Activision Blizzard Will Post Strong Q1 Results

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Activision Blizzard (NASDAQ:ATVI) will report fiscal Q1:14 (ending March) results after market close on Tuesday, May 6, and will hold a call at 1:30pm PT (888-312-9863, passcode: 6972116, or at http://investor.activision.com/events.cfm).

We expect Q1 results at or above our bullish expectations. Our current estimates are for revenue of $709 million and EPS of $0.11, versus consensus of $689 million and $0.10, and guidance of $675 million and $0.09. On March 11, Blizzard released Hearthstone: Heroes of Warcraft, a free-to-play collectible card game, to strong reviews. On March 25, it released the first Diablo III expansion, Reaper of Souls, with the game selling-through over 2.7 million units in its first week, roughly in-line with our expectations. We expect catalog sales to benefit from expansion of the next-gen console installed base, with Call of Duty: Ghosts likely among the most popular titles. Skylanders will also be an important contributor to Q1 results.

We expect management to increase FY:14 guidance by part of the Q1 beat, but expect relatively weak Q2 guidance. The current FY:14 guidance is for revenue of $4.60 billion and EPS of $1.26, versus our estimates of $4.65 billion and $1.28, and consensus of $4.65 billion and $1.29. Management typically provides conservative guidance, with much uncertainty about the rate of current gen declines. We think that top-line guidance is too low given incremental releases this year (including Destiny in September), while guided year-over-year EPS growth is only 34 percent despite a 28 percent lower expected share count. FY:14 guidance should increase after each quarterly beat and the likely releases of Call of Duty in China and Heroes of the Storm.

We expect a very strong release slate in 2014. Blizzard has already released the first Diablo III expansion, and will release a World of Warcraft: Warlords of Draenor expansion later this year. We expect each to contribute at least $200 million to revenue. Activision has also announced that Destiny will be a September launch. We view the game as a potential blockbuster with as much as $500 million of sales potential in addition to DLC and Season Pass purchases. We have modeled revenue growth of over $300 million, and believe sales can surpass our estimate.

Maintaining our OUTPERFORM rating and our price target of $22. We value the shares at a market multiple of roughly nineteen times our 2014 $1.28 per share EPS estimate. We believe the company communicates clearly, executes well, and its management appears to truly understand how to make money.

Michael Pachter is an analyst at Wedbush Securities. 

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