Activision Blizzard Earnings Preview: Key Metrics Investors Must Watch
The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Activision (NASDAQ:ATVI) will report its fiscal Q3:12 (ending September) results after market close on Wednesday, November 7, and hold a call at 1:30pm PT (888-455-2265, passcode 7041557, or at http://ir.activisionblizzard.com/events.cfm).
We expect a Q3 beat driven by World of Warcraft: Mists of Pandaria. We expect results above our estimates for revenue of $700 million and EPS of $0.09, vs. consensus of $708 million and $0.08, and guidance of $690 million and $0.07. According to NPD, Activision’s U.S. software sales were ≈ flat in Q3. We modeled Pandaria sell-in of $96 million (mostly digital) and Elite subs revenues of $31 million, offset by a Blizzard subs drop of $35 million. This represents net revenue growth of $92 million, above the $73 million of growth implied by our estimate.
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EPS upside to come from digital sales (mainly Mists of Pandaria and Elite) and share repurchases. Activision spent over $300 million on repurchases in 1H.
We expect the company to raise FY:12 guidance for revenue of $4.63 billion and EPS of $0.99, but by less than the amounts of the beats, in-line with its historical practice. The company will likely cite continued macro uncertainty and conservatism around World of Warcraft subs and Call of Duty: Black Ops II sales.
Mists of Pandaria appears to have had a strong debut. On October 4, the company announced that during its first week, Mists of Pandaria sold through ≈ 2.7 million copies and World of Warcraft subs surpassed 10 million, up from 9.1 million at June 30, 2012. As a result, our sell-in (3 million) and subs (8.8 million) estimates for Q3 are probably too conservative, strengthening our conviction about a beat.
Call of Duty is still the King of first-person shooters after EA’s weak Medal of Honor: Warfighter scores. The much-hyped contender turned out to be nothing more than a pretender after garnering very weak reviews and disappointing sales.
The King lets them eat their cake too. Activision recently announced that Elite for Black Ops II will be free, with players given the option of purchasing DLC a-la-carte or with a Season Pass. We believe Activision elected to make Elite services and features free to stabilize and lengthen the tail of the game’s sales.
Maintaining our OUTPERFORM rating and $19 price target, which reflects a forward multiple of ≈ 13x our 2013 EPS estimate of $1.20 plus $3/share in cash. This is a discount to the market multiple due to weak investor sentiment towards the video game industry, which is suffering from packaged goods declines.
Michael Pachter is an analyst at Wedbush Securities.
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