'Call Of Duty' Shirks Duty Call, But Activision Still Delivers

Reviewing Activision Blizzard, Inc.'s ATVI fourth quarter results, Baird said the company reported better than expected overall results despite the underperformance of "Call of Duty: Infinite Warfare."

Q4 Outperformance

Analyst Colin Sebastian said fourth quarter revenues of $2.45 billion, up 15.8 percent year-over-year, exceeded the consensus estimate and the company's guidance. The analyst attributed the upside to strong digital sales and positive user engagement trends across the portfolio. This, according to the analyst, offset disappointing unit sales of the fourth quarter release "Infinite Warfare."

Strength in Blizzard Franchises

Baird noted that King Digital Entertainment's monthly active users (MAU) declined slightly, but user engagement trends and monetization were healthy. The firm also referred to the company's assertion on the call that user growth showed strong trends, with 447 million MAU in the fourth quarter. The Blizzard franchises "Overwatch" and "World of Warcraft" continued to benefit from recurring usage and monetization.

Outlook

Baird believes recent strategic moves such as the creation of a new Consumer Products division as well as investments in media/entertainment and eSports create additional opportunities to monetize existing IP. The firm believes the previously announced Overwatch League would lead to incremental revenue streams in the second half of 2017.

On the guidance, the firm said the company's below-consensus first quarter earnings and revenue guidance reflected the impact of slower holiday sales of "Call of Duty: Infinite Warfare." However, 2017 guidance was better than some low-end targets. According to the firm, a light release slate and the "Infinite Warfare" hangover would depress organic growth rate until the fourth quarter. Baird expects the frequent content updates for core Blizzard franchises to drive digital transaction volume.

Rating/Price Target

Baird said there is no change to its fundamental outlook and thesis. The firm maintained its Outperform rating and $47 price target for the shares of Activision.

Activision Blizzard rallied 16.41 percent to $46.25. In a sympathy move, Electronic Arts Inc. EA added 3.82 percent to $86.44 and Take Two Interactive Software Inc TTWO advanced 3.57 percent to $58.02.

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