Activision Blizzard - University of Oregon Investment Group

Transcription

05/13/2016
Technology, Media, Telecom
Sector
Activision Blizzard
Ticker: ATVI
Current Price: $37.26
Recommendation: Outperform
Price Target: $40.16
Action Recommendation: Buy
Investment Thesis

Key Statistics
$24.04-$37.99
52 Week Price Range
50-Day M oving Average
$33.98
Estimated Beta
1.333
Dividend Yield
0.76%
M arket Capitalization (mm)
27,347
3-Year Revenue CAGR

37.28%
Trading Statistics
Diluted Shares Outstanding (mm)
734.99
Average Volume (3-M onth) (mm)
7.703
Institutional Ownership
70%
Insider Ownership
30%
Activision Blizzard is well positioned as the No.1 leader in the video
game publishing industry and is capable to achieve stable long-term
growth given its strong brand loyalty and high-quality franchises.
The internal financial power enables the firm to invest heavily in new
franchise development and explore more aggressive projects.

The Acquisition of King Digital Entertainment allows Activision
Blizzard to expand its market share in Mobile Gaming Industry and
continue to diverse its revenue sources.

The Establishment of Activision Blizzard Studio will promote its
existing franchises and generate profits from media segment, imitating
the successful model of the Walt Disney Company

The proven capability to create highly successful franchises enables
Activision Blizzard to be less dependent on third-party developers and
outperform its competitors in the long run.
16.92x
EV/EBITDA (LTM )
Margins and Ratios
Gross M argin (LTM )
66.02%
EBITDA M argin (LTM )
33.70%
Net M argin (LTM )
21.40%
Debt to Enterprise Value
0.16x
Covering Analysts: Jing Li
Email: [email protected]
Email
1
University of Oregon Investment Group
Figure 1: Activision Blizzard’s Realized Revenue
Breakdown by Business Segments (in Q1 2016)
Business Overview
History
Activision & Blizzard, as one of the largest interactive gaming companies in the
world, was established in 2008 by the merger of Activision Inc. and Vivendi Inc.
The company is the component of the S&P 500 and its headquarter locates in
Santa Monica, California. The famous franchise of the company includes Call of
Duty, Skylanders, Guitar Hero, Warcraft, StarCraft, Diablo and the incoming
OverWatch.
The Company was originally owned and operated by Vivendi Games Inc. as it
controlled 63% of the shares. On July 25th, 2013, Activision Blizzard completed
one of its biggest stock purchases in the company history, acquiring a total of
shares worth $5.83 billion dollars from its parent company Vivendi Games and
becoming an independent company.
Source: 10-Q Fillings of Activision Blizzard
Figure 2: Revenue Comparison: Retail vs Digital (Millions)
In 2014, Activision Blizzard surpassed Electronic Art and claimed the throne as
the biggest video games publishers in the United States. One year later, in 2015,
Activision Blizzard announced the acquisition of King Digital Entertainment
Inc. and closed the deal on Feb 23, 2016. Nowadays, with King Digital
Entertainment joining the group, Activision Blizzard continuously strengthens
its leading position in the video game publishing industry. Other important
business units include Activision Blizzard Studio and Major League Gaming.
Business Segments and Products
Activision Blizzard divide its sales into two segments: Product and Digital. In
2015 calendar year, the revenue generated from digital channel has outweighed
the revenue from retail channel.
Source: 10-K Fillings of Activision Blizzard
Figure 3: Online Transaction as % of Total in All Industry
Source: IBISWorld
Product segment includes the revenue generated from sales of physical products
in stores. The distribution of physical product is conducted by the Activision
Blizzard’s subsidiary and alliances, including marketplaces (Target), electronic
discount stores (BestBuy), online retailer (Amazon.com) and local gaming
stores. The physical products are offered in standard edition and collector
edition in order to meet the different need from customers, especially all
Blizzard's games having a high-end edition for hardcore fans.
Since 2012, the growth in digital segment has been outpacing the growth of
product segment and the revenue from retail product declined from 75% in 2012
to 52% in 2015 due to the greater popularity of digital download. However,
physical products are still favored by a great portion of loyal customers as
physically collectible contents appeal more attractive to them than the digital
contents.
