Analyst Sees 5 Factors for Activision Exceeding 2012 Expectations

Activision Blizzard Inc. (NASDAQ: ATVI) will report its fiscal first quarter of 2012 (ending March) results after market close on Wednesday, May 9th.

A Closer Look: Activision Blizzard Earnings Sneak Peek>>

We expect Q1 results at or above our estimates for revenue of $570 million and EPS of $0.08, compared to consensus for revenue of $552 million and EPS of $0.04, and guidance for revenue of $525 million and EPS of $0.03. For Q1, we have modeled a publishing revenue decline of ≈ 30%, better than the NPD sales decline of ≈ 40%. Activision should overcome this shortfall with Elite (which should add $22 million), the first MW3 DLC pack, and Skylanders accessories not captured by NPD (we estimate $30 million contribution).

We expect management to increase FY:12 guidance for revenue of $4.50 billion and EPS of $0.94 by less than the Q1 beat. 2012 guidance contemplates 10% operating income growth, including the negative effects of f/x. Without f/x losses, guidance reflects operating profit growth of 15%. We think valuation should disregard f/x, as EPS guidance growth of $0.01 is unusually impacted by f/x losses and compares to a 2011 tax benefit.

Increasing reliance on Call of Duty and WoW. Activision continues to commit an increasing amount of resources to Call of Duty and Elite, while Blizzard appears focused on Diablo III, StarCraft II expansions, and its MMO. Diablo III (due May 15) will generate recurring revenues from its auction house, which should benefit from additional players from the WoW promotion. Call of Duty appears well positioned to maintain market share in 2012 due to the futuristic Black Ops II, but will face a very difficult comp this year. The franchise should eventually encounter FPS fatigue.

Many factors could result in 2012 exceeding expectations.  Upside to FY:12 guidance could come from: (1) more than two titles  from Blizzard, (2)  CoD packaged goods growth, (3) continued Elite premium subs growth, (4) Skylanders: Giants outperforming its predecessor, or (5) more favorable f/x.

Maintaining our OUTPERFORM rating and $19 price target, which reflects a forward multiple of 16x our 2012 EPS estimate of $0.98 plus an estimated $3/share in cash. This is at the low end of its historical multiple range, reflecting continuing industry malaise and risk from dependence on a few franchises.

Michael Pachter is an analyst at Wedbush Morgan.