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Expect a significant beat from Activision Blizzard (ATVI) this week during its June quarter conference call. Stronger-than-expected Diablo III sales should highlight the discussion. The video game sold over 3.5 million copies through the first day following release, and the first week alone saw sales reach over 5 million copies.

Prior to the release of the game, Activision gave revenue guidance for the June quarter of $805 million and EPS of $.10. Analysts' estimates for revenue average $835 million with EPS at $.12. We are calling for revenues over $850 million and earnings of $.15 per share.

Seeking Alpha Commenter Scerabi recently brought the January 2013 calls to our attention noting that the in the money calls were "priced with the expectation that ATVI has absolutely no upside potential". For those who are long ATVI, we recommend adding to your position prior to the earnings announcement through the purchase of the January 2013 $11.00 call options in the $1.60 range. These longer dated options also have the benefit of expiring after what has become the strong fall season following the yearly release of the company's flagship Call of Duty edition.

There are three primary downside risks. First, during last quarter's conference call, the company had beat its guidance by $.03 but only added $.01 to its full-year guidance. This is generally perceived as a negative outlook for future quarters. This risk is somewhat offset by the fact that the company has a history of presenting conservative guidance.

Second, Activision's parent company Vivendi is trying to sell or spin-off its majority stake in Activision. Uncertainty surrounding the situation is limiting the effects of any positive news and an eventual divestiture could put pressure on the Activision's stock. One positive, the break-up may come with the issuance of a special dividend from the large net cash position Activision holds. Note: if a dividend is announced that exceeds 25% of the share price, special rules will apply for the ex-dividend date.

Lastly, there is always risk in Activision's conference call because it reports users/subscriptions for the key World of Warcraft franchise. The title has seen declining usage over the past year and a half following the last major expansion pack. The latest expansion is due out this year and will help stabilize users and subscriptions. It has been difficult to predict where the World of Warcraft number will fall, but for the record, we are calling for a small decline of 100,000 users.

Source: Expect Beat From Activision On Strong Diablo III Sales