Outlook: Activision Blizzard Starting 2014 With Strong Slate

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Call of Duty Ghosts

Activision Blizzard (NASDAQ:ATVI) is another beat in Q4. Revenue was $2,272 million versus our estimate of $2,235 million, consensus of $2,221 million, and guidance of $2,215 million. Revenue was driven by new releases Call of Duty: Ghosts and Skylanders: Swap Force, as well as World of Warcraft, which saw a modest quarter-over-quarter increase in subs. EPS was $0.79 versus our estimate and consensus of $0.73, and guidance of $0.72. The EPS beat was from top-line strength and cost control.

A very strong release slate for 2014 looms. Activision will release the first Diablo III expansion, and is expected to release an expansion for World of Warcraft. We expect each expansion to contribute at least $200 million to revenue. Activision has also announced Destiny for a 2014 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.

In addition, Activision may launch Call of Duty in China, which should provide some cushion should revenues from its three main brands decline. Overall, we have modeled revenue growth of over $300 million next year, and we believe that Activision can easily surpass our estimate.

Call of Duty will be shifted to a three-year development cycle, which should positively impact game quality for each year’s iteration. Notwithstanding the incremental cost, we think this is a positive, as it is intended to ensure a higher quality offering for each installment of this $1 billion annual franchise. In our view, Call of Duty is too important to Activision’s profitability to allow a poor quality game to be released, and we think that consumers and investors will be happy that the company is spending more money to improve game quality.

Activision’s lower share count provides more operating leverage than in the past. Activision’s diluted share count will to approximately 750 million in 2014 from a weighted diluted share count of just over 1 billion for FY:13, due to its recent repurchase of shares from former controlling shareholder Vivendi. Management provided non-GAAP FY:14 revenue guidance of $4.6 billion and EPS guidance of $1.26, delivering significant EPS growth on only modest revenue growth.

We are maintaining our OUTPERFORM rating and our price target of $22. We value the shares at a market multiple of roughly 19x our 2014 $1.28/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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