Earnings Preview: Activision

Activision Blizzard Inc. ( ATVI - Snapshot Report ) is scheduled to release its fiscal third quarter 2012 results after the closing bell on November 7, 2012.

Prior Quarter Highlights

Activision reported robust second quarter 2012 results. Revenues on non-GAAP basis surged 50.8% year over year to $1.05 billion in the quarter and comfortably exceeded the company’s guidance of $805.0 million. The quarterly revenues also surpassed the Zacks Consensus Estimate of $893.0 million. The significant year-over-year growth was driven by strong performances from Diablo III, Skylanders, World of Warcraft and Call of Duty franchises.

Activision’s bottom line also doubled to 20 cents in the reported quarter boosted by higher revenue and solid margin expansions. Including stock based compensation, earnings came at 18 cents.

For the third quarter, Activision expects non-GAAP earnings of 7 cents per share on revenues of $690 million. The Zacks Consensus Estimate for revenue was $707 million.

For further details please read: Activision's 2Q Profits Double Y/Y

Estimate Revision Trend

In the last 30 days, none out of the 5 analysts covering the stock revised their estimates for the third quarter. The Zacks Consensus Estimate for the quarter remained at 7 cents per share for the same period of time.

Analysts expect Activision’s top line to exceed estimates banking on higher sales of World of Warcraft: Mists of Pandaria. Moreover, the bottom line is expected to get a boost from higher digital sales and share repurchase activity. However, analysts remain concerned regarding the uncertain macroeconomic conditions coupled with subscription losses in the World of Warcraft game and weaker-than-expected sales from Call of Duty: Black Ops II.

Recommendation

We note that Activision has a staggering average earnings surprise of 217.7% over the past four quarters. We don’t expect a major change in the earnings trend pattern for the current quarter. We believe that Activision is focusing on expanding its product portfolio that will boost top-line growth over the long term.

Meanwhile, Activision continues to strengthen its World of Warcraft, Call of Duty and Skylanders franchises through the launch of new versions and content packs, which are expected to boost top-line growth in the near term. Moreover, with video game sales slowing down in the major western markets, Activision has been focusing on boosting its presence in the emerging markets of China and South East Asia.

However, softness in the video game industry and significant competition from Electronic Arts Inc. ( EA - Analyst Report ) and Take-Two Interactive Software Inc. ( TTWO - Snapshot Report ) are the major headwinds going forward. Moreover, increasing investment related to new product developments may hurt profitability in the near term.

We prefer to remain on the sidelines due to these concerns and maintain our Neutral recommendation over the long term (6-12 months). Currently, Activision Blizzard has a Zacks #3 Rank, which implies a ‘Hold’ rating in the short term.