After the closing bell today, video game developer and publisher, Activision Blizzard Inc. (ATVI) is scheduled to release its fiscal first quarter 2011 results. The Zacks Consensus Estimate for the quarter is 6 cents per share.
Activision’s performance in the trailing four quarters has resulted in an impressive average positive surprise of 69.5%. In this quarter, we expect Activision to surpass our estimates.
Fourth Quarter 2010 Recap
Activision reported earnings per share (including stock-based compensation but excluding one-time items) of 52 cents, up from 48 cents reported in the prior-year quarter. This was above Activision’s earnings guidance of 47 cents per share as well as the Zacks Consensus Estimate of 49 cents.
The better-than-expected earnings was on account of strong revenue, which exceeded Activision’s guidance of $2.20 billion and the Zacks Consensus Estimate of $2.35 billion. Revenue on a non-GAAP basis (excluding revenues from deferral and related cost of sales) was $2.55 billion, up 2.1% from $2.50 billion in the year-ago quarter.
The year-over-year growth was primarily driven by increased sales from the PC market (up 2.0% year over year) and Massively Multiplayer Online Role-Playing Game (MMORPG) games (up 69.0% year over year) segment, which fully offset weak results from Distribution (down 13.0% year over year), Consoles (down 7.0% year over year) and Handheld devices (down 22.0% year over year).
However, revenues from digital channels (30% of total revenue) for the quarter were more than $470 million, an increase of 40% year over year.
For further details, please refer to: Activision Beats, Outlook Dull
Current Quarter Expectations
For the first quarter of 2011, Activision forecasts non-GAAP net revenues of $640 million, way below the Zacks Consensus Estimate of $667 million. Earning for the quarter is estimated at 7 cents per share, a penny ahead of the Zacks Consensus Estimate of 6 cents. During the quarter, the company released Call of Duty: Black Ops – First Strike, the first add-on content pack.
For full year 2011, Activision anticipates non-GAAP earnings per share of 70 cents and revenues of around $3.90 billion. According to the Zacks Consensus Estimate, Activision will earn 64 cents per share on revenues of $3.99 billion in 2011.
The outlook does not include any new game from Blizzard in 2011. Revenues are expected to be down year over year due to the negative foreign exchange impact and the exit of low-margin business.
Management expects no new music or skateboarding games and anticipates distribution and affiliate businesses to decline in 2011. In case the company does not release a major title this year, management plans to launch only two Blizzard titles in 2012.
Activision had planned to reduce its exposure to low-margin and low-potential businesses, helping it to grow over the long term and enabling it to continue expanding its position as the largest digital publisher. However, management expects growth from the high-margin Digital business going forward.
Given the continued decline in the music genre, the company has plans to spin off its Publishing’s Guitar Hero business unit that has witnessed slow growth in the last two years and will discontinue development of its Guitar Hero game for 2011. The company will also stop development of True Crime: Hong Kong.
Estimate Revision Trends
In the run up to the earnings release (in the last seven days), of the five analysts covering the stock, one analyst has raised estimates and no movement was witnessed in the opposite direction.
For fiscal 2011, there was just one upward revision in the last seven days. However, the EPS estimate for fiscal 2011 remained unchanged at 64 cents.
Recommendation
Over the long term, we remain neutral on Activision due to the lack of any major title release in the last 6-12 months. We believe Activision’s top line could be under pressure in 2011 due to the lack of any major new product.
Activision continues to face tough competition from Electronic Arts Inc. (ERTS) and Take-Two Interactive Software Inc. (TTWO), which will act as a headwind going forward.
Moreover, Activision does not have any exposure in the social gaming platform as compared to Electronic Arts, which may hurt its competitive position over the long term.
We currently have a Zacks #2 Rank for Activision Blizzard Inc., which implies a Buy rating in the short term (1-3 months).
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