Digital segment represents a fast growing and profitable business model for
Activision Blizzard with the segment revenue doubling since 2011. This revenue
source of the segment is very diverse, including subscription revenue from
online video game World of Warcraft, licensing revenue from all Activision
Blizzard’s franchises, value-add services, digital downloadable contents and
purchase of intangible contents in game. Focusing on the delivery of highquality digital contents is one of Activision Blizzard’s priority as digital delivery
presents a potential for revenue growth and greater probability. Thanks to the
acquisition of King Digital Entertainment Inc., Activision Blizzard is well
positioned to boost further growth from the digital business.
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Figure 4: Revenue Growth of Activision (Millions)
Business Model
Before Activision Publishing Inc. merged with Blizzard Entertainment Inc.,
these two companies used to operate (right now they still do) in different
business models. The merger of these two companies allows Activision Blizzard
to possess unique business and internal financing advantages over its main
competitors.
Activision:
Figure 5: Revenue Growth of Blizzard (Millions)
Activision has been the old rival for Electronic Art for a long period since 1980s
due to their very similar business model. Activision, as well as Electronic Art,
publishes and licenses games developed by small video gaming firms and put a
significant effort on publishing the sequels of games with great financial
success. The advantage of this strategy is less risk than creating their own
franchises, which usually requires expensive capital investments, and generates
stable cash inflow and financial performance. Nonetheless, there have been
many games that did not sell well and were criticized by the public.
That being said, even though Activision published a considerable amount of
games more than its roommate Blizzard, Activision was merely the publisher
instead of the developer for many cases, which results in being questioned about
its capability to develop its own successful franchises. Famous franchises of
Activision include Call of Duty series, Skylanders, Guitar Hero and Destiny
franchise.
Blizzard:
Figure 6: Top 10 MMO Games by Revenue in 2014
(Millions, gray marked the games owned by Blizzard)
Blizzard, which has an opposite strategy to Activision, is the powerhouse of five
legendary franchises--World of Warcraft, Diablo, StarCraft, Hearthstone and
Heroes of the Storm--under operation with Overwatch joining the family in May
2016. Blizzard Entertainment is worshiped by its reputation and MMO (Massive
Multi-players Online) business model to create long-existing franchises with
huge financial success. MMO business model has the following advantages over
the traditional single-player game model.
• Beside the traditional revenue realized from the sale of games and licensing
fees, MMO games bring additional profits by providing online add-in value and
charge subscription fees while keep players playing for a much longer period
due to the high interaction between players and consistent new contents. The
most financially successful example would be the World of Warcraft, which is
the most successful MMO game ever in history measured by the monthly active
users (MAU).
• The MMO model will significantly increase the profitability and increasing
profitability has been Activision Blizzard’s priority since the merger. Periodic
updates and maintenance of existing games is much less labor intensive,
boosting the contribution margin for the publishers.
However, compared to Activision, Blizzard only published very few games and
sequels annually and consequently, its financial performance is much more
volatile than Activision to the release of new franchises and sequels.
Source: Statista
Therefore, the merger of Activision and Blizzard combines the financial stability
of Activision (quantity) and power of MMO business model (quality) together,
providing the company more internal financing power and opportunities to
conduct speculative projects.
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Figure 7: Revenue Growth of King Digital Entertainment
by Quarters for 2014 and 2015 (Millions)
Source: Google Finance
Figure 8: Revenue Growth of Video Game Software
Publishing Industry (Millions)
King Digital Entertainment:
The King Digital Entertainment Company is the new addition to the Activision
Blizzard family as the acquisition closed at Feb 26, 2016. As the mobile gaming
industry is rapidly growing in an unignorable pace, the arrival of King will
certainly strengthen the mobile game segment of Activision Blizzard and
prepares the firm to compete with other rivals, like Electronic Art, in this new
emerging market. Before the acquisition, King was a public-own company
dedicating to publish best-selling games on mobile apps, Facebook and
Windows. The most reputable franchise of King is the Candy Crush Saga and its
sequels. By the end of 2015, King Digital Entertainment was the No.1 leader in
the smart phone app and gaming industry, with a market share of 14.9%, which
was nearly 7 times more than the runner up.
