Deutsche Bank Bullish on Activision Into Earnings

Deutsche Bank maintains their Buy rating on the shares of Activision (ATVI) ahead of earnings today. The company remains bullish on the shares due to Activision’s product line-up, its subscription-based business in WarCraft which provides visibility into revenues, market share gains, and potential margin expansion.

From Analyst Jeetil Patel
In-line 4Q earnings expected, but outlook should be positive - BUY

We maintain our BUY investment rating on shares of Activision-
Blizzard as well as our price target of $13. Activision-Blizzard
(AB) plans to report 4Q earnings on Wednesday (4:30 pm ET, dial-in
719-325-4748; pwd: 9818084), and we would expect the company to post
results in-line with expectations. We estimate 4Q revenues and EPS
of $2.03bn (in-line) and $0.26 (EPS could be modestly ahead of
our estimate on better GM). To no surprise, 4Q was driven by Call of
Duty and World of Warcraft (subs + expansion pack).

* Themes to look for on the conference call

We estimate 62% gross margins and 26.4% operating margins in 4Q,
with upside likely to both from Warcraft GM and opex controls. Note
that Street consensus stands at $0.29 (vs. DB estimate at $0.26) in
EPS for 4Q. The key themes on the call to look out for will be the
2009 lineup, strength/channel inventories/outlook for Guitar Hero,
SKU growth, new IP/titles, update on Warcraft in China & potential
StarCraft 2 launch.

* Expecting '09 growth an in-line with industry growth rates

We estimate 2009 revs/EPS of $4.77bn and $0.65, based on a 7%
decline in core Activision ($3.0bn) and $1.75bn at Blizzard. (Street
consensus at $5.2bn/$0.67). We think the co. guides to '09 software
revs in-line with industry growth (0%-5%), implying $5+ bn in revs,
with upside to EPS offset by lower interest income on cash. We would
expect Activision to guide conservatively in a range of $0.60- $0.65
to start 2009. Upside potential exists from share buybacks,
potential new China deal for Warcraft (could add $0.05 in annualized
EPS), Starcraft launch & SKU growth to propel software growth.

* 12-month price target of $13

Our $13 price target is based on 20x our CY09E EPS of $0.65, vs. the
37x for Electronic Arts and target multiple of 17x CY09E EPS, given
the company's more diversified revenue stream and high-quality
stable of in-house IP, subscription business, market share gains,
higher margins, and potential upside to earnings from leverage
against generally fixed technology costs. Risks: slower demand,lower
software ASPs & slower next gen hardware sales.