Activision Blizzard, ATVI fin1

Important disclosures appear on the last page of this report.
The Henry Fund
Henry B. Tippie School of Management
Ashutosh Kumar Jha [ashutoshkumar-jha@uiowa.edu]
Activision Blizzard (ATVI) April 12, 2015
Information Technology – Application Software Stock Rating Buy
Investment Thesis Target Price $26.00-$27.00
Activision Blizzard has a strong product portfolio of old and new games and
has been successful in generating steady revenues from its core franchises. We
believe ATVI deserves to trade at a premium to peers based on the company’s
industry leadership, though at P/E of 18.2x NTM the stock currently trades at
discount. We recommend BUY rating for Activision Blizzard (ATVI) with a mean
target price of $26.50, which provides 15.21% upside from its current market
price of $23.00.
Drivers of Thesis
 Increased Operating Margin due to digital distribution. We expect
revenues from retail product sales to decline at 2.77% CAGR and revenues
from digital distribution medium to increase at 13.47% CAGR over the
period from 2015 to 2020. Digital distribution method, which has
significantly higher margins compared to physical sale, will increase
earnings for Activision Blizzard at 8.27% CAGR over the same period.
 Product differentiation and targeted consumer segment. Quality games
and loyal customer base of hardcore gamers ensures high retention of
gamers for older franchises and reduces risk of losing market share to new
technologies such as mobile gaming.
 Launch of Free-to-Play gaming model. Asian market comprises for 46% of
global gamers but accounts for less than 10% of revenues for the Video
Game Industry. We believe free-to-play gaming monetization model will
reduce the impact of piracy and will be a significant growth driver in future.
Risks to Thesis
 Expectation of decline in revenues from core franchises. Revenues
associated with the Call of Duty, World of Warcraft, and Skylanders
franchises combined accounted for 67%, 80%, and 72% of consolidated net
revenues for the years ended December 31, 2014, 2013, and 2012,
respectively. As Blockbusters franchises age, expectation of decline builds.
 Weak 2015 outlook. As Europe accounts for 40% of total revenue,
weakening Euro is a risk and primary reason for weak 2015 guidance.
 Low ROE relative to the Industry. Activision Blizzard’s ROE is lower relative
to the industry average and is a concern for long-term growth.
Henry Fund DCF $26.71
Henry Fund DDM $19.47
Relative Multiple $22.35
Price Data
Current Price $23.00
52wk Range $17.73 – 24.18
Consensus 1yr Target $25.86
Key Statistics
Market Cap (B) $16.63
Shares Outstanding (M) 722.90
Institutional Ownership 66.3%
Five Year Beta 1.20
Dividend Yield 1.0%
Est. 5yr Growth 7.6%
Price/Earnings (TTM) 20.4
Price/Earnings (FY1) 18.2
Price/Sales (TTM) 3.8
Price/Book (mrq) 2.3
Profitability
Operating Margin 26.8%
Profit Margin 18.7%
Return on Assets (TTM) 5.7%
Return on Equity (TTM) 11.9%
Earnings Estimates
Year 2012 2013 2014 2015E 2016E 2017E
EPS $1.01 $0.96 $1.14 $1.21 $1.42 $1.61
growth 8.60% -4.95% 18.75% 6.49% 16.91% 13.22%
12 Month Performance (Source: Factset) Company Description
Activision Blizzard Inc., headquartered in Santa
Monica, California, United States, is a worldwide
publisher of online computer, console, tablet, and
mobile games. Activision Blizzard’s product
portfolio consists of some of the most successful
franchises in the history of the Video Gaming
industry. First person action game Call of Duty,
Mass-Multiplayer Online game World of Warcraft
and platform role playing game Skylanders
generate major proportion of the revenue. The
video game industry is estimated to be $80.5B and
ATVI accounts for 12.5% of the market.
18.2
11.9
13.0
23.7
15.5
19.5
18.2
20.2
15.6
0
5
10
15
20
25
P/E NTM ROE P/CF
ATVI Industry Sector
-10%
0%
10%
20%
30%
A M J J A S O N D J F M
ATVI S&P 500

EXECUTIVE SUMMARY
Activision Blizzard Inc., headquartered in Santa Monica,
California, United States, is a worldwide publisher of
online computer, console, tablet, and mobile games.
Activision Blizzard has a strong product portfolio of old and
new games and has been successful in generating steady
revenues from its core franchises. Fiscal year 2015
promises to be a lighter year for new releases and in
additional to that two of the new releases are free-to-play
titles, which will take time to build. However, most of the
drag will be due to weakening Euro and higher taxes rather
than due to operational factors.
Moving forward Activision Blizzard will benefit from higher
margins from digital distribution and monetization of free-
to-play games in Asian markets. Due to superior quality of
games and targeted loyal customer base of hardcore
gamers, we do not see the revenues from core franchises
declining any time soon. Also, this reduces the threat from
other alternative options of gaming such as mobile games.
We believe ATVI deserves to trade at a premium to peers
based on the company’s industry leadership, though at P/E
of 18.2x NTM the stock currently trades at discount. We
recommend BUY rating for Activision Blizzard (ATVI) with
a mean target price of $26.50, which provides a 15.21%
upside from its current market price of $23.00.
COMPANY DESCRIPTION
Activision Blizzard is a worldwide developer and publisher
of online, personal computer, video game console,
handheld, mobile and tablet games. Activision Blizzard
currently offers games that operate on Microsoft’s Xbox
one and Xbox 360, Nintendo’s Wii U and Wii, and Sony
PlayStation 4 (PS4) and PlayStation3 (PS3); the PC, the
Nintendo 3DS, Nintendo Dual Screen and Sony PlayStation
Vita handheld game systems; and mobile and tablet
devices. Console systems Xbox one, Wii U and PS4 are
collectively referred to as “next-generation”.
Vivendi SA, a French telecommunications company,
owned Blizzard in 2008 when Activision and Blizzard
merged. After the merger Vivendi took 61% stake in the
newly formed Activision Blizzard. In 2013, Vivendi
reportedly wanted to pay down its $17B in debt and saw
the sale of $8.2B of its equity in Activision Blizzard as an
ideal means to that end. One of the benefit of the deal for
Activision Blizzard is that management has more freedom
to make decisions. In 2013, Activision Blizzard purchased
38.4% of itself from Vivendi SA through $4.6B in debt and
$1.2B in cash. Activision Blizzard paid $13.60 per share for
its stock. Vivendi sold half of its remaining stake in May 22,
2014, reducing its ownership to 5.8%.
The company has three operating segments: Activision
Publishing, Inc., which is a developer and publisher of
software products and content, with a focus on developing
and publishing video games on various consoles, handheld
platforms and the PC platform, primarily based on
internally developed properties, as well as licensed
properties; Blizzard Entertainment, Inc., which is a
publisher of online subscription-based games in the
multiplayer online role-playing game category; and
Activision Blizzard Distribution, which distributes
entertainment software and hardware products. In
addition, the company maintains a proprietary online-
game related service, Battle.net that facilitates the
creation of user generated content, digital distribution,
and online social connectivity in its games.
Source: Activision Blizzard 10K 2015
Activision
Activision develops, markets and sells products through
retail channels or digital downloads, which are principally
based on internally developed intellectual properties, as
well as some licensed properties. Activision’s successful
intellectual properties include the Call of Duty and
Skylanders franchises, and management intend to
continue development of owned franchises in the future.
Activision also has an exclusive 10 year alliance with
Bungie, a developer of successful game franchises, for
Destiny, which was released on September 9, 2014.
56%
36%
8%
2014 Revenue
Activision
Blizzard
Distribution

Activision has been known for its success in the first-
person action category from its internally-developed
intellectual property, Call of Duty. The Call of Duty
franchise has achieved approximately $11 billion life-to-
date revenues and has an active global community of
millions of players. The latest addition to the franchise, Call
of Duty: Advanced Warfare, was released on November 4,
2014, and, was #1 best-selling video game release
worldwide and #1 title on the next-generation PS4 and
Xbox One console platforms in 2014, according to The NPD
Group and Gfk Chart-Track. In January 2015, Activision
launched a public open beta in China for Call of Duty
Online, a free-to-play game in which players are able to
purchase or rent in-game items.
On October 5, 2014, Activision launched Skylanders Trap
Team, the fourth title in our Skylanders franchise, an
internally-developed intellectual property that combines
the use of physical toys with video games. The games in
the Skylanders franchise involve smart toys consisting of
action figures and accessories and an electronic portal
which, when used with a figure or accessory, allows a
player to store and access information about his or her
performance in the game. They sell the toys and
accessories both bundled with the software for the titles
and on a stand-alone basis. Skylanders Trap Team
continues with the innovative toys to life concept by
allowing players to physically trap villains in the game.
According to the NPD Group and GfK Chart-Track,
including toys and accessories, for the third consecutive
year, Skylanders was the #1 kid’s video game franchise of
the year in the U.S., and globally and in 2014, Skylanders
outsold all action figure lines globally.
On September 9, 2014, Activision released Bungie's
Destiny, an online universe of first-person action
gameplay. According to the NPD Group and GfK Chart-
Track, including toys and accessories, in 2014, Destiny was
the #1 top-selling new video game IP (Intellectual
Property) and was the #3 top selling new release of the
year in North America and Europe combined. The first
expansion pack for Destiny, The Dark Below, containing all-
new maps, missions, gear, weapons and raids, was
released on December 9, 2014.
Sales from Activision has declined at 4.38% CAGR from
2012 to 2014. Moving forward we expect sales to decline
by 1.45% in 2015. Over the period from 2015 to 2020, we
expect sales from this segment to grow at 3.14% CAGR.
Blizzard
Blizzard Entertainment, Inc. (Blizzard) is a development
studio and publisher best known as the creator of the
multiple award winning World of Warcraft, Diablo,
StarCraft, and Hearthstone: Heroes of Warcraft franchises.
Blizzard is the leading publisher of online subscription-
based games in the massively multiplayer online role-
playing game (MMORPG) category. In addition, Blizzard
maintains a proprietary online game-related service,
Battle.net, which facilitates the creation of user generated
content, digital distribution and online social connectivity
across all Blizzard games.
Source: Activision Blizzard 10k 2015
Blizzard distributes its products and generates revenues
worldwide through various means: subscriptions; sales of
prepaid subscription cards; value-added services such as
realm transfers, faction changes, character boosts, and
other character customizations within the World of
Warcraft gameplay; retail sales of physical boxed
products; online download sales of PC products; purchases
and downloads via third-party console, mobile and tablet
platforms.
World of Warcraft, the leading subscription-based
MMORPG, was initially launched in November 2004. As of
December 31, 2014, over 10 million gamers worldwide
were subscribed to play Blizzard's World of Warcraft.
Since the first release of World of Warcraft, Blizzard has
launched five expansion packs. The newest expansion,
World of Warcraft: Warlords of Draenor, which was
released in November 2014.
In May 2012, Blizzard released Diablo III for the PC at retail
and through digital distribution. In September 2013,
Blizzard released Diablo III for the PS3 and Xbox 360
50%
41%
9%
2014 Geographic Revenue
Distribution
North America
Europe
Asia Pacific