After acquired by Activision Blizzard, King will not only continue to publish its
existing franchises, including the No.1 downloaded IOS game Candy Crush
Saga, but also facilitate the development of Activision Blizzard’s franchises on
Mobile by its in-house proven mobile game veterans.
Industry
Overview
The main industry, in which Activision Blizzard operates its business, is the
video game publishing industry. Firms in this industry develops and publishes
video games for different platforms including PC, consoles, mobile and online
platforms like Facebook. Buoyed by the technology evolution and greater
accessibility to Internet and mobile, the industry has been growing in an average
rate of 10.3% annually in the last few years and it is expected to continue this
strong momentum until 2021, by which the revenue will reach nearly a total of
30 billion.
Source: IBISWorld
Figure 9: Market Share Breakdown by Firms in the Video
Game Publishing Industry in 2015
Barrier of Entry:
The video game publishing industry requires a level of capital investment that is
not prohibitively expensive for a new company, especially as nowadays there
are many funding option available for startups. The true barrier to enter the
industry is the technology and skilled workers needed to publish high-quality
franchises and intellectual properties. Long-established firms, in terms of
resources of work forces and mature technology, have advantage over new
startups.
Power of Consumers:
The consumers have extremely high bargaining power in the video game
industry as the switching cost for them to choose between different publishers’
games is barely existent. As a result, publishing firms dedicate to provide highquality contents in order to create brand loyalty among its customers with the
hope of offsetting their high bargaining power and outperforming competitors in
the industry.
Rivalry:
The internal competition between different publishers is extremely high, with
the top five firms controlling more than 35% of the total market share.
Activision Blizzard is not only competing with professional publishers such as
Electronic Art, but also competing with conglomerates such as Sony and
Source: IBISWorld
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Figure 10: Major Consoles Manufacturers and their Market
Share by 2015
Microsoft as their subsidiaries operating business in this industry. The main
competition focuses on developing good relationship with developers and the
rights to publish their new games, even though some big publishers, such as
Activision Blizzard, have their own in-house developers. Also firms compete on
attracting the most skillful workforces to join by offering better compensation
and work-life balance.
Power of Suppliers
Source: IBISWorld
Figure 11: Revenue Growth in Movie & Video Production
Industry (Millions)
As mentioned before, one of the key competing strategies is to foster
relationship with game developers and obtain the right to publish their games,
meaning that outstanding developers will enjoy the luxury of maximizing their
benefits by choosing between different publishers. Activision Blizzard, as well
as other publishers, aggressively compete on getting high-quality game
developers and the relationship with developers is crucially important for
publishers, especially for those whose strategies are not to heavily invest capitals
in developing their own franchises. Established companies with great financial
power will position themselves ahead small companies as they are capable to
offer better deals from financial perspective. In addition, the relationship with
video game consoles manufacturers is also important as publishing games need
to be compatible on game platforms, such as Xbox and PS.
Substitute
Video game publishers compete outside of the industry with other types of
entertainment, including KTV, TV, movie, sports and self-published videos.
These substitutes represent a great threat to the video gaming industry as they
will drive customers away. All entertainment forms compete on attracting new
customers and actualizing organic growth, and therefore, they all need to catch
the trend of customer preference. With the mobile gaming has become an
unstoppable trend, the video gaming industry will welcome the tailwind to
overcome the external competition as their easy-to-play mobile games will keep
customers playing on their goes as well as staying in this industry.
Macro factors
Per capita disposable income
Source: IBISWorld
Figure 12: Per Capita Disposable Income and Growth Rate
The Per capita disposable income, which is an indicator of individual’s
purchasing power, is one of the most essential factors to the success of
Activision Blizzard as the company operates its business in an industry that will
be hit heavily if economics encountered a recession. All products and services
provided by Activision Blizzard will be more favorable when consumers have
stronger purchasing power, especially for luxury digital edition and collector's
edition of its franchise games. Overall, there is no other factor that is more
important than per capita disposable income to Activision Blizzard.
