Activision Blizzard Sneak Peek: Increased Guidance Ahead?

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

Activision (NASDAQ:ATVI) will report its fiscal Q2:12 (ending June) results after market close on Thursday, August 2, and hold a call at 1:30pm PT (888-282-4591, passcode 4121658, or at http://ir.activisionblizzard.com/events.cfm).

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Q2 beat expected. We expect Q2 results at or above our estimates for revenue of $825 million and EPS of $0.12, compared to consensus for revenue of $832 million and EPS of $0.12, and guidance for revenue of $805 million and EPS of $0.10. We expect the top-line beat to driven by Blizzard sales, which we have modeled at $497 million, up $184 million from PY. However, given that Blizzard sold over 6.3 million copies of Diablo III in its first week (over 1.2 million were WoW annual pass promos), our Blizzard revenue estimate is likely conservative. Other strong contributors will be CoD Elite, DLC (one content collection in Q2 for Xbox 360, two for PS3 and PC), and Skylanders (over $100 million of revenue in Q1).

We expect management to increase FY:12 guidance for revenue of $4.53 billion and EPS of $0.95 by less than the Q2 beat. Although it delivered nonGAAP EPS of $0.06 in Q1, three cents above guidance of $0.03, FY EPS guidance was raised by only one cent to $0.95 from $0.94. Failure to fully pass through an EPS beat can be perceived as a lowered outlook for the remainder of the year, although Activision typically offers conservative guidance.

There could be significant upside to FY:12 guidance. We believe any of these factors could result in the company exceeding expectations: (1) over two titles from Blizzard, (2) Call of Duty packaged goods growth, (3) Elite premium subs growth, (4) Skylanders: Giants outperforming its predecessor, or (5) more favorable f/x.

Activision had a relatively quiet E3, with the latest CoD (Black Ops II) ending the Microsoft event. We conservatively estimate lifetime sales of 25 million units.

We continue to assign a low probability to the sale of Activision Blizzard by parent Vivendi, as, in our view, there are not any readily apparent buyers.  We expect Vivendi to cause Activision to borrow as much as $5 billion and pay a special dividend, followed by a spin-off of Activision stock to Vivendi shareholders.

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 Securities.

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