platforms. Blizzard released the first expansion pack to
Diablo III, on the PC, Diablo III: Reaper of Souls, in March
2014 and on certain consoles, Diablo III: Reaper of Souls
Ultimate Evil Edition, in August 2014. In July 2010, Blizzard
launched the sequel to StarCraft, StarCraft II: Wings of
Liberty. In March 2013, Blizzard released the first
expansion pack to StarCraft II, StarCraft II: Heart of the
Swarm.
Blizzard released Hearthstone: Heroes of Warcraft, a free-
to-play digital collectible card game, on the PC in March
2014, and on the iPad and Android tablets later in 2014. In
July 2014, Blizzard released Curse of Naxxramas: A
Hearthstone Adventure. The first Hearthstone: Heroes of
Warcraft expansion pack, Goblins vs Gnomes, was
released on December 8, 2014.
Additionally, Blizzard maintains an online gaming service,
Battle.net. Battle.net facilitates the creation of user
generated content, digital distribution and online social
connectivity across all Blizzard games. In January 2015,
Blizzard started closed beta testing for Heroes of the
Storm, a new free-to-play online hero brawler.
Blizzard plans to maintain and build upon its intellectual
properties and franchises by developing new content and
games under new business models, such as free-to-play,
and on new platforms, such as console and mobile
platforms. By leveraging its existing intellectual properties
and franchises and offering new content, game play and
platform options, Blizzard expects to continue to expand
its Battle.net community and attract new customers.
Source: Activision Blizzard 10K 2015
Sales from Blizzard has increased at 2.25% CAGR from
2012 to 2014. Moving forward we expect World of
Warcraft subscription to decline in 2015 as we have seen
historically in the year following the release of a large-scale
expansion. We expect sales to decline by 15.70% in 2015.
Over the period from 2015 to 2020, we expect sales from
this segment to grow at 4.85% CAGR.
Distribution
The Activision Blizzard Distribution (Distribution) business
consists of operations in Europe that provide warehousing,
logistical, and sales distribution services to third-party
publishers of interactive entertainment software, its own
publishing operations, and manufacturers of interactive
entertainment hardware.
Sales from this segment has increased at 9.97% CAGR from
2012 to 2014. Moving forward we expect sales to decline
by 13.51% in 2015. Over the period from 2015 to 2020, we
expect sales from this segment to grow at 6.71% CAGR.
Growth Analysis
Last year, fourth-quarter results were, as usual, driven by
the November 2014 release of the latest installment of the
Call of Duty franchise, Advanced Warfare as well as
continued sales of Destiny, a new video game, and
Skylanders: Trap Team, released in September and
October 2014, respectively. Again, as expected, Call of
Duty: Advanced Warfare was the top-selling video game
title in 2014, extending its dominance in the first-person
shooter category for another year. The World of Warcraft:
Warlords of Draineor and Hearthstone multiplayer online
role player games also remained strong sellers in fourth
quarter of 2014.
This year will have a lighter release schedule, as Activision
will not have a new offering comparable to March 2014
release of Diablo III: Reaper of Souls. User engagement is
also likely to decline after the Reaper of Souls and
Warlords of Draineor releases. However, the company has
already launched its first expansion pack for Hearthstone
in second quarter of 2015. Later in the year, we expect
new releases in both the Call of Duty and Skylanders
franchises. A new free-to-play game, Heroes of the Storm,
is in closed beta.
The transition to next-generation consoles, with the
launch of the Xbox One and PlayStation 4 in 2013,
63%
37%
2014 Sales Method
Revenue Distribution
Retail Product Sales
Digital Distribution

continues slowly. Activision sees opportunity in the better
graphics and increased functionality of new consoles in
high-margin lines, including downloadable content, virtual
items, and other value-added online services. However,
the company will have to work through the buildup of the
next-generation user base over the next few years.
Activision sees another opportunity in expanding its game
franchises to new platforms and new geographies. The
company launched Call of Duty Online in China in beta in
January. It will also bring Hearthstone to mobile devices in
2015. Management’s goal is to replace stagnant to
declining retail revenues with digital revenue from online
and mobile.
Retail product sales accounted for 63% of total revenue in
2014. Retail product sales declined at 8.36% CAGR from
2012 to 2014. We expect it to decline by 5.24% in 2015.
Over the period from 2015 to 2020, we expect retail
product sales to decline at 2.77% CAGR. Digital revenue
accounted for 37% of total revenue in 2014. Digital
revenues increased at 9.48% CAGR from 2012 to 2014. We
expect it to increase by 10.97% in 2015. Over the period
from 2015 to 2020, we expect retail product sales to
increase at 13.74% CAGR.
RECENT DEVELOPMENTS
2014 Results
Activision Blizzard reported fourth-quarter and full-year
results for 2014, beating the quarterly consensus EPS
estimate by $0.06. It also outperformed its own non-GAAP
EPS guidance by $0.08. Fourth-quarter GAAP revenue rose
3.7% to $1.575 billion, while non-GAAP revenue declined
2.6% to $2.21 billion. The non-GAAP operating margin
widened by 340 basis points to 41.3%. Non-GAAP net
income rose 12.6% to $698 million and EPS increased 19%
to $0.94 per diluted share from $0.79 per diluted share in
4Q13. The difference between net income growth and EPS
growth reflected a 6% decline in the share count due to
stock buybacks. The company posted GAAP EPS of $0.49
per share, up from $0.22 in 4Q13.
For all of 2014, non-GAAP revenue rose 11% to $4.81
billion. Non-GAAP net income increased 6% to $1.057
billion, though EPS rose 51% to $1.42 from $0.94 in FY13.
The gap between net income growth and EPS growth
reflected the October 2013 reorganization in which the
company retired 429 million shares formerly owned by
Vivendi.
Activision Blizzard 4th
quarter & full year 2014 results:
Source: Factset
Fourth-quarter results were driven by the November 2014
release of the latest installment of the Call of Duty
franchise, 'Advanced Warfare,' as well as continued sales
of 'Destiny,' a new videogame, and 'Skylanders: Trap
Team,' released in September and October 2014,
respectively. Again, as expected, 'Call of Duty: Advanced
Warfare' was the top-selling videogame title in 2014,
extending its dominance in the first-person shooter
category for another year. The 'World of Warcraft:
Warlords of Draenor' and 'Hearthstone' multiplayer online
role player games also remained strong sellers in 4Q14.
Weak 2015 Outlook
Given the significant weakening of foreign currencies
versus the U.S. dollar, the company’s 2015 international
revenues and earnings are expected to be translated at
much lower rates than in 2014. This will impact the
company’s 2015 outlook as compared to 2014 actual
results given approximately 50% of the company’s
revenues, and a higher percentage of profits, are
generated outside the U.S. Tax rate is also expected to
higher as compared to 2014. The guidance for effective tax
rate is 24% for 2015 compared to 10% in 2014. R&D tax
credit and strong international performance from Blizzard
were the reason for tax rate to be lower in 2014. We used
marginal tax rate of 20% in our model.
Our prediction for FY2015 revenue is 4440, which is slightly
higher than the guidance of 4400. Our FY2015 EPS of $1.20
is also slightly higher than the guidance of $1.15. Currency
assumption for guidance is $1.13 USD/Euro. With current
rate of $1.08 USD/Euro we would expect earnings to be
even lower going by the guidance. Our short-term (next 6

months) and long-term (2 years) prediction for exchange
rate is $1.14 USD/Euro, which is similar to management
guidance assumption of $1.13 USD/Euro. Revenues and
EPS will increase if the Euro or British Pound Sterling
strengthens vs. USD.
Activision Blizzard 1st
quarter & full year 2015 outlook:
Source: Factset
Reconciles CY14 actual eps to CY15 outlook eps:
Source: Factset
Currency Assumptions for 2015 outlook:
 $1.13 USD/Euro (vs. a $1.33 average for 2014)
 $1.51 USD/British Pound Sterling (vs. a $1.65
average for 2014)
 Revenue and EPS increase if the Euro or British
Pound Sterling strengthens vs. USD
What’s next?
On January 11, 2015, Activision Publishing and Tencent
launched a public open beta for Call of Duty Online,
making the game available to millions of Chinese gamers.
The open beta marks a historic first for the Call of Duty
series as it expands into the world’s largest gaming market.
On January 13, 2015, Blizzard Entertainment began the
closed beta test for Heroes of the Storm, its upcoming
free-to-play online team brawler featuring iconic heroes
from more than 20 years of Blizzard gaming history. To
date, more than nine million players have signed up to
beta test the game.
On January 27, 2015, Activision Publishing launched the
first DLC for Call of Duty: Advanced Warfare – Havoc,
available first on the Xbox Live online entertainment
network from Microsoft for Xbox One and Xbox 360. The
DLC offers four new multi-player maps, exclusive weapon,
custom weapon variant and a new zombies cooperative
mode called Exo Zombies.
In January 2015, Blizzard Entertainment’s Hearthstone:
Heroes of Warcraft reached more than 25 million
registered players. Additionally, in 2015, Blizzard
Entertainment expects to begin beta testing Overwatch.
The company has already launched its first expansion
content, called 'Havoc,' for 'Advanced Warfare' in January,
and will release an expansion pack for 'Hearthstone' in
2Q15. Later in the year, we expect new releases in both
the 'Call of Duty' and 'Skylanders' franchises. A new free-
to-play game, 'Heroes of the Storm,' is in closed beta.
Stock Repurchase Program, Debt Repayment
and Cash Dividend
The company announced that its Board of Directors
authorized a new two-year stock repurchase program
under which the company is authorized to repurchase up
to $750 million of its outstanding common stock during the
period from February 9, 2015 through February 8, 2017.
Additionally, the company announced that its Board of
Directors has approved a repayment of $250 million of the
company’s outstanding “Term Loan B,” which is expected
to occur during the first quarter of 2015.The Board of
Directors also declared a cash dividend of $0.23 per
common share, payable on May 13, 2015 to shareholders
of record at the close of business on March 30, 2015, which
represents a 15% increase from 2014. We used the
guidance values in our model. We expect dividends to
increase at 11.42% CAGR from 2015 to 2020.
INDUSTRY TRENDS
Number of broadband connections
Video games commonly feature enhanced content and
features for players with broadband internet connections.
These features include multiplayer modes, downloadable

