Activision Blizzard (ATVI) reported a strong start to 2017 as first-quarter GAAP results came in well above our projections and guidance. Management raised its full-year 2017 GAAP revenue guidance to $6.1 billion from $6.0 billion and its GAAP EPS guidance to $0.88 from $0.72. However, the guidance raise was less than the beat in the first quarter, implying some weakness later in the year. We are maintaining our narrow economic moat rating. We are raising our fair value estimate to $42 from $39 as we increased our gross margin projections to better reflect the leverage the firm demonstrated in the first quarter and lowered tax rate assumptions to align with 2017 guidance. With shares trading in the two-star range, we would wait for a larger margin of safety before investing.
GAAP revenue for the quarter improved 19% year over year to $1,726 million (versus guidance of $1,550 million) due to strong performance at Blizzard. Console GAAP revenue fell 20% year over year to $615 million, as the latest Call of Duty game, Infinite Warfare, continues to underperform versus the 2015 installment, Black Ops III. Management expects Activision to rebound in the second half of 2017 with the launches of Destiny 2 and the next Call of Duty game. PC GAAP revenue improved 42% to $566 million driven by Overwatch as Blizzard continues to diversify its revenue stream. Overwatch recently became the firm’s eighth $1 billion franchise less than a year since its launch. GAAP operating margin for the quarter fell to 29% from 32% last year as the firm was hurt by fewer higher-margin digital sales at Activision.
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