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.

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