content and in-game chat, which can be free or provided
on a subscription basis.
Number of Broadband Connections
Source: IBISWORLD
Growth in the number of broadband connections indicates
a greater number of players able to take advantage of
these enhanced features. The number of broadband
connections is expected to increase by 25% from 2014 to
2020. This will have a positive impact on gaming industry
as all the major companies try to move into digital
distribution business model.
Number of smartphone connections
Source: Gartner, IDC, Strategy Analytics, Machina
Research
According to analysis from BI Intelligence, more than 18
billion devices will be connected to the Web by 2018.
Smart mobile devices account for 26% of the world’s
connections to the internet in 2014, and will increase to
54% of the world’s internet connections in 2018.
Smartphones made up 88% of total global phone sales in
2014, up from 66% in 2013. Smartphones will account
from 76.6% to total internet connected device shipments
in 2014. Smartphones have created a new market for
game developers, as consumers can now download games
straight to their phones for free or a small fee. Therefore,
as the number of mobile internet connection increases, so
does the overall demand for games which will increase the
revenue from mobile games.
Source: APPLift / NewZone mobile gaming report
Activision Blizzard’s games are focused on hardcore
gamers who mostly use consoles and/or PC. Mobile
gaming makes up around 5% of sales for Activision Blizzard
while EA has created more than 100 mobile games. So
although Activision Blizzard is behind in this area we
believe that this growing trend of mobile gaming will not
really effect Activision Blizzard a great deal as games such
as Call of Duty or World of Warcraft are not really
competing for gamers who play Candy Crush or Angry Bird.
At the same time we do see greater involvement of
Activision Blizzard in mobile gaming industry moving
forward.
Time spent on leisure and sports
Video gamers traditionally come from demographics with
and abundance of leisure time: students and children. As
industry now serves a broader audience, leisure time is a
major determinant of consumers’ ability to play and spend
money on video game products. Recent developments in
game design enabled the industry to focus on the female
demographic as a new market. The evolution of full-body
3D motion capture, along with the release of several series

of fitness games, attracted many health-conscious female
consumers looking for a fun way to exercise. Easy-to-use
interfaces helped attract nontraditional, less experienced
gamers and advanced features such as scanning attracted
a higher proportion of individuals that do not wish to learn
complex gaming features. As the population ages and baby
boomers retire, this expanding demographic is becoming
another focal point for publishers. The significantly higher
level of leisure time that retirees have also makes them
more attractive to publishers searching for new markets.
Free-to-play (F2P) games
The F2P model will remain popular in 2015 and beyond.
Free game distribution provides a marketing and business
approach for developers and publishers to monetize
games. With so many products available, F2P helps attract
new gamers and allows them to try new things with zero
commitment to buy. People can pay absolutely nothing
and still enjoy the game, or they can choose to spend
money and customize their experience by purchasing
items through micro transactions during the game. The
flexibility of this pricing model benefits online game
publishers and consumers alike.
Developers are increasingly deploying the F2P model
across all platforms, including mobile and consoles. F2P is
already the most popular type of game for mobile users,
and this trend will continue to increase. Also, next-
generation consoles will soon provide much more support
for F2P games than in the past; for example, Sony’s new
PlayStation 4 and Microsoft’s Xbox One will offer more F2P
options than before. This model can be very successful
particularly in price sensitive environment in emerging
markets.
Esports
The popularity of video games as a spectator sport has
grown dramatically in the past two years. Esports fuse the
multiplayer game experience with real-world physical
sports, and attract large sponsors including Red Bull and
Coke. Originally popular in Asia, the main enabler for the
growth of Esports was Twitch, which was acquired by
Amazon for just under $1B. Professional gamers like Matt
Haag are earning a comfortable living through competitive
careers. Four game franchises have now had Esports
events with a prize pool of more than $1M: League of
Legends, DoTA2, Call of Duty, and SMITE. This provides
new opportunity for growth for video game publishers.
Business model focused on blockbusters
Game companies are employing a ‘movie style’ of sales,
whereby blockbuster, or ‘AAA’ releases support loss-
incurring, smaller game releases. However, the greater
reliance on AAA games has increased revenue volatility for
several operators, as companies heavily invest in a few
games, any of which could fail. The failure of these games
could be catastrophic for a company, as illustrated by the
January 2013 liquidation of video game developer and
publisher THQ following poor sales of its HomeFront and
Red Faction games.
Services shifts online increasing profitability
The industry is expected to become increasingly profitable
as the delivery of services goes online. Online game
providers make up one of the most profitable industry
segments, and reduced need to manufacture and
wholesale software on physical media will decrease
publishing costs. Wage costs for software engineers will
continue to rise over next five years as software publishers
compete for a limited amount of skilled engineers. Despite
cost rises associated with a greater proportion of high-tech
positions, earnings for Activision Blizzard is forecasted to
increase at 8.27% CAGR from 2015 to 2020.
MARKETS AND COMPETITION
Global video game software publishing market is set to
reach $80.5 Billion. While growth in mobile and tablet
gaming will drive much of the new market space, we
expect to see continued growth in sale of next generation
consoles which were released in 2013 by Microsoft and
Sony.
The blockbuster video games of Activision Blizzard such as
Call of duty and World of Warcraft are still dominant in the
market. Activision Blizzard has a targeted customer
segment and specific value proposition which enables
them to differentiate their products from any other
companies.
Competition in this industry is high. Companies in the
Video Game Software Publishing industry compete on
many different levels. Their main competition involves
obtaining the rights to publish a newly developed video
game. Having a strong relationship with talented
developers and having patents on new games can make or
break the company’s success. Technology is also vital for

this industry. Companies need to be aware of the latest
technology in soon to be released consoles so that they are
able to supply games for the new consoles. Since video
games rely on visual effects, publishers need to make sure
their products offer the highest quality graphics. Firms also
compete on aggressive marketing and franchising tactics.
Attracting and retaining a talented workforce is one of the
largest factors companies compete on.
Video game publishers also face competition from
external factors. Other forms of competition such as
movies, sports or TV, which can draw consumers away
from their video games. As mobile technologies are
adapted over the next five years, however, they will enable
more consumers to game on the go, decreasing the level
of external competition.
Barriers to entry on this industry are medium and
decreasing. Those considering a new venture in video
game publishing for consoles and PCs face a large initial
investment. The growing market for smartphone games,
however, has significantly lowered barriers to entry.
Source: IBISWORLD
Activision Blizzard is one of the biggest video game
software publishing companies in the world with a market
share of 14.2%. The industry typically sees more than 505
of its sales in the holiday season with many titles releasing
around black Friday. In 2014, Activision Blizzard’s Call of
Duty: Advanced Warfare and Destiny made it to top 10 list
of best-selling games at retail ranked by unit sales. In terms
of revenue Call of Duty: Ghosts also made the top 10 list.
Top 10 Digital console titles by worldwide revenue ($ mil)
Source: SuperDataResearch
Peer comparisons
Electronic Arts (EA) develops, markets, publishes and
distributes games software content and services that can
be played by consumers on a variety of video game
machines and electronic devices. EA dominates sports
video games with titles such as FIFA, Madden, and NBA
being blockbuster hits.
EA controls 10.5% of market share. Off late EA’s strategy
has been to move in mobile gaming industry. In this sector,
EA seems to be well ahead compared to Activision Blizzard.
Also EA should benefit from upcoming Star Wars movie as
historically, any product related to this franchise has been
great success in the market. But the rapidly increasing cost
of developing games has eaten into EA’s bottom line.
All this growth prospects and strong industry outlook have
been reflected in EA’s stock price as it has soared more
than 100% over the last year, while over the same period
ATVI has not appreciated that much. This is one reason for
us to believe that ATVI provides more value moving
forward as compared to EA especially when we include the
fact that EA is trading at forward P/E of 24x while ATVI is
trading at 20x.
Take-Two Interactive (TTWO) is a leading developer,
publisher and marketer of interactive entertainment for

consumers around the globe. It develops and published
products through its two wholly-owned labels Rockstar
Games and 2k. Take-Two lauds its Grand Theft Auto (GTA)
franchise as a huge success with GTA V reaching over $1
billion in sales.
Take-Two controls around 4.9% of market share. It is very
similar to Activision Blizzard in product mix and
organizational structure. Returns of this company looks
great relative to competitors mainly it is not investing to
move to different market.
Ubisoft Entertainment SA (EPA: UBI) is a France based
video game software developer and publishing company.
The firm primarily develops and publishes video games
with famous titles such as Assassin’s Creed, Far Cry and
Just Dance. Ubisoft R&D expenses are extremely high and
we believe product innovation which is critical in this
industry is primary reason for the high expenses.
Nintendo Co. Ltd. (TYO: 7974) develops, manufactures,
and sells home entertainment products. The company
produces video games, consoles, and portable gaming
devices. Nintendo faces stiff competition from
smartphones, tablets, Microsoft, and Sony. It is currently
losing money when they tighten up operations. Nintendo
controls 8% of the market share.
Microsoft (MSFT), headquartered in Redmond, CA, is a
software company that primarily sells Office, Windows
operating system, and enterprise solutions. It operates
the Xbox, a competing video game software unit and game
console. Microsoft controls 12.9% of total market share.
As competition heightens among eighth-generation
consoles, recent studies suggest that the PlayStation 4 has
outsold the Xbox One by a large margin, suggesting that
future earnings for Microsoft’s software division may be
somewhat hampered going forward if this margin
increases and exclusive proprietary titles do not entice
consumers to purchase an Xbox One console over other
eighth-generation consoles.
Sony Corporation (SNE) is an international corporation
headquartered in Tokyo, Japan. Sony controls 13.2% of
total market share. PlayStation was the biggest game
platform in 2014, outselling Microsoft Xbox One. It also
produces its own video game titles, but primarily relies on
third parties to develop and publish video games for its
hardware. Sony’s music business struggles amid internet
challenges are proving an advantage to its gaming
segment, as it gradually moves to an online-delivery
model. Sony’s intent to capture more of the games retail
market via online sales has been pivotal to reducing
operating costs. However, increased costs associated with
the development and release of the PS4 in 2013, returned
the company to losses during fiscal 2014.
Other companies such as THQ Inc., Warner Bros, Konami,
Capcom etc. account for remaining 42.90% of total market
share.
EA seems to be the best comparable stock to ATVI, as it is
not only similar in business but also close in terms of
market cap and enterprise value. Whether we look at P/E
or P/BK or EV/EBITDA, ATVI appears to be trading at a
discount and cheaper as compared to EA.
Company
Name Ticker
Market
Cap (B)
($)
Enterprise
Value (B)
($) Price ($)
EV/
EBITDA EPS($)
P/E
NTM
P/
BK
Activision
Blizzard ATVI 16.60 16.06 22.96 10.42 1.42 18.20 2.3
Electronic Arts EA 17.83 15.52 57.51 13.7 1.69 21.80 6.6
Take-Two
Interactive TTWO 2.10 1.56 24.86 20.8 4.26 18.40 2.7
Ubisoft
Entertainment
SA
UBI-
FR 2.07 2.12 19.12 4.21 -0.63 13.90 2.2
Microsoft
Corp. MSFT 340.30 278.50 41.48 8.1 2.63 14.90 3.7
Sony corp.
6758-
JP 35.18 33.23 30.01 4.25 -1.12 21.80 1.7
Nintendo Co.
Ltd.
7974-
JP 22.20 12.48 156.41 30.40 -1.75 91.00 1.9
Average 69.95 57.23 54.90 13.58 0.85 30.30 3.1
Source: Bloomberg, Factset
Recently following the news of positive outlook for gaming
industry and increasing margins attributed to digital
distribution, EA stock surged while ATVI hardly moved.
Over last 12 months, EA has witnessed 103.23% change
compared to 15.82% for ATVI and 11.60% for S&P500. This
suggests that it is only a matter of time we would see
similar trend with ATVI. Considering this ATVI seems to
provide better value.

