The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Q2 in-line with preannounced levels that were above our earlier expectations. Revenue was $608 million, in-line with the preannounced amount and our recently revised estimate, with key drivers including Call of Duty, Skylanders, and World of Warcraft. Digital was a record 63 percent of revenue. EPS was $0.08, also in-line.
Activision (NASDAQ:ATVI) delivered yet another quarter of revenue and earnings growth. Once again, Activision delivered both top and bottom line growth, as Call of Duty Black Ops II catalog sales were much higher than Modern Warfare 3 sales last year. The Skylanders business has generated over $1.5 billion in revenue life to date, suggesting that 2013 revenues (through July 31) were over $500 million, compared to $750 million for all of last year. Blizzard’s World of Warcraft subscriber base declined once again, but contribution from strong catalog sales of Skylanders and Call of Duty helped to offset the decline in Blizzard revenue.
Digital expansion continues to drive revenue growth and margin expansion. Digital content revenues continued to benefit margins, with Call of Duty DLC purchases offsetting declines in World of Warcraft subscription revenue. We expect continued digital sales growth for the balance of 2013 from future releases, and are particularly optimistic about the long-term potential contribution from the free-to-play Call of Duty launch in China.
Continued dependence on Call of Duty and WoW. A large portion of Activision’s profits are derived from these two franchises, and Activision continues to commit an increasing amount of its resources to Call of Duty; the Q2 decline in WoW subscribers will likely trigger increased investment in order to maintain the franchise’s base, pressuring profitability. In addition to a large Blizzard revenue decrease this year from a difficult Diablo III comparison, Call of Duty sales will be challenged by the releases of Grand Theft Auto V and Battlefield 4, while Skylanders must compete with Disney Infinity, due later this month.
Maintaining our OUTPERFORM rating and our price target of $22. We value the shares at a market multiple of roughly 18x our 2014 $1.29/share EPS estimate, less approximately $2 per share in net debt after the Vivendi transaction has closed. The company communicates clearly, executes well, and its management appears to truly understand how to make money.
Michael Pachter is an analyst at Wedbush Securities.