Activision Blizzard Analyst Earnings Recap

Activision Blizzard (NASDAQ:ATVI) pro forma revenue was $627 million, compared with our estimate of $600 million, the consensus estimate of $558 million, and guidance of $530 million. Pro forma EPS was $0.07, compared with our estimate of $0.04, the consensus estimate of $0.02, and guidance of $0.01.

Guidance raised by more than Q3 beat. The company increased 2011 pro forma guidance for revenue to $4.25 billion from $4.05 billion, and for EPS to $0.85 from $0.77. Initial Q4 guidance is for revenue of $2.17 billion, and EPS of $0.55.

We are increasing our 2011 pro forma estimates for revenue to $4.25 billion from $4.10 billion, and for EPS to $0.85 from $0.79 to reflect the raised guidance. We are raising our 2012 pro forma estimates for revenue to $4.65 billion from $4.60 billion, and for EPS to $0.95 from $0.90.

The major concern from Q3 is the sequential decline in WOW subs to 10.3 million from Q2’s 11.1 million. While the company attributed the declines primarily to Asian subs, we expect Western subscriber growth to be further challenged when EA launches Star Wars The Old Republic MMO in December.

The company expects to benefit from the strong launch of Call of Duty: Modern Warfare 3 (launched Tuesday). Activision stated that preorders were “significantly” above last year’s record breaking presales of Call of Duty Black Ops. With review scores in the 88 – 90 range, we believe sales are likely to equal or exceed Black Ops sales (we have modeled 20 million units in Q4).

We expect the Call of Duty: Elite premium membership plan to be very popular. The company stated that tie ratios for Elite with MW3 are better than expected, and that it can reach one million paid subscribers within a year.

Skylanders appears to be off to a strong start, and should generate solid holiday sales. The company stated that over two million toys have already sold.

Activision’s (NASDAQ:ATVI) 2012 lineup is stronger than 2011’s, in our view. In addition to a game from Bungie, Activision may release two Call of Duty games (shooter and action game), and Blizzard may release up to three titles.

Maintaining OUTPERFORM rating and $19 price target, which reflects a forward multiple of 17x our 2012 EPS estimate of $0.95 plus an estimated $3/share in cash. This is at the low end of its historical multiple range, reflecting continuing industry malaise and risk from dependence on a few franchises.

Michael Pachter is an analyst at Wedbush Morgan.

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