EA vs. ATVI vs. S&P500 (Price and Return)
Source: Factset
EA does have higher earnings per share but it does not
provide any dividend. The biggest positive market sees in
EA is its lead in transitioning into mobile gaming. Mobile
gaming is expected to see rapid growth over next few
years. But the biggest benefit to EA from this move is its
rapidly growing margins. Due to the cost savings courtesy
various digital distribution platforms, the profitability is
expected to increase for EA. But even after taking all this
into consideration we believe that ATVI will not be
affected too much from not taking aggressive approach to
move into mobile gaming, as we believe ATVI value
proposition and strength lies elsewhere and that would
not be weakened by emergence or presence of mobile
gaming.
Due to this transition to different market EA’s R&D
expense is greater than ATVI’s. Also EA has ROE of 36.1%
as compared to ATVI’s ROE of 11.09%. Moving forward we
see both stocks doing well, but currently ATVI appears to
be better investment.
In comparison to ATVI, TTWO (Take-Two Interactive)
seems to be overpriced as shown by P/E or P/BK or
EV/EBITDA, but traditionally market’s main concern with
this stock is its volatility. TTWO’s operating margin, net
margin and ROE are negative. Thus the company is
struggling to remain profitable and appears to be a risky
investment. Ubisoft also seems to be in the same situation
as shown by its not existent margin and poor ROE.
Microsoft, Sony and Nintendo are mainly console makers
and are not direct competitors for Activision Blizzard
although all of them do have small segment for developing
and publishing their own video games. Microsoft’s P/E
appears to be lower but its stock price is not driven a great
deal by revenues and earnings from this segment. Sony
PS4 outpaced Microsoft Xbox one in the recent
replacement cycle and Sony used the profits from this
segment to supplement some of other segments such as
music appliances. Regardless of who wins the console war,
as long as the unit sales number keep increasing, ATVI
should benefit from it.
Company
Name
Ticker Divid
end
Yield
(%)
Operating
Income
Margin
(%)
Net
Profit
Margin
(%)
CapEx/
Sales
(%)
ROE
(%)
R&D/
Sales
(%)
Activision
Blizzard
ATVI 1.0 26.80 18.70 2.43 11.9 12.95
Electronic
Arts
EA 0.0 20.50 19.00 2.71 36.1 31.47
Take-Two
Interactive
TTWO 0.0 -2.90 -7.10 1.27 -8.4 4.48
Ubisoft 066570
KR
0.7 3.90 0.70 45.07 1.0 43.09
Microsoft
Corp.
MSFT 3.0 30.40 22.20 6.32 23.4 13.11
Sony corp. 6758-
JP
1.3 1.05 -1.65 3.65 -5.8 6.00
Nintendo
Co. Ltd.
7974-
JP
0.7 -8.12 -4.06 3.42 2.2 12.54
Average 0.9 7.47 4.85 10.41 8.1 18.45
Source: Bloomberg, Factset
ECONOMIC OUTLOOK
Gross Domestic Product
Many high-income countries continue to struggle with the
aftermath of global financial crisis. Recovery in the high-
income economies has been uneven, as some countries,
such as the United States and the United Kingdom, have
exceeded pre-crisis output peaks, but others such as
countries in Euro area are still below earlier peaks. Low-
income countries continue to grow at a robust pace,
despite a challenging global environment.
According to World Bank, global growth is expected to rise
in 2015 to 3 percent and is expected to be at 3.2-3.3
percent in 2016-17. U.S. GDP growth was 2.4 percent in

the first quarter of 2015 which was lower than
expectation.
Source: World Bank, GEP Forecast January 2015
We expect the economy to stabilize and predict growth to
settle at 2.7 percent in next six months. Weak GDP growth
is negatively correlated with spending in gaming industry
and should slow growth in the industry.
Source: World Bank, GEP Forecast January 2015
46% of gamers in 2014 were from Asia Pacific region.
Healthy growth in GDP is expected in the region from 2015
to 2017, which should be increase gaming spending across
industry.
Exchange Rate- Euro
Majority of companies in this industry either have foreign
operations and/or depend on the foreign market. This
makes these companies susceptible to exchange rate
volatility. 40% of revenue for Activision Blizzard comes
from Europe. Thus, the recent weakening of Euro against
US dollars will negatively impact Activision Blizzard sales
number and bottom-line. This is one of the primary reason
for weak 2015 guidance provided by the management.
Activision Blizzard has a hedging program but that covers
only 20% of the revenue from Europe. On the other hand
if Europe’s political and economic situation stabilizes and
Euro strengthens, it could result in Activision Blizzard
beating expectations comfortably in 2015.
Per capita disposable income
As consumers’ disposable incomes increase, they become
more willing to buy items for leisure, such as video games.
Disposable income substantially dropped during
recession, leading to a decline in consumer spending,
which damaged video game sales. Per capita disposable
income is expected to increase in 2015, presenting a
potential opportunity for the industry.
Demographics
While existing game title comprehensively cater to the
young make (i.e. under 40) demographic, the female
market is currently the focal point. It is one of the
remaining demographic groups that remain readily
available to the industry.
Operators are focusing on women like never before. They
represent nearly 40% of game players and 48% of game
buyers, yet they are a market segment that this industry
was long renowned for ignoring. Historical efforts to
attract female gamers were often considered half-
hearted. Creating fitness focused games have attracted
more females in the past few years, increasing their
market share during the period.

Until recently, individuals who were the teenaged
pioneers of video games 25 years ago were under 40 years
old. Today, those gamers are approaching their mid- to
late 40s. In order to retain those original fans, games
designed specifically to appeal to older players are most
likely the next frontier for developers and publishers to
cross.
However, despite all of the attention currently being
lavished on female customers, it is prudent to remember
that the vast bulk of gamers (55%) are male and aged
under 45 years old. Regardless of moves made by the
industry’s largest companies to capture new markets,
these male customers make up the lifeblood of the
industry revenue. Many of the biggest selling games in the
world such as Call of Duty, Halo, Madden, FIFA etc. are all
distinctly masculine in their focus. We expect video game
industry to remain dominated by the demands of young
men.
CATALYSTS FOR GROWTH
Consumer confidence in Asia- Pacific region
Price-sensitivity is the primary characteristics of
consumers in emerging markets. Strong economic data
can influence consumer confidence and increase their
willingness to pay for games. Also new business model of
providing games that are free to play in such countries and
finding innovative ways to monetize such games looks like
a winning strategy for Activision Blizzard and should
results in big influx in their revenue from 2016-17
onwards.
Consoles innovation and new gadgets
Constant innovation and release of new consoles by Sony,
Microsoft and Nintendo boost sales for Activision Blizzard
as new games are purchased by consumers to experience
the latest technology. Also emergence of new gadgets
such as smartwatches provide new platform for gaming
companies or individual developers to grow.
INVESTMENT POSITIVES
Increased Operating Margin due to digital distribution.
We expect revenues from retail product sales to decline at
2.77% CAGR and revenues from digital distribution
medium to increase at 13.47% CAGR over the period from
2015 to 2020. Digital distribution method, which has
significantly higher margins compared to physical sale, will
increase earnings for Activision Blizzard at 8.27% CAGR
over the same period.
Product differentiation and targeted consumer segment.
Quality games and loyal customer base of hardcore
gamers ensures high retention of gamers for older
franchises and reduces risk of losing market share to new
technologies such as mobile gaming.
Launch of Free-to-Play gaming model. Asian market
comprises for 46% of global gamers but accounts for less
than 10% of revenues for the Video Game Industry. We
believe free-to-play gaming will reduce the impact of
piracy and will be a significant growth driver in future.
INVESTMENT NEGATIVES
Expectation of decline in revenues from core franchises.
Revenues associated with the Call of Duty, World of
Warcraft, and Skylanders franchises combined accounted
for 67%, 80%, and 72% of consolidated net revenues for
the years ended December 31, 2014, 2013, and 2012,
respectively. As Blockbusters franchises age, expectation
of decline builds.
Weak 2015 outlook. As Europe accounts for 40% of total
revenue, weakening Euro is a risk and primary reason for
weak 2015 guidance.
Low ROE relative to the Industry. Activision Blizzard’s ROE
is lower relative to the industry average and is a concern
for long-term growth.
VALUATION
Our investment thesis is the outcome of careful analysis of
Activision Blizzard as a company, video game industry,
macro-economic outlook, and preparation of detailed
financial modeling. In this part of the report we will discuss

