Activision Blizzard Earnings Analysis: Significant Upside?

Activision (NASDAQ:ATVI) Q1 results above consensus. Revenue was $587 million, compared with our estimate of $570 million, consensus of $556 million, and guidance of $525 million. EPS was $0.06, compared with our estimate of $0.08, consensus of $0.04, and guidance of $0.03.

The company increased 2012 guidance for revenue to $4.53 billion from $4.50 billion, and for EPS to $0.95 from $0.94. It provided initial Q2 guidance for revenue of $805 million and EPS of $0.10. We are increasing our 2012 estimate for revenue to $4.67 billion from $4.65 billion, but are decreasing our EPS estimate to $0.96 from $0.98 to reflect Q1 results. We are maintaining our 2013 estimates.

Call of Duty Elite showed continued premium subs growth. In December, Activision (NASDAQ:ATVI) announced over one million premium subs. On Wednesday, it disclosed that as of April 30, 2012, Elite had over ten million gamers and over two million premium memberships. We expect the number of premium subscribers to continue to grow throughout 2012 as additional content drops become available, with a peak in Q4 when the next Call of Duty is released.

There could be significant upside to FY:12 guidance. In our view, any of the following factors could result in the company exceeding expectations: (1) more than two titles from Blizzard, (2) Call of Duty packaged goods growth, (3) continued Elite premium subs growth, (4) Skylanders: Giants outperforming its predecessor, or (5) more favorable f/x rates. We expect an additional Blizzard title, and believe that Skylanders has the potential to grow significantly in the coming year.

The company again failed to fully pass through its quarterly EPS beat to full year guidance. Despite delivering non-GAAP EPS of $0.06, three cents above guidance of $0.03, full year EPS guidance was raised by only one cent to $0.95 from $0.94. The failure to fully pass through an earnings beat can be perceived as a lowered outlook for the remainder of the year.

Maintaining our OUTPERFORM rating and $19 price target, which reflects a forward multiple of almost 17x our 2012 EPS estimate of $0.96 plus an estimated $3/share in cash. This is at the low end of its historical multiple range, reflecting industry malaise and risk from dependence on a few franchises.

Michael Pachter is an analyst at Wedbush Morgan.