During the last five years, the per capita disposable income has been growing in
an average annualized rate of 1.5% since 2011 due to the remaining impact from
the financial crisis in 2008 and the implementation of unfavorable political
regulation, including the Medical Tax Policy. Going forward, the per capita
disposable income is projected to experience a strong recover, reflecting by a
compound growth rate of 1.9% until 2021. The faster growth rate of per capita
disposable income will represent a boost in Activision Blizzard’s top line and
bottom line.
Source: IBISWorld
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Time Spent on Leisure and Sports
Figure 13: Projected Revenue Growth of Online Gaming
Industry in China (Millions)
This macro factor will influence Activision Blizzard’s overall business as the
time spending on gaming and leisure can be an indicator of the company’s
revenue outlook. When more time that people spend on leisure and sports, the
more likely they would play video games as one of their ways to relax.
Therefore, an increasing amount of time spends on leisure and sports will
potentially benefit the overall video gaming industry and Activision Blizzard’s
performance.
As a prediction for the next five years, the average time spending on leisure and
sports will slowly grow at 0.1% into 2021. However, as the culture and attitude
toward to gaming, especially competitive gaming, has been changing in the
positive direction, the video game publishing industry will have more potential
for actualizing long-term growth.
Source: IBISWorld
Additionally, there is strong potential for growth in Asia, particularly in China,
as the booming of E-sport industry facilitate the increasing time that people
spend on video games. Activision Blizzard have already eyed on this great
opportunity, launching several franchise games simultaneously in a global basis,
such as StarCraft 2 – Legacy of the Void.
Figure 14: Trade-weighted index Projection
Currency Exchange Rate
“For the year ended December 31, 2015, a hypothetical adverse foreign currency
exchange rate movement of 10% would have resulted in potential declines of
our net income of approximately $121 million.”--Activision Blizzard 2015 10-K
Source: IBISWorld
Figure 15: Number of Mobile Internet Connection (Millions)
As the company states in their 2015 annual reports, the fluctuation in currency
exchange is threatening Activision Blizzard’s financial performance and
outlook. In 2015, nearly 48% of the total revenue came from oversea, including
Europe and Asia. International revenue and related expenses are first recorded in
local currencies and then are converted to US dollars. Primary currencies
include Australian dollar, British pound, Chinese renminbi, Korean won, Euro
and Swedish Krona. That being said, a stronger U.S. will lower Activision
Blizzard’s revenues from international markets and result in decreased EBITDA
and earnings, especially more revenue will be generated oversee because Asian
marketing is booming due to the popularity of E-sport industry in South Korea
and China.
The trade-weight index measures the strength of the U.S. dollar compared to the
currencies of its trading partners, including Canada, Australia, China, South
Korea and etc. As going forward, the trade-weight index is expected to increase
from 89.9 in 2015 to 109.97 in 2022, meaning that the growth of revenue and
earnings from international market will be partially offset by the stronger U.S.
dollars if there is no cash hedging protection.
Mobile Internet Connection
As the mobile gaming industry is booming and becomes a relatively new
industry for video game publishers to compete, a decent growth in the number of
mobile internet connection will be a tailwind for video game publishers.
Source: IBISWorld
By 2015, there are 241.90 million consumers who have a mobile device
connectable to the Internet, enabling them to browse and download mobile
games on their devices. This number is projected to grow consistently at an
annual compound rate of 5.3% until 2021, by which the number will reach 331.2
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Figure 16: Projected E-sport Industry Revenue Breakdown
by Geography in 2015 (Millions)
million. Activision Blizzard, as well as other publishers, will be beneficial from
this mega trend.
E-Sport Industry
One unstoppable trend nowadays is that competitive gaming has become a
professional sport activity recognized by official government in many countries.
The total revenue generated from E-sport market, by conservative estimate, will
hit at least 0.5 billion and 1.0 billion respectively in 2017 and 2020. Some
research agents, like Superdata, even predict the revenue from E-sport Industry
will pass 1.9 billion by 2018 and reach 3.0 billion by 2020. The prize cool has
been growing in even a faster pace, passing 40 million dollars in 2015 as the
total prize pool money.