the key assumptions behind our financial model and
investment thesis.
We expect the revenue of ATVI to increase by only 0.73%
in 2015 as most of the growth will be offset by weakening
Euro and higher tax rate compared to 2014. We expect
revenues from retail product sales to decline by 5.24% and
revenues from digital distribution medium to increase by
10.97% in 2015. We expect revenues from retail product
sales to decline at 2.77% CAGR and revenues from digital
distribution medium to increase at 13.74% CAGR from
2015-2020. The total revenue is expected to increase at
5.20% CAGR from 2015-2020.
We expect gross profit to increase at 6.80% CAGR from
2015-2020. The increase in proportion of sales through
digital distribution is the primary reason of cost reduction
which will result in increased margins. We expect research
and development to remain at current level of 12.5-13.0%
of sales. Our 2015 estimate EPS of $1.20 is above
management’s guidance of $1.15. The company has
beaten its own guidance in each of the last 14 quarters,
and topped consensus in 12 of the last 14 quarters.
Management expects negative foreign exchange
movements to shave $0.14 from 2015 EPS, and higher tax
rates to trim an additional $0.08. Our FY2015 and FY2016
estimate EPS are $1.20 and $1.37 respectively. Consensus
expectation for FY2015 and FY2016 EPS are $1.18 and
$1.45. We expect EPS to increase at 10.35% CAGR from
2015 to 2020. Over the same period consensus expects
EPS to increase at 13.81% CAGR.
Activision had $4.86 billion in cash and equivalents at the
end of 2014. The company had $4.32 billion in debt at the
end of 2014, all of it long term, down from $4.67 billion at
the end of 2013. Debt to total capital was 37.5% at the end
of 2014, down from 41.3% at the end of 2013. The credit
agencies give ATVI ratings of BB+, just one notch below
investment grade.
Along with its 2014 results, Activision increased its annual
dividend by 15% to $0.23, for a yield of about 1.0%. We are
predicting dividend per share of $0.21 in 2015 and we
expect it to grow at 12.12% CAGR from 2015 to 2020. The
Vivendi transaction in 2013 resulted in the repurchase of
$5.83 billion in stock. ATVI plans to repurchase $750
million in common stock through February 2017 and is also
repaying $250 million of its bank debt in 1Q15. We
incorporated these guidance value for share repurchase in
our model.
The 3 year raw Beta of 1.14 from Bloomberg seemed to be
a reasonable estimate. Risk premium of 4.85% was used,
which is an average of 87 years geometric average of stock
return in excess of the 30-year Treasury bond yield, and
Damodaran’s equity premium calculated monthly as at
March, 1 2015. Return on 30 year US treasury rate of
2.71% was used as proxy for risk free rate.
With 7.48% of WACC and estimate of 2.5% as continuing
growth, we arrive at price of $26.71 from DCF/EP model.
We believe a CV growth of 2.5% is conservative estimate
and taking current positive outlook of the video game
industry into consideration, we arrive at our target price of
$26-$27 for ATVI. Our price from DDM model is $19.47,
slightly lower because we forecasted slightly lower payout
ratio. Based on relative valuation method, we arrive at
target price of $22.38. We calculated the P/E ratio of
competitors of ATVI and took average of the 2015 and
2015 P/E ratios of competitors to arrive at target P/E ratio
for ATVI.
ATVI shares have traded between $17 and $25 over the
last year and are currently near the middle of that range.
ATVI’s EV/EBITDA of 10.42x and P/E NTM of 18.20 is
significantly lower than average of peers EV/EBITDA of
13.58 and P/E of 30.30. Thus we believe that higher
multiples is warranted given Activision Blizzard’s
leadership in the gaming industry. We give ATVI a BUY
rating with a mean target price of $26.50 which provides
15.21% upside from its current market price of $23.
KEYS TO MONITOR
We will provide Activision Blizzard a SELL rating if it is not
able to maintain its market share due to several reasons
such as emergence of better games which decrease the
number of users for World of Warcraft or reduction in sale
of Call of Duty franchise games. Also if Activision Blizzard
is not able to publish new franchises over time to retain
the gamers from some of its aging franchises we will
consider selling ATVI.
Another thing to monitor would be if Euro weakens even
further against U.S. dollar, and the increase in revenue
from Asia region does not offset the decline in revenue
from Europe region, then we will recommend SELL.
REFERENCES
1) Activision Blizzard, Inc. 10-K 2015, 2014, 2013, 2012, 2011,
2010, 2008, 2006

2) Activision Blizzard Beats Profit Forecast but Expects Weak Sales This
Year
http://recode.net/2015/02/05/activision-blizzard-beats-profit-
forecast-misses-on-sales/
3) THE CONNECTED-HOME REPORT: Forecasts and growth trends for
one of the top 'Internet of Things' markets
http://www.businessinsider.com/connected-home-forecasts-
and-growth-2014-9
4) Top 5 online gaming industry trends for 2015
http://www.internap.com/2014/12/01/top-five-online-gaming-
industry-trends-2015/
5) 2015 Video Game Statistics & Trends Who’s Playing What & Why?
http://www.bigfishgames.com/blog/2015-global-video-game-stats-
whos-playing-what-and-why/
6) 2014 Global Gaming Stats: Who’s Playing what, and why?
http://www.bigfishgames.com/blog/2014-global-gaming-stats-whos-
playing-what-and-why/
7) The year’s top-selling games at retail ranked by unit sales
http://www.vgchartz.com/yearly/2014/USA/
8) Wikinvest.com
http://www.wikinvest.com/stock/Activision_Blizzard_%28ATVI
%29
9) Take-Two Interactive Software worth a Look
http://seekingalpha.com/article/2971466-take-two-interactive-
software-worth-a-look
10) Videogames next for Vegas?
http://seekingalpha.com/news/2282316-videogames-next-for-
vegas
11) Activision: Will Investors Switch Into EA?
http://seekingalpha.com/article/2897906-activision-will-
investors-switch-into-ea
10) Argus Research Analyst Report- Joseph Bonner, CFA
11) Factset Research Systems
12) Bloomberg
13) Factiva
14) Activision Blizzard: Could Rewards Await Long-Term Investors?
http://seekingalpha.com/article/2926826-activision-blizzard-
could-rewards-await-long-term-investors
15) Activision - 'Guitar Hero' To Return in 2015?
http://seekingalpha.com/article/2939396-activision-guitar-hero-to-
return-in-2015
16) Better Video Game Stock: Activision Blizzard Inc. vs. Electronic Arts
Inc.
http://www.wikinvest.com/wikinvest/api.php?action=viewNews&aid=
6601080&page=Stock%3AActivision_Blizzard_%28ATVI%29&comment
s=0&format=html
17) Activision reveals Hearthstone expansion, offers new WoW
payment option
http://seekingalpha.com/news/2353126-activision-reveals-
hearthstone-expansion-offers-new-wow-payment-option
18) Video game sales stronger than expected in February
http://seekingalpha.com/news/2368806-video-game-sales-stronger-
than-expected-in-february
19) Activision plans Call of Duty Online launch for China in first quarter
of 2015
http://venturebeat.com/2014/11/04/activision-3/
20) Make a hole! Breaking into the free-to-play shooter market
http://www.superdataresearch.com/blog/warface-revenue-scenarios/
21) Console micro transactions: the best of both worlds
http://www.superdataresearch.com/blog/console-microtransactions/
22) eSports Market Brief: 71M watch competitive gaming
http://www.superdataresearch.com/blog/esports-brief/
23) Comparing MMO ARPU for major free-to-play titles
http://www.superdataresearch.com/blog/mmo-arpu/
24) REPORT: China $3B mobile game market is about to overtake the
States
http://www.superdataresearch.com/blog/mobile-games-brief/
25) Does digital distribution improve margins?
http://www.superdataresearch.com/blog/digital-distribution-
improve-margins/
26) Is Activision about to bet big on virtual reality?
http://www.superdataresearch.com/blog/activision-bet-big-virtual-
reality/

27) US digital games market: February 2015
http://www.superdataresearch.com/blog/us-digital-games-market/
28) Understanding free-to-play MMO retention
http://www.superdataresearch.com/blog/understanding-mmo-
retention/
29) Free-to-play online games market
http://www.superdataresearch.com/market-data/online-games-
research/
30) Digital console games market, February 2015
http://www.superdataresearch.com/blog/digital-console-games-
market/
31) Why Activision Blizzard is absolutely a buy
http://seekingalpha.com/article/2761655-why-activision-blizzard-is-
absolutely-a-buy
32) Activision Blizzard: Priced For Perfection, With Headwinds Coming
http://seekingalpha.com/article/3008546-activision-blizzard-priced-
for-perfection-with-headwinds-coming#comments_header
33) Video games spring back on strong console sales
http://www.cnbc.com/id/102341937?__source=seekingalpha
34) IBISWorld Video Game Software Publishing in the US October 2014
– Andrew Alvarez
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.

Activision Blizzard
Revenue Decomposition
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E
Product sales 3620 3201 2786 2640 2820 2623 2634 2399 2294 2179
Subscription, licensing & others 1236 1382 1622 1800 2030 2677 3166 3222 3426 3630
TOTAL REVENUES 4856 4583 4408 4440 4850 5300 5800 5620 5720 5809
* Others include value-added services,
downloadable content, and digitally distributed
products
Segment Breakdown (% of Total)
Product sales 74.55% 69.85% 63.20% 59.46% 58.14% 49.49% 45.41% 42.68% 40.11% 37.51%
Subscription, licensing & others 25.45% 30.15% 36.80% 40.54% 41.86% 50.51% 54.59% 57.32% 59.89% 62.49%
TOTAL REVENUES 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Segment Revenue Growth YOY (%)
Product sales 11.15% -11.57% -12.96% -5.24% 6.82% -6.99% 0.41% -8.93% -4.36% -5.02%
Subscription, licensing & others -17.49% 11.81% 17.37% 10.97% 12.78% 31.89% 18.26% 1.76% 6.33% 5.96%
TOTAL REVENUES 2.12% -5.62% -3.82% 0.73% 9.23% 9.28% 9.43% -3.10% 1.77% 1.55%
Product sales
Nummber of units 44 47 43 43 39 37 35
Average price per unit 60.00 60.00 61.00 61.25 61.50 62.00 62.25
Total Sales 2640 2820 2623 2633.75 2398.5 2294 2179
Subscription, licensing & others
Registered users 120 132 158 176 179 187 196
Average revenue per user 15.00 15.41 16.95 17.99 18.00 18.32 18.52
Total sales 1800 2030 2677 3166 3222 3426 3630

