling, General & Administrative Expenses and included in it is the investments made for the Magic digital platform.  Here Brian Goldner and the CFO are restating that expenses are higher than normal and will continue to be in 2015 with the notable call-out to fund MAGIC: THE GATHERING digital platform.  This is a good sign, there is no indication that Hasbro intends to pull out investing in Magic and they are telling all their shareholders the plan is still intact.

In the same vein, later on the call during the Q&A, Stephanie Schiller Wissink - Piper Jaffray & Co (Broker) asks

“just a question for you on cash flow priorities, we're looking at a nice cash flow cycle now, can you talk a little bit about prioritization of cash, maybe even looking at some of the brand partnerships you have or some acquisitions that you might be interested in?”

Brian Goldner responds:

“And as I look out to answer your specific question about sightlines, we believe now we've fully assembled the brand blueprint; we'll continue to invest in aspects of our business. Right now we're investing in MAGIC: THE GATHERING online. We want to continue to improve people's participation in our brands at every turn. We'll continue to invest in product development. You see some of that this year with investments in Disney Princess and over trend investments in R&D. But over the long-term, we feel that the blueprint has been assembled. We'll continue to add parts to it and pieces to it and we'll continue to execute across global geography. So we feel very good as a team that we have the right skill sets and we continue to on-board new leadership and new employees all the time who are helping us to deliver what you are seeing now.”

Again this is the CEO of Hasbro reiterating his strategy for continued investments in MTGO.

Then another question comes in:

Drew E. Crum - Stifel, Nicolaus & Co., Inc.

“Okay, thanks. Good morning, everyone. Brian, could you remind us what the release schedule looks for like for MAGIC in the third quarter this year versus last year? And in the second quarter, what did Games do ex MAGIC?”

Brian D. Goldner - President, Chief Executive Officer & Director

“In the second quarter, our traditional Games business was up a bit, and so that would be – let's call it board games business was up a bit in the quarter. In Wizards of the Coast in the quarter we also had a reduction of Duel Masters which they're restaging in Japan, so that was a bit of the impact in the Games business. As we go forward for MAGIC, there are a number of initiatives that are going across the brand. As we've talked about, we're investing to continue to improve and seek more players in MAGIC Online. We have Magic Duels. Hopefully you've downloaded it by now onto your iPhone. It's a great digital game that really introduces people to the play. And as we look at the holiday period, we'll have a couple of releases for MAGIC for the remainder of the year.”

And not to repeat the above, there are two more questions where Brian talks further about investments in Magic Online with the goal to drive an increase in the player base.

Commentary

Hasbro as a company is doing well, Magic is doing well and there is a continued focus on improving the digital platforms.  There is no indication of any changing strategies or a decrease in funding, therefore by all accounts Hasbro is still supporting WOTC and funding is being maintained.  This is all self-explanatory from listening to the call.  But what I find most encouraging is the nuanced point Brian mentions around a strategy to “seek more players in MAGIC Online.”  I really hope I am not reading into this statement, but it points to what I feel is a significant change of thinking by senior management.

Seek more players in MAGIC Online

As a senior manager in a large company, a part of your job is to identify the key strategies for the team and then create goals to meet those strategies for the team to focus on.  In the past I have always gotten the impression that Magic Online was an important strategy but the goal was always to maximize short term revenue.  I could see WOTC having goals such as “increase magic online revenues by 10% over the next year.”  I think this strategy manifests itself by WOTC’s continued focus primarily only on those features that make money now (e.g. drafting).  This led to a lack of focus on other items such as UI excellence, cross-platform accessibility, casual players and such.  The revenue goal is very different than what I see in say Hearthstone.  It is apparent to me that Hearthstone’s goals where to maximize users and goals around participation.  Reading between the lines I think Brian is trying to move the goals to increasing players and usage of the platform.  Or maybe it is my hope that this is what Brian is driving towards.

Why do I hope this is a goal change at WOTC?  Well I think the single most important thing for Magic Online is to increase users and usage of their platform.  It is the best long term strategy for Magic Online and will have the team focus on usability and the fun of playing the game no matter what your preferred game type.  In turn with more users and usage, my opinion is more revenue will come either through existing channels or new channels not seen today.  Now don’t get me wrong, revenue is important to WOTC, but at this point it is secondary in my mind.

In closing, Magic Online is still a top priority for WOTC and Hasbro based on the recent earnings call and I hope there is also a changing of goals to driving new users and usage of the platform from senior management.

 

Woof

4 Comments

Thanks for the positive by Paul Leicht at Thu, 08/06/2015 - 17:49
Paul Leicht's picture
5

Thanks for the positive encouragement. I think the community could use some morale boosting at this point because none of this is readily apparent to us outside of your reporting here. Well to me anyway. I always continue to hope for the best but honestly communication between WOTC and us has been abysmal.

I don't think anyone doubts by enderfall at Fri, 08/07/2015 - 07:58
enderfall's picture

I don't think anyone doubts whether Hasbro wants MTGO to perform well. The doubts stem from whether the people tasked with running MTGO are competent enough to do what Hasbro wants them to do.

I've harbored some doubts as by Paul Leicht at Fri, 08/07/2015 - 08:38
Paul Leicht's picture

I've harbored some doubts as to how much direction WOTC has been getting towards picking up the MTGO slack.

From working in similar by thewoof2 at Sat, 08/08/2015 - 09:10
thewoof2's picture

From working in similar corporate structures I can say having parent company buy in on the strategy and providing funding is critical for success. That said the obvious limiting factor is the competency of the staff at WOTC. If their skill is the issue then nothing will help besides getting a new staff.