Source: SuperData
Figure 17: Projected E-Sport Industry Revenue Breakdown
by Sources in 2015 (Millions)
According to Newzoo’s research report, the winner of Dota 2 International 2015
Championship took home 6 million in total or 1.2 million per player, which was
higher than the 3rd Place Prize Money in 2014 Soccer World Cup.. In 2013 and
2014, the Unite State Government issued professional sport visas to several
notable professional gamers sponsored by the local professional gaming teams,
including the No.1 North America powerhouse Evil Genius. As the popularity
and prize money in E-sport industry soaring, game publishers have a huge
potential to boost their revenue from the E-sport market.
Competition
Activision Blizzard competes for the leisure time and spending of consumers
and the company not only faces sustainable competition with other publishers in
the video game publishing industry, but also competes with other forms of
entertainment. The primary competition includes but not limited to:
• The quality of franchises, product features and playability.
• The brand awareness among consumers.
• The compatibility of products with popular platforms.
• The resources to invest, develop and test new games.
• The distribution channel to reach consumers.
• The marking and sale strategy.
• The changing technology and skillful workers.
Source: SuperData
Figure 18: Cash Hold By Activision Blizzard (Millions)
Overall, the level of competition for Activision Blizzard is very intense as there
are many other famous publishers operating business in the industry. Outside of
the industry, Activision also faces the threat from other entertainment giants
such as Walt Disney Company and Comcast.
Strategic Positioning
The Strong Balance Sheet
Activision Blizzard, by December 31, 2015, had a total asset of 15,251 million
and nearly no debt under management, compared to Electronic Art’s 6,470
million asset and Take-Two Interactive’s 2,106 million. As the largest video
game publisher in the western measured by both revenue and assets, Activision
Blizzard is able to fully utilize its economics of sale to conduct strategic
movement and implement speculative acquisitions.
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Figure 19: Reputable Franchises of Activision
By the end of 2015, with 5.2 billion in cash on hand, Activision Blizzard was
able to acquire King Digital Entertainment Inc. for $18 per share or a total of 5.9
billion all by cash, without relying on debt heavily. Overall the powerful cash
pool plus the low level of debt will give Activision Blizzard a unique advantage
to make strategic acquisitions and investments.
The Quantity plus Quality
As mentioned in the previous section, Activision and Blizzard individually have
different business model with Activision focusing on primarily publishing thirdparty developed games in a great number and Blizzard working on its MMO
business model with few very successful franchises. Thanks to the merger of
these two firms, the Activision Blizzard have more diverse revenue resource and
the capability to conduct aggressive investment in new franchises and sequels of
existing successful game.
Source: Activision Blizzard Site
Figure 20: Reputable Franchises of Blizzard
Compared to its old rivalry Electronic Art, Activision Blizzard receive more
compliment in the industry because of its capability to create original franchises.
This credit mainly goes to Blizzard as all of its games were their own franchises,
including the most famous World of Warcraft series and Diablo 3 Series. With
Blizzard continuously producing high-quality franchises, Activision Blizzard
has the backbone to outperform its peers going forward.
The Kingdom of Franchises
Activision Blizzard, as one of the largest franchise-held company in the world,
have many well-known franchises across different platform. The Call of Duty
series published by Activision is the best-selling game in history, generating
more than 11 billion revenue since its very first release back in 2003. The World
of Warcraft is the most successful MMO game ever with five expansion released
and the sixth coming at the end of 2016. Diablo 3, which was published by
Blizzard in 2012, is the best-single-selling game, excluding any precedent and
sequel, in the company, with a total of more than 30 million copies sold by the
second quarter of 2015. This sale number of Diablo earned the game a spot in
the list of Top 10 Best-Selling Games in the history.
Because of the big pool of successful franchises, Activision Blizzard has been
able to build up formidable market share and obtained sustainable competitive
advantages. Existing franchises also enable the company to publish sequels,
which are far less risky than to create new franchises with zero use base and
brand awareness, and stabilize revenue growth. Overall expanding established
franchises and creating sequels provide high predictability of revenue and
increase the profitability of foreseeable high volume sales.
