Activision Blizzard: Finally, Earnings Guidance to Celebrate

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Activision Blizzard (NASDAQ:ATVI) Q3 performance was above expectations. Revenue was $751 million, compared with our estimate of $700 million, consensus of $710 million, and guidance of $690 million. EPS was $0.15, compared with our estimate of $0.09, consensus of $0.08, and guidance of $0.07. Better-than-expected results were driven by Mists of Pandaria, Diablo III, Skylanders Spyro’s Adventure, and the Call of Duty games.

For the first time in years, the company raised guidance by more than its quarterly beat. It increased 2012 guidance for revenue to $4.805 billion from $4.63 billion, and for EPS to $1.10 from $0.99. Activision Blizzard has a history of opting against fully passing through quarterly beats, only to eventually beat annual guidance by a significant amount as the year progresses. On Wednesday, it raised full-year revenue guidance by $175 million after exceeding Q3 guidance by $61 million, and raised full-year EPS guidance by $0.11 after beating Q3 guidance by $0.08. The company cited better visibility on Black Ops II pre-orders (tracking ahead of Modern Warfare 3), Skylanders Giants, and better merchandising.

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Strong release slate for 2012 and beyond. Blizzard released two games in 2012 (Diablo III and Pandaria), and may release two more in 2013. We also expect the Bungie game and three key sequels in 2013, so Activision could see significant 2013 revenue growth; we are modeling only a modest increase due to a multitude of moving parts, including an estimated $300 million drop in Blizzard revenue from a difficult Diablo III comp, the Bungie game’s unknown release date and potential contribution (we estimate 9 million units in CY:13), and a lack of  Black Ops II review scores, which will likely impact the franchise’s 2013 sales as well.

We continue to see significant upside to today’s closing price. We believe the company has many positive upcoming catalysts, including: (1) a clearer picture of the company’s future from the statements or actions of Vivendi’s management, (2) an increase in Call of Duty sales from a free Elite service, (3) updates on the success of Skylanders Giants, (4) a firmer 2013 release slate, (5) stabilizing World of Warcraft subs numbers, and (6) continued margin expansion from digital sales.

Maintaining our OUTPERFORM rating and $19 price target, which reflects a forward multiple of  ≈ 14x our 2013 EPS estimate of $1.12 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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