Earnings Cheat Sheet: Starcraft II Propels Activision-Blizzard (ATVI) To Earnings Beat

Activision Blizzard Inc. (NASDAQ: ATVI) produces online, PC, console and handheld video games.  It’s probably best known for mega-hit series’ like World of Warcraft, Starcraft and Call of Duty.  While sales dipped as the downturn deepened, a rebounding economy and several hit releases seem to have the company back on track.

ATVI boasts a $14 billion market cap and a 1.33% dividend.  The company has beaten estimates in nine of the past eleven quarters.

Earnings: 3Q profits of $51 million ($0.12/share excluding items) vs. 3Q09 profits of $15 million ($0.04/share excluding items).

Revenue: Up 6% YoY to $745 million.

Actual vs. Wall St. Expectations: ATVI’s EPS came in $0.03 ahead of analyst expectations while its revenue beat the company’s August guidance of $725 million.

Notable Stats: Product sales fell 3.4% YoY to $397 million, while subscription, licensing and other revenues popped 19% to $348 million

Operating margins rose to  7.4% from 1.3% as costs fell modestly.

The company forecasted 4Q earnings excluding items of $0.47/share on $2.2 billion in revenue.

ATVI has approximately $400 million left on its buyback program.

Did You Hear That? CEO Robert Kotick noted that, “StarCraft is one of the highest-rated pieces of software ever created…the product will sell successfully just like it has for the last 10 years.”

Following the conference call, one analyst stated that, “the videogame space is coming through a transition where it’s no longer about retail; it’s about leverage…as [Activision moves] from physical distribution to digital, you have revenue compression but margin expansion.”

Technicals: ATVI had been creeping towards breaking above resistance dating back to late-July/early-August, but Friday’s high volume down-day following Thursday night’s report seems to have put a breakout of any nature into question.  While shares traded a big range and ended up on the downside, they did manage to hold their 50- and 200-day moving averages, as well as their trend-line dating back to the summer (see below).  So, while Friday’s trade may not have been superficially positive, there were definitely foundations for investors to hang their hats on, particularly in terms of support.

Commentary: ATVI’s Q was boosted by sales of the much-ballyhooed Starcraft II and the company has likely mega-hits in the pipeline in Call of Duty: Black Ops and World of Warcraft: Cataclysm.  ATVI is near the forefront of its industry in terms of shifting towards a subscription model, with nearly 12 million subscribers for World of Warcraft alone.  The subscribtion model not only allows the company to create long-term revenue streams, but also allows it to capitalize on high-margin add-ons.  Heading into what some are expecting to be a strong holiday season, this may be the time to give ATVI some serious consideration.

Disclosure: No holdings in ATVI.