Figure 21: Reputable Franchises of King
Great Place to Work
2016 is the second year that Activision Blizzard made to the Fortune list of 100
best Companies to work, advancing from #96 in 2015 to #77 in 2016. Based on
the Fortune magazine's survey, 96% of the employee are proud to work in
Activision Blizzard and 92% of them are willing to sacrifice extra time to get the
job done.
In order to keep the harmonic relationship with its employees, Activision
Blizzard launched several programs, including the Activision Blizzard Studio
Summit, Wellness program and Activisionaries, to enrich employees’ working
experience, to improve work-life balance and health condition, and to motivate
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Figure 22: Revenue from Top 10 Call of Duty Franchise
Series (Millions)
their employees intellectually. The capability to attract and maintain best talents
in the industry puts the company in a well-defensive position.
Business Growth Strategies
Continue the Organic Growth
One of the primary revenue growth strategies for Activision Blizzard is to
continuously publish high-quality sequels of established successful franchises. A
sequel of successful franchises usually end up generating great financial success
thanks to the reputation of existing franchises and also keep the brand loyalty
from its customers.
Source: Forbes
Figure 23: Revenue Growth in Smartphone App and Game
Developers Industry (Millions)
For example, Call of Duty has been the No.1 selling game in the North America
for seven years in a row, with the latest expansion Black Ops III outselling its
previous two expansions and collecting more than 550 million revenue in the
first three days of its launch. One reason why Activision Blizzard implement
this strategy successfully is that the company consistently improve user
experience by releasing new patches even after games were launched for several
years.
In 2016, the outlook of franchise sequels for Activision Blizzard is unstoppable.
From Activision side, the top three franchises Call of Duty, Destiny and
Skylanders will all launch their new expansion in the second half of the year.
From Blizzard side, World of Warcraft will welcome its sixth expansion in the
summer.
Expand the Franchise Family
Source: IBISWorld
Figure 24: Revenue Growth in Smartphone App and Game
Developers Industry (Millions)
Activision Blizzard has been consistently seeking and developing world-class
franchises in order to expand the franchise pool and diversify its revenue
sources. As the internal financing strengths have been mature after the merger of
Activision and Blizzard, the company right now can fully utilize the advantage
from internal allocation of capital and enjoy the luxury of conducting several
projects simultaneously. In the second quarter of 2016, the company will launch
its long-awaited new first-person shooter game--Overwatch, which is expected
to become the biggest launch of Blizzard since Diablo 3 based on the pre-sale
data. This new franchise game will not only serve the community of Blizzard,
but also help the company compete with other famous first-person shooter game
like Counter Strike.
In addition, thanks to the large number of franchises owned by the company,
Activision Blizzard can easily create new franchise games based on existing
franchises. In 2012 and 2013, Activision Blizzard launched Hearthstone and
Heroes of Storm respectively, which have tremendous success in growing
audience and revenue. Hearthstone acquired 10 million registered users in just
one quarter and Heroes of the Storm just hit 20 million users by Q1 2016. All
the characters in these two games come from existing franchises, including
Warcraft, Diablo and StarCraft and they are proven to be very successful so far.
Grow with the Mobiles
Source: IBISWorld
As the mobile gaming industry is booming, the Activision Blizzard is eager to
enter the new market and expand its share. During the last few years, before the
acquisition of King Digital Entertainment Inc., Activision Blizzard has already
made some success in the industry. The Hearthstone, which is the very first and
milestone game on mobile from Blizzard side, has just past 50 million in
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Figure 25: Most visited streaming sites among US
eSports viewers in 2015
audience, with 10 million new audiences adding in last quarter. Entering 2016,
with the support from King’s experienced mobile game veterans, Activision
Blizzard is expected to popularize its existing franchise games across mobile
app platform. In 2016 schedule, the next expansion of Hearthstone is in progress
and King is expected to launch two new non-candy crush franchise games in the
summer and fall respectively.