Activision Blizzard
Income Statement
Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E
REVENUES 4755 4856 4583 4408 4440 4850 5300 5800 5620 5720 5809
Total cost of goods sold 1682 1632 1507 1511 1443 1528 1590 1694 1607 1556 1510
Cost of goods sold exluding depreciation 1607 1542 1423 1435 1366 1441 1494 1592 1512 1458 1410
Depreciation expense 75 90 84 76 77 87 96 102 95 98 100
Gross profit 3073 3224 3076 2897 2997 3322 3710 4106 4013 4164 4298
Sales & marketing expense 545 578 606 712 704 786 906 1009 995 1030 1057
General & administrative expense 456 561 490 417 466 529 610 690 674 698 709
Sales, general & administrative expense 1001 1139 1096 1129 1170 1314 1516 1699 1669 1727 1766
Research & development expense 646 604 584 571 557 614 676 745 728 744 755
Ammortization expense 73 30 24 14 10 9 5 3 2 - -
Restructing expense 25 - - - - - - - - - -
Total operating expenses 1745 1773 1704 1714 1737 1937 2197 2448 2399 2471 2521
OPERATING INCOME 1328 1451 1372 1183 1260 1385 1514 1659 1614 1693 1777
Interest & other investment income 14 8 5 6 2 2 3 3 3 3 4
Interest & other investment expense (11) (1) (58) (208) (139) (134) (136) (138) (142) (140) (140)
Income (loss) before income taxes 1331 1458 1319 981 1124 1254 1380 1523 1475 1557 1641
Income tax provision 246 309 309 146 289 306 329 348 336 315 319
NET INCOME (LOSS) 1085 1149 1010 835 835 948 1051 1175 1139 1242 1321
Year end shares outstanding 1148 1112 1024 716 695 694 680 669 660 652 640
Net income (loss) per share - basic 0.93 1.01 0.96 1.14 1.20 1.37 1.55 1.76 1.73 1.91 2.07
Total dividends declared 189 200 195 143 146 166 184 206 216 236 251
Dividends declared per common share 0.17 0.18 0.19 0.20 0.21 0.24 0.27 0.31 0.33 0.36 0.39
Dividends payout ratio 0.18 0.18 0.20 0.18 0.18 0.18 0.18 0.18 0.19 0.19 0.19

Activision Blizzard
Balance Sheet
Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E
Current Assets
Cash & cash equivalents 2958 2768 2812 3165 3959 4410 4848 5063 5622 6239 6979 7681 8252 8894
Short-term investments, at fair value 44 477 696 360 416 33 10 11 12 13 15 16 18 19
Total cash, cash equivalents & short-term investments 3002 3245 3508 3525 4375 4443 4858 5074 5634 6252 6994 7697 8270 8914
Accounts receivable, net 974 739 640 649 707 510 659 610 679 755 835 821 844 857
Total Inventories 262 241 112 144 209 171 123 145 165 191 215 212 218 222
Software development 235 224 147 137 164 367 452 456 501 551 613 606 629 639
Intellectual property licenses 35 55 45 22 11 11 5 18 18 18 18 15 14 14
Deferred income taxes 536 498 640 507 487 321 368 364 393 424 452 422 412 418
Other current assets 201 327 293 396 321 418 444 362 410 449 514 495 489 501
Total current assets 5259 5329 5385 5380 6274 6241 6909 7029 7800 8641 9641 10267 10876 11565
Long-term investments 78 23 23 16 8 9 9 10 11 12 13 14 16 18
Intellectual property licenses 5 28 28 12 30 - 18 22 25 29 34 34 35 36
Property and equipment,net 149 138 169 163 141 138 157 148 160 173 188 180 182 185
Other assets 30 9 21 12 11 35 85 32 34 36 37 35 33 34
Intangible assets, net 1283 618 160 88 68 43 29 28 27 25 23 20 17 15
Trademark and trade names 433 433 433 433 433 433 433 418 459 503 552 538 550 558
Goodwill 7227 7154 7132 7111 7106 7092 7086 7086 7086 7086 7086 7086 7086 7086
Total assets 14465 13742 13406 13277 14200 14012 14746 14827 15663 16573 17649 18251 18875 19577
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable 319 302 363 390 343 355 325 342 377 414 455 443 454 461
Deferred revenues 923 1426 1726 1472 1657 1389 1797 1554 1717 1888 2075 2013 2055 2086
Accrued expenses and other liabilities 842 779 818 694 652 636 592 655 680 737 812 788 808 814
Current portion of long-term debt - - - - - 25 - - - - - - - -
Total current liabilities 2084 2507 2907 2556 2652 2405 2714 2551 2773 3039 3342 3243 3317 3361
Long-term debt,net - - - - - 4668 4324 4583 4464 4619 4739 4900 4850 4875
Deferred income taxes, net 615 270 112 55 25 66 114 73 71 81 101 101 93 95
Other liabilities 239 209 184 174 206 251 361 228 259 301 346 341 322 333
Total Liabilities 2938 2986 3203 2785 2883 7390 7513 7435 7567 8040 8527 8585 8582 8664
Shareholder's Equity
Common stock and Additional paid in capital 12170 12376 12353 9616 9450 9682 9924 9995 10066 10137 10208 10279 10349 10349
Retained earnings (accumulated deficit) (474) (361) 57 948 1893 2686 3374 4062 4844 5711 6680 7603 8609 9679
Treasury stock, at cost (126) (1235) (2194) 0 0 (5814) (5762) (6362) (6512) (7012) (7462) (7912) (8362) (8812)
Accumulated other comprehensive income (loss) (43) (24) (13) (72) (26) 68 (303) (303) (303) (303) (303) (303) (303) (303)
Total equity 11527 10756 10203 10492 11317 6622 7233 7392 8095 8533 9123 9666 10293 10913
Total liabilities and Equity 14465 13742 13406 13277 14200 14012 14746 14827 15663 16573 17649 18251 18875 19577

Activision Blizzard
Cash Flow Statement
Fiscal Years Ending Dec. 31 2012 2013 2014
Net income (loss) 1149 1010 835
Deferred income taxes (10) 161 (44)
Provision for inventories - 33 39
Depreciation & amortization 120 108 90
Loss on disposal of property & equipment 1 - 1
Impairment - - -
Impairment of goodwill & intangible assets - - -
Unrealized loss (gain) on auction rate securities
classified as trading securities - - -
Amortization & write-off of capitalized software
development costs & intellectual property licenses 208 207 256
mortization of debt discount & debt financing costs - 1 7
Stock-based compensation expense 126 108 104
Excess tax benefits from stock option exercises (5) - -
Excess tax benefits from stock awards - (29) (39)
Loss (gain) on disposal of assets - restucturing - - -
Unrealized loss on auction rate securities rights from UBS AG - - -
Realized loss (gain) on sale of short term investments - - -
Tax benefit of stock options & warrants exercised - - -
Tax benefit associated with emplyee stock options - - -
Accounts receivable, net (46) 198 (177)
Inventories (62) 6 (2)
Software development & intellectual property licenses (301) (268) (349)
Other assets 88 (67) 18
Deferred revenues 153 (275) 475
Accounts payable (54) 7 (12)
Accured expenses & other liabilities (22) 64 90
Net cash flows from operating activities 1345 1264 1292
Proceeds from maturities of available-for-sale investments 444 304 21
Cash used in business acquisition - - -
Proceeds from sale of auction rate securities classified as trading securities- - -
Proceeds from auction rate securities called at par 10 - -
Proceeds from sale of available-for-sale investments - 98 -
Purchases of available-for-sale investments (503) (26) -
Payment of contingent consideration - - -
Capital expenditures (73) (74) (107)
Proceeds from disposal of property & equipment - - -
Net proceeds from disposal of assets - restructuring - - -
Cash acquired through business combination, net of
cash payment to effect acquisitions - - -
Purchase of short-term investments - - -
Decrease (increase) in restricted cash (2) 6 2
Purchase of investments - - -
Proceeds from sales & maturities of investments - - -
Net cash flows from investing activities (124) 308 (84)
Proceeds from issuance of common stock to employees 33 158 175
Excess tax benefits from stock option exercises 5 - -
Tax payment related to net share settlements of restricted stock rights(16) (49) (66)
Excess tax benefits from stock awards - 29 39
Repurchase of common stock through tender offer - - -
Return of capital to Vivendi S. A. - - -
Issuance of additional common stock related to business combination- - -
Repurchase of common stock (315) (5830) -
Settlement of payable to Vivendi S. A. - - -
Dividends paid (204) (216) (147)
Proceeds from issuance of long-term debt - 4750 -
Repayment of long-term debt - (6) (375)
Payment of debt discount & financing costs - (59) -
Net cash flows from financing activities (497) (1223) (374)
Effect of exchange rate changes on cash & cash equivalents 70 102 (396)
Net increase (decrease) in cash & cash equivalents 794 451 438
Cash & cash equivalents at beginning of period 3165 3959 4410
Cash & cash equivalents at end of period 3959 4410 4848
Cash paid for income taxes, net of refunds 159 138 34
Cash paid for interest 2 19 201

Activision Blizzard
Cash Flow Statement Forecast
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E
Cash Flows from Operating Activities
Net Income (loss) 835 948 1051 1175 1139 1242 1321
Depreciation & Amortization 87 96 101 105 97 98 100
Changes in Working Capital Accounts:
Change in Accounts Receivables 49 (69) (76) (80) 15 (23) (13)
Change in Inventories (22) (20) (26) (24) 2 (6) (3)
Change in Software development (38) (52) (56) (70) 7 (27) (11)
Intellectual property licenses (17) (3) (4) (4) 2 0 (1)
Change in Other current Assets 82 (48) (39) (64) 19 6 (12)
Change in Deferred Taxes (37) (31) (21) (9) 31 2 (5)
Change in Accounts Payable 17 35 37 41 (12) 11 7
Change in Accrued Compensation and Other Liabilities 63 25 57 75 (24) 21 5
Change in deferred revenue (243) 163 171 187 (63) 42 32
Change in Other Non-Current Liabilities (133) 31 42 45 (5) (18) 11
Net cash flows from operating activities 643 1075 1236 1376 1209 1348 1431
Cash Flows from Investing Activities
(Increase) Decrease in short-term investments (1) (1) (1) (1) (1) (2) (2)
(Increase) Decrease in long-term investments (1) (1) (1) (1) (1) (1) (2)
Capital Expenditures (Change in gross PPE) (78) (107) (114) (120) (90) (100) (103)
Change in intangible assets 1 0 2 2 3 3 2
Change in trademark and trade names 15 (41) (44) (49) 14 (12) (9)
Change in goodwill 0 0 0 0 0 0 0
(Increase) Decrease in other assets 53 (2) (2) (1) 2 2 (1)
Net cash flows from investing activities (11) (152) (161) (170) (74) (110) (114)
Cash Flows from Financing Activities
Proceeds from issuance of ST debt - - - - - - -
Proceeds from issuance of long-term debt 259 (119) 155 119 161 (50) 25
Payment of Dividends (146) (166) (184) (206) (216) (236) (251)
Proceeds from issuance of common stock 71 71 71 71 71 71 0
Repurchases of common stock (600) (150) (500) (450) (450) (450) (450)
Changes in accumulated other comprehensive income 0 0 0 0 0 0 0
Net cash flows from financing activities (417) (365) (458) (466) (434) (665) (676)
Change in Cash 215 558 617 741 701 572 642
Cash and cash equivalent, beginning of the period 4848 5063 5622 6239 6979 7681 8252
Cash and cash equivalent, ending of the period 5063 5622 6239 6979 7681 8252 8894

