Activision Blizzard: Is the Earnings Scare Overdone?

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

Activision (NASDAQ:ATVI) will report its fiscal Q1:13 (ending March) results after market close on Wednesday, May 8, and hold a call at 1:30pm PT (800-316-8317, passcode: 9157412, or at

We expect a Q1 beat driven by Call of Duty: Black Ops II. We expect results above our estimates for revenue of $737 million and EPS of $0.12, vs. consensus of $704 million and $0.11, and guidance of $690 million and $0.10. According to NPD, console SW sales were up 19 percent in Q1, well above our estimate of down 3 percent. We note that Call of Duty: Black Ops II accounted for much of the beat, with Q1 dollar sales for the newest iteration up over 30 percent in Q1. We attribute the growth to free Elite this year. Also, we note sales of the newest Skylanders were up y-o-y.

Maintaining our FY:13 estimates, which remain well above consensus and guidance. We are adjusting our quarterly estimates, however, as we now expect Bungie’s Destiny in Q4. Our current estimates are for revenue of $4.74 billion and EPS of $1.05, vs. consensus of $4.26 billion and $0.85, and guidance of $4.175 billion and $0.80. Guidance assumes a Blizzard drop-off due to a difficult comparison to 2012’s Diablo III and Mists of Pandaria.

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In addition, Activision expects Call of Duty sales to decline, which has not happened so far. Guidance does not include Bungie’s Destiny or Call of Duty Online, but we expect modest contribution from each. It also expects the console transition to impact results.

We expect additional clarity about the company’s long-term capital structure, with a tender offer or dividend making the most sense, given parent Vivendi’s large ownership stake and debt position.

Management will likely raise FY:13 guidance, although not to the levels we have modeled. Until more is known about how consumer behavior will be affected by the console transition, management will likely maintain conservative guidance.

Initiating our FY:14 estimates for revenue of $4.74 billion and EPS of $1.05, flat with FY:13. We expect next gen console sales to pick up as supply constraints ease, resulting in flat CoD sales and stronger demand for non-AAA titles.

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Maintaining our OUTPERFORM rating and 12-month price target of $21. Our price target reflects a forward multiple of ≈ 16x our 2013 EPS estimate of $1.05 plus $4/share in cash. This multiple is in-line with industry peers, and reflects an improving outlook for publishers ahead of the launches of the next gen consoles.

Michael Pachter is an analyst at Wedbush Securities. 

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