Catch up the E-sport
The E-sport popularity seems to be unstoppable during the last few years as the
revenue from this industry increased 48% year to year in 2015 and it is expected
to hit half billion by 2017. Not only the revenue growth is accelerating but also
the prize pool money is increasing tremendously, reaching 71 million in 2015,
which represents a 97% year to year growth compared to 2014.
Source: SuperData
Figure 26: Top Players World Wide by Prize Earnings
by 2015 (Thousands)
Activision Blizzard is well-positioned to gain more market share in the E-sport
tailwind with its diverse franchise games in competitive gaming. From
Activision, the Call of Duty annual tournament in 2015 had a prize pool of 1
million dollars in total and it is expected to grow larger this year. From Blizzard
side, all of the franchises, except for Diablo and World of Warcraft, are
competitive games, which will mostly benefit from the E-sport booming.
As going into 2016, Blizzard’s annual event-Blizzcon-has the biggest prize pool
ever in history, offering a total of 2.75 million dollars to players competing in
this World Championship Event. Furthermore, Activision Blizzard acquired
Major League Gaming (MLG), which is the one of the largest game livebroadcast websites and a professional organizer for E-sport tournaments, at
January 01, 2016 for 46 million dollars. The alliance between Facebook and
Activision Blizzard allows the company to launch E-sports broadcast network
with Facebook with the hope of spreading the heat of E-sport to the users in the
biggest social platform in the world. All these action will lead to the company’s
financial success in the E-Sport Industry.
Team up for Blockbusters
Source: E-sport Earnings
Figure 27: Top 10 Movies in 2015 by Global Box Office
(Millions)
Source: Mojo Box Office
The video game software publishing industry has switch its favor similar to the
movie industry, which is to employ a “blockbuster style” of sale, meaning that
large-investment franchises, such as Call of Duty and Diablo series, are more
likely to succeed commercially and break numbers of sale record. As this trend
becomes popular in the industry, Activision Blizzard is well positioned to catch
this trend and leverage on it as it has plenty experiences of creating blockbuster
games. The upcoming blockbuster games, Call of Duty Infinite Warfare and
Overwatch, contain tremendous growth potential for the company in 2016.
Not only does Activision Blizzard focuses on creating blockbuster game, but
also would the company release the very first blockbuster movie this year.
Activision Blizzard, together with Legendary Studio and Universal Studio,
completed the production of the film Warcraft and it is expected to hit the movie
market heavily this summer. Going forward, Activision Blizzard would like to
copy the success of media giants, using blockbuster movies to promote its
franchises and to boost revenue from the gigantic global box office market.
Activision Blizzard is determined to continuously release several franchise
movies in the future, including the upcoming Call of Duty film scheduled in
2017 temporarily. By executing this strategy, Activision Blizzard will expect
revenue from more diverse sources and effectively promote its existing
franchises within the global box office market.
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Figure 28: Compensation of Important Executives in 2015
Management and Employee Relations
Overall, Activision Blizzard has a very experienced and stable management
team, which is led by the CEO Bobby Kotick, who has been serving in the
company for more than two decades. With this well-rounded and experience
management team, Activision Blizzard is expected to continue its success going
forward.
Bobby Kotick - President and Chief Executive Officer
Source: Morningstar
Figure 29: Total Compensation of Top Management in
Electronic Art vs. Activision Blizzard
Bobby Kotick started his career as a co-founder of a software startup company
in the video game publishing industry in 1980s. In 1990, Bobby acquired 9% of
the total share of Activision and became the Chief Executive Officer in the
company at 1991. After the merger of Activision and Blizzard, Bobby continue
to serve as the President and Chief Executive Officer to present.
As serving the company for more than two decades, Bobby Kotick has
tremendous experience in the video game industry and he is also the cochairman of the Call of Duty Endowment, which is served as a non-profit
organization aiming at recruiting skillful veterans in the industry. Outside of
Activision Blizzard, Bobby Kotick also serves as one of the board of directors at
Coco-Cola Company.
Dennis Durkin - Chief Financial Officer
Before joined Activision Blizzard in 2012, Dennis Durkin hold several positions
at Microsoft Company, including the most recent title of the Vice President and
Chief Operating and Financial Officer in XBOX division. Dennis Durkin has
great experience in video game publishing and developing and has been serving
brilliantly as the Chief Financial Offers of Activision Blizzard for nearly four
years.