Activision Blizzard
Common Size Income Statement
REVENUES 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Total cost of goods sold 33.61% 32.88% 34.28% 32.50% 31.50% 30.00% 29.20% 28.60% 27.20% 26.00%
Cost of goods sold exluding depreciation 31.75% 31.05% 32.55% 30.77% 29.71% 28.18% 27.44% 26.90% 25.48% 24.27%
Depreciation expense (% of Net PPE) 63.83% 60.87% 48.41% 51.87% 54.20% 55.84% 54.24% 52.91% 53.81% 54.20%
Gross profit 66.39% 67.12% 65.72% 67.50% 68.50% 70.00% 70.80% 71.40% 72.80% 74.00%
Sales & marketing expense 11.90% 13.22% 16.15% 15.85% 16.200% 17.10% 17.40% 17.700% 18.00% 18.200%
General & administrative expense 11.55% 10.69% 9.46% 10.50% 10.90% 11.50% 11.90% 12.00% 12.20% 12.20%
Sales, general & administrative expense 23.46% 23.91% 25.61% 26.35% 27.10% 28.60% 29.30% 29.70% 30.20% 30.40%
Research & development expense 12.44% 12.74% 12.95% 12.55% 12.65% 12.75% 12.85% 12.95% 13.00% 13.00%
Ammortization expense (% of Net intangibles) 44.12% 55.81% 48.28% 36.33% 33.14% 19.65% 12.93% 9.88% - -
Restructing expense - - - - - - - - - -
Total operating expenses 36.51% 37.18% 38.88% 39.13% 39.94% 41.44% 42.20% 42.69% 43.20% 43.40%
OPERATING INCOME 29.88% 29.94% 26.84% 28.37% 28.56% 28.56% 28.60% 28.71% 29.60% 30.60%
Interest & other investment income (% of investments) 1.89% 11.90% 31.58% 10.65% 10.40% 10.30% 10.20% 10.10% 10.00% 10.00%
Interest & other investment expense (% of debt) - -1.24% -4.81% -3.02% -3.00% -2.95% -2.92% -2.90% -2.88% -2.88%
Income (loss) before income taxes 30.02% 28.78% 22.25% 25.30% 25.85% 26.03% 26.26% 26.24% 27.22% 28.25%
Income tax provision 6.36% 6.74% 3.31% 6.50% 6.30% 6.20% 6.00% 5.98% 5.50% 5.50%
NET INCOME (LOSS) 23.66% 22.04% 18.94% 18.80% 19.55% 19.83% 20.26% 20.26% 21.72% 22.75%

Activision Blizzard
Common Size Balance Sheet
Current Assets
Cash & cash equivalents 81.53% 96.23% 109.98% 114.04% 115.91% 117.71% 120.34% 136.66% 144.28% 153.12%
Short-term investments, at fair value 3.13% 0.23% 0.07% 0.07% 0.08% 0.08% 0.09% 0.09% 0.10% 0.10%
Total cash, cash equivalents & short-term investments 90.09% 96.95% 110.21% 114.29% 116.16% 117.96% 120.59% 136.94% 144.59% 153.46%
Accounts receivable, net 14.56% 11.13% 14.95% 13.74% 14% 14.25% 14.40% 14.60% 14.75% 14.75%
Total Inventories 4.30% 3.73% 2.79% 3.27% 3.40% 3.60% 3.70% 3.78% 3.82% 3.82%
Software development 3.38% 8.01% 10.25% 10.26% 10.34% 10.40% 10.57% 10.78% 11.00% 11.00%
Intellectual property licenses 0.23% 0.24% 0.11% 0.41% 0.37% 0.34% 0.31% 0.27% 0.24% 0.24%
Deferred income taxes 10.03% 7.00% 8.35% 8.20% 8.10% 8.00% 7.80% 7.50% 7.20% 7.20%
Other current assets 6.61% 9.12% 10.07% 8.14% 8.46% 8.48% 8.85% 8.80% 8.55% 8.63%
Intangible assets, net - - - - - - - - - -
Total current assets 129.20% 136.18% 156.74% 158.31% 160.82% 163.03% 166.22% 182.67% 190.14% 199.10%
Long-term investments 0.06% 0.06% 0.06%
Software development 2.66% 0.46% 0.45% 1.22% 1.25% 1.27% 1.31% 1.35% 1.39% 1.39%
Intellectual property licenses 0.62% - 0.41% 0.50% 0.52% 0.55% 0.58% 0.61% 0.62% 0.62%
Property and equipment,net 2.90% 3.01% 3.56% 3.34% 3.300% 3.26% 3.24% 3.21% 3.19% 3.19%
Other assets 0.23% 0.76% 1.93% 0.73% 0.70% 0.68% 0.64% 0.62% 0.58% 0.58%
Intangible assets, net 1.40% 0.94% 0.66% 0.62% 0.56% 0.48% 0.40% 0.36% 0.30% 0.26%
Trademark and trade names 8.92% 9.45% 9.82% 9.41% 9.46% 9.49% 9.51% 9.57% 9.61% 9.61%
Goodwill 146.33% 154.75% 160.75% 159.59% 146.10% 133.69% 122.17% 126.08% 123.88% 121.99%
Total assets 292.42% 305.74% 334.53% 333.72% 322.72% 312.45% 304.08% 324.47% 329.72% 336.74%
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable 7.06% 7.75% 7.37% 7.71% 7.77% 7.81% 7.84% 7.88% 7.93% 7.93%
Deferred revenues 34.12% 30.31% 40.77% 34.99% 35.40% 35.62% 35.78% 35.81% 35.92% 35.92%
Accrued expenses and other liabilities 13.43% 13.88% 13.43% 14.74% 14.01% 13.90% 13.99% 14.02% 14.13% 14.01%
Current portion of long-term debt - 0.55% - - - - - - - -
Total current liabilities 54.61% 52.48% 61.57% 57.45% 57.18% 57.33% 57.61% 57.71% 57.98% 57.86%
Long-term debt,net - 47.51% 45.19% 46.35% 45.77% 46.06% 45.91% 45.99% 45.95% 45.97%
Deferred income taxes, net 0.51% 1.44% 2.59% 1.64% 1.47% 1.53% 1.73% 1.79% 1.63% 1.63%
Other liabilities 4.24% 5.48% 8.19% 5.14% 5.34% 5.68% 5.97% 6.06% 5.64% 5.74%
Total Liabilities 59.37% 161.25% 170.44% 110.58% 109.76% 110.60% 111.23% 111.55% 111.21% 111.20%
Shareholder's Equity
Common stock and Additional paid in capital 194.60% 211.26% 225.14% 225.11% 207.54% 191.25% 175.99% 182.88% 180.94% 178.17%
Retained earnings (accumulated deficit) 38.98% 58.61% 76.54% 91.50% 99.88% 107.75% 115.18% 135.27% 150.51% 166.63%
Treasury stock, at cost - -126.86% -130.72% -143.29% -134.27% -132.29% -128.66% -140.77% -146.19% -151.70%
Accumulated other comprehensive income (loss) -0.54% 1.48% -6.87% -6.82% -6.25% -5.72% -5.22% -5.39% -5.30% -5.22%
Total equity 233.05% 144.49% 164.09% 166.49% 166.91% 160.99% 157.29% 171.98% 179.96% 187.88%
Total liabilities and Equity 292.42% 305.74% 334.53% 333.95% 322.94% 312.68% 304.30% 324.73% 330.00% 337.04%

Activision Blizzard
Value Driver Estimation
Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E
NOPLAT CALCULATION:
EBITA:
Net Sales 3026 4279 4447 4755 4856 4583 4408 4440 4850 5300 5800 5620 5720 5809
Less: Cost of products sold 1533 2036 1996 1682 1632 1507 1511 1443 1528 1590 1694 1607 1556 1510
Less: Selling, General, and Administrative 735 939 884 1001 1139 1096 1129 1170 1314 1516 1699 1669 1727 1766
Less: Research & Development 592 627 642 646 604 584 571 557 614 676 745 728 744 755
Less: Depreciation & Amortization 385 347 198 148 120 108 90 87 96 101 105 97 98 100
Plus: Implied Interest on Operating Leases 25 22 22 25 20 22 24 26 25 25 26 26 27 29
EBITA -194 352 749 1303 1381 1310 1131 1209 1324 1442 1583 1545 1622 1706
Less: Adjusted Taxes:
Marginal tax rate 10% 10% 10% 10% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Provision for income taxes -80 -121 74 246 309 309 146 289 306 329 348 336 315 319
Plus: Tax shield on implied lease interest 2 2 2 2 4 4 5 5 5 5 5 5 5 6
Less: Tax on non-operating income -1 1 1 -1 0 -12 -42 -28 -27 -27 -28 -28 -28 -28
Adjusted Taxes -77 -120 75 250 313 325 192 322 337 361 381 370 348 353
Plus: Change in deferred tax (DT) Liabilities
DT Liabilities - 270 112 55 25 66 114 73 71 81 101 101 93 95
Less: DT Assets - 498 640 507 487 321 368 364 393 424 452 422 412 418
Net DT liabilities for current year - -228 -528 -452 -462 -255 -254 -291 -322 -343 -352 -321 -318 -323
Previous year DT liabilities - 615 270 112 55 25 66 114 73 71 81 101 101 93
Less: Previous year DT assets - 536 498 640 507 487 321 368 364 393 424 452 422 412
Net DT liabilities for previous year - 79 -228 -528 -452 -462 -255 -254 -291 -322 -343 -352 -321 -318
Net change in DT liabilities - -307 -300 76 -10 207 1 -37 -31 -21 -9 31 2 -5
NOPLAT: EBITA - Adjusted Taxes + Change in DT - 164 373 1129 1058 1192 940 850 956 1060 1193 1206 1277 1347
INVESTED CAPITAL COMPUTATION:
Operating Current Assets:
Normal Cash (10% of sales) 303 428 445 476 486 458 441 444 485 530 580 562 572 581
Accounts Receivable, Net 974 739 640 649 707 510 659 610 679 755 835 821 844 857
Inventory 262 241 112 144 209 171 123 145 165 191 215 212 218 222
Intellectual property licenses 35 55 45 22 11 11 5 18 18 18 18 15 14 14
Other operating current assets 201 606 485 555 496 796 901 835 930 1019 1145 1116 1132 1154
Operating Current Assets 2010 2293 1874 1983 2073 2313 2581 2508 2778 3064 3405 3332 3409 3466
Opearating Current Liabilities:
Accounts Payable 319 302 363 390 343 355 325 342 377 414 455 443 454 461
Deferred revenue & accrued expenses 1765 2205 2544 2166 2309 2025 2389 2208 2397 2625 2887 2800 2863 2900
Operating current liabilities 2084 2507 2907 2556 2652 2380 2714 2551 2773 3039 3342 3243 3317 3361
Net operating working capital -74 -214 -1033 -574 -579 -67 -133 -42 4 26 64 89 92 106
Plus: Net PPE 149 138 169 163 141 138 157 148 160 173 188 180 182 185
Plus: Software development 1 10 55 62 129 21 20 54 61 67 76 76 80 81
Plus: Intellectual property licenses 5 28 28 12 30 - 18 22 25 29 34 34 35 36
Plus: Net intangible assets 1283 618 160 88 68 43 29 28 27 25 23 20 17 15
Plus: Trademark and trade names 433 433 433 433 433 433 433 418 459 503 552 538 550 558
Plus: Goodwill 7227 7154 7132 7111 7106 7092 7086 7086 7086 7086 7086 7086 7086 7086
Plus: PV of operating leases 359 364 410 339 368 405 361 341 368 397 432 415 420 426
Plus: Other assets 30 9 21 12 11 35 85 32 34 36 37 35 33 34
Less: Other liabilities 239 209 184 174 206 251 361 228 259 301 346 341 322 333
Invested Capital 9174 8331 7190 7472 7501 7849 7695 7859 7965 8042 8146 8132 8173 8194
RETURN ON INVESTED CAPITAL:
NOPLAT - 164 373 1129 1058 1192 940 850 956 1060 1193 1206 1277 1347
Beg. Invested Capital - 9174 8331 7190 7472 7501 7849 7695 7859 7965 8042 8146 8132 8173
TOTAL ROIC - 1.79% 4.48% 15.70% 14.16% 15.89% 11.98% 11.05% 12.16% 13.31% 14.83% 14.80% 15.70% 16.49%
FREE CASH FLOW:
NOPLAT - 164 373 1129 1058 1192 940 850 956 1060 1193 1206 1277 1347
Change in Invested Capital - -843 -1141 282 28 349 -155 164 106 76 104 -13 41 21
Total FCF - 1007 1514 847 1030 843 1095 686 849 984 1089 1219 1236 1327
ECONOMIC PROFIT
Beg. Invested Capital - 9174 8331 7190 7472 7501 7849 7695 7859 7965 8042 8146 8132 8173
ROIC - 1.79% 4.48% 15.70% 14.16% 15.89% 11.98% 11.05% 12.16% 13.31% 14.83% 14.80% 15.70% 16.49%
WACC 7.48% 7.48% 7.48% 7.48% 7.48% 7.48% 7.48% 7.48% 7.48% 7.48% 7.48% 7.48% 7.48%
TOTAL EP -522 -250 591 499 631 352 274 368 464 591 596 668 736

Activision Blizzard
Weighted Average Cost of Capital (WACC) Estimation
Risk-free rate 2.71%
Market Risk Premium 4.85%
Equity Beta of Firm 1.14
Cost of Equity (Re) 8.24%
YTMCorporate Bond 6.04%
Cost of Debt (Rd) 6.04%
MV of Common Stock 23.00
Shares Outstanding 716 In Millions
Weight of Equity 16468
PV of Operating Leases 361.12
Market Value of LT Debt 4324 In Millions
Total Debt 4685.12
Re 8.24%
Rd 6.04%
E 16468 WACC= 7.48%
D 4685.118
V 21153.12
(1-t) 80.00%
Wd 22.15%
We 77.85%
WACC= Re(E/V)+Rd(1-t)(D/V)+Rpfd(PFD/V)
WACC= Re(E/V)+Rd(1-t)(D/V)+Rpfd(PFD/V)
Cost of Equity (Re)
Cost of Debt (Rd)
Weight of Equity (E)
Weight of Debt (D)
WACC Calculation

Activision Blizzard
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 2.50%
CV ROIC 15.70%
WACC 7.48%
Cost of Equity 8.24%
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E
DCF Model
Free Cash Flow 686 849 984 1089 1219
Contiuing Value 21536
Periods to Discount 1 2 3 4 5
Discounted FCF 639 735 792 816 15862
Sum of DCF's 18844
Plus: Excess Cash 4848
Plus: Short term investments 10
Plus: Long term investments 9
Less: Total Debt (including PV OL) 4685
Less: ESOP 299
Value of Equity 18727
Shares Outstanding 716
Share Price 26.15
Price Today 26.72
EP Model
Invested Capital 7695
EP 274 368 464 591 596
Continuing Value 13404
Periods to Discount 1 2 3 4 5
Discounted EP 255 318 374 443 9759
Sum EP 11149
Beginning Invested Capital 7695
Plus: Excess Cash 4848
Plus: Short term investments 10
Plus: Long term investments 9
Less: Total Debt (including PV OL) 4685
Less: ESOP 299
Value of EP 18727
Share Outstanding 716
Share Price 26.15
Price Today $26.72

Activision Blizzard
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E
EPS 1.20 1.37 1.55 1.76 1.73 1.91
Key Assumptions
CV growth 2.50%
CV ROE 12.85%
Cost of Equity 8.24%
Future Cash Flows
P/E Multiple (CV Year) 14.03
EPS (CV Year) 1.91
Future Stock Price 26.75
Dividends Per Share 0.21 0.24 0.27 0.31 0.33
1 2 3 4 5
Discounted Cash Flows 0.19 0.20 0.21 0.22 18.22
Intrinsic Value 19.06$
Pice Today 19.48$

Activision Blizzard
Relative Valuation Models
EPS EPS Est. 5yr
Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr.
EA Electronic Arts Inc $57.75 $2.38 $2.63 24.3 22.0 15.4
UBSFF Ubisoft Entertainment $18.40 $1.17 $1.35 15.7 13.6 10.2
TTWO Take-Two Interactive $25.00 $1.75 $1.34 14.3 18.7 20.0
KING King Digital Entertainment $16.45 $1.93 $1.86 8.5 8.8 4.4
Average 15.7 15.8
ATVI Activision Blizzard $23.00 1.20 1.37 19.1 16.8 6.4
Implied Value:
Relative P/E (EPS15) $ 18.87
Relative P/E (EPS16) 21.56$

Activision Blizzard
Key Management Ratios
Liquidity Ratios
Current Ratio 2.37 2.60 2.55 2.76 2.81 2.84 2.89 3.17 3.28 3.44
= Current Assets/ 6274 6241 6909 7029 7800 8641 9641 10267 10876 11565
Current Liabilities 2652 2405 2714 2551 2773 3039 3342 3243 3317 3361
Quick Ratio 2.29 2.52 2.50 2.70 2.75 2.78 2.82 3.10 3.21 3.37
=(Current Assets-Inventory)/ 6065 6070 6786 6884 7635 8450 9426 10054 10657 11343
Cash Ratio 1.65 1.85 1.79 1.99 2.03 2.06 2.09 2.37 2.49 2.65
=(Cash + Short-Term or Marketable Securities )/ 4375 4443 4858 5074 5634 6252 6994 7697 8270 8914
Activity or Asset-Management Ratios
Inventory Turnover 7.81 8.81 12.28 9.93 9.26 8.33 7.89 7.57 7.12 6.81
=Cost of Goods Sold/ 1632 1507 1511 1443 1528 1590 1694 1607 1556 1510
Inventory 209 171 123 145 165 191 215 212 218 222
Receivables Turnover 6.87 8.99 6.69 7.28 7.14 7.02 6.94 6.85 6.78 6.78
=Sales/ 4856 4583 4408 4440 4850 5300 5800 5620 5720 5809
Account Receivable 707 510 659 610 679 755 835 821 844 857
Total Assets Turnover 0.34 0.33 0.30 0.30 0.31 0.32 0.33 0.31 0.30 0.30
=Sales/ 4856 4583 4408 4440 4850 5300 5800 5620 5720 5809
Total Assets 14200 14012 14746 14827 15663 16573 17649 18251 18875 19577
Financial Leverage Ratios
Debt/Equity 0.25 1.12 1.04 1.01 0.93 0.94 0.93 0.89 0.83 0.79
=Total Liabilities/ 2883 7390 7513 7435 7567 8040 8527 8585 8582 8664
Total Equity 11317 6622 7233 7392 8095 8533 9123 9666 10293 10913
Debt Ratio 0.20 0.53 0.51 0.50 0.48 0.49 0.48 0.47 0.45 0.44
=Total Liabilities/ 2883 7390 7513 7435 7567 8040 8527 8585 8582 8664
Total Assets 14200 14012 14746 14827 15663 16573 17649 18251 18875 19577
Interest Coverage Ratio 1451.00 23.66 5.69 9.09 10.35 11.11 11.99 11.36 12.12 12.66
=Opearating Income/ 1451 1372 1183 1260 1385 1514 1659 1614 1693 1777
Interest Expense 1 58 208 139 134 136 138 142 140 140
Profitability Ratios
Net Profit Margin 23.66% 22.04% 18.94% 18.80% 19.55% 19.83% 20.26% 20.26% 21.72% 22.75%
=Net Income/ 1149 1010 835 835 948 1051 1175 1139 1242 1321
Net Sales 4856 4583 4408 4440 4850 5300 5800 5620 5720 5809
Return on Assets 8.09% 7.21% 5.66% 5.63% 6.05% 6.34% 6.66% 6.24% 6.58% 6.75%
=Net Income/ 1149 1010 835 835 948 1051 1175 1139 1242 1321
Total Assets 14200 14012 14746 14827 15663 16573 17649 18251 18875 19577
Return on Equity 10.15% 15.25% 11.54% 11.29% 11.71% 12.32% 12.88% 11.78% 12.07% 12.11%
=Net Income/ 1149 1010 835 835 948 1051 1175 1139 1242 1321
Total Equity 11317 6622 7233 7392 8095 8533 9123 9666 10293 10913
Payout Policy Ratios
Dividend Payout Ratio 0.17 0.19 0.17 0.18 0.18 0.18 0.18 0.19 0.19 0.19
=Dividends/ 200 195 143 146 166 184 206 216 236 251
Net Income 1149 1010 835 835 948 1051 1175 1139 1242 1321
Total Payout Ratio 0.17 5.95 0.11 0.89 0.33 0.65 0.56 0.59 0.55 0.53
=Dividends + Repurchases / 200 6009 91 746 316 684 656 666 686 701
Net Income 1149 1010 835 835 948 1051 1175 1139 1242 1321

Activision Blizzard, ATVI fin1

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