Dennis Durkin hold a B.A. degree in government from Dartmouth College and a
MBA from Harvard Business School.
Thomas Tippl - Chief Operating Officer
Source: Morningstar
Figure 30: Stock Performance of Activision Blizzard, S&P
500 and NASDAQ since 2010
Before Thomas Tippl joined the Activision Blizzard in October 2005 as the
Chief Financial Officer of Activision Publishing and became the Chief
Operating Officer in 2010 after the merger of Activision and Blizzard. Also
Thomas was holding the title of Chief Corporate Officer during 2009 to 2010 in
the company. Prior to Activision, Thomas had been gaining experience as the
Chief Financial Officer of Procter & Gamble in different regions, including
China, Japan and Europe.
Management Guidance
Source: Activision Blizzard 10-K Fillings
Management Guideline is provided in two parts -- GAAP and Non-GAAP, and
it is usually updated in each quarter after the quarterly earnings released. In the
2015 Q4 earning call, the original outlook provided by management team was,
on a GAAP basis, revenue of 1,260 million and EPS of $0.21 for 2016 Q1 and
revenue of 6,100 million and EPS of $0.45 per share for the calendar year 2016.
After the better-than-expectation results released for 2016 Q1, the management
boosted the guideline as following:
UOIG 11
Figure 31: Tall Firs Portfolio Sector Allocation
• For 2016 Q2, the revenue is expected to be 1,375 million and the EPS is
expected to be $0.10 per share.
• For the calendar year 2016, we expect a revenue of 6,130 million and an EPS
of $0.69 per share.
During the last few years, management has been very cautious about providing
their financial guidelines, which have led to frequent outperformance. Therefore,
the better-than-expectation results of 2016 Q1 earning were not too surprising.
Portfolio Strategy
Portfolio Analysis
Source: Tall Firs Portfolio Report in 2016 Annual Meeting
Figure 32: Activision Blizzard Pitching and Update History
in the University of Oregon Investment Group
Activision Blizzard (ATVI) is being pitched for both Tall Firs and DADCO
portfolios. For Tall Firs, due to the fact that it is fairly weighted in large cap and
the Technology, Media and Telecom (TMT) sector, Activision Blizzard will be
a good addition even though it will make Tar Firs slight overweight in large cap
and TMT sector. The fundamental value-play style of Activision Blizzard also
makes it a good fit for Tall Firs. I am pitching the stock for DADCO because as
the acquisition of MLG and King completed and the establishment of Blizzard
Entertainment Studio, the company has tremendous potential for growth in the
next two to three years, plus its value-play nature making its success more
predictable.
Pitching History
Activision Blizzard was originally pitched in 2008 by the senior analyst named
Russell Sneddon with a recommendation of Buy for all portfolios. After the
group purchased the stock, the stock had been updated three times in Fall 2009,
Fall 2011 and Fall 2012, eventually the group ending up selling the stock from
all portfolios.
Source: University of Oregon Investment Group
Recent News
Activision Blizzard Gets Hoped-For Boost from King Digital -Wall Street Journal, May 05, 2016
Figure 33: Monthly Active Users of King Digital
Entertainment since 2014 (Millions)
Activision Blizzard reported a very strong results for its first quarter of calendar
year 2016. With the completion of King’s acquisition, Activision Blizzard
boosted its revenue and EPS outlook and delivered an adjusted revenue of 908
million vs 813 million expected from Wall Street Analyst. Piper Jaffray analyst
Mike Olson highlighted the acquisition of King as a no-brainer move, which
will milk Activision Blizzard in the long term. With factoring in King, the
monthly active users (MAU) grows up to 544 million, which are crucially
important for upcoming new mobile games from Activision Blizzard.
Why Analysts Are Chasing Activision Blizzard Even Higher
Wall Street Journal, May 06, 2016
Source: King’s Investor Relation
With the acquisition of King Digital Entertainment, the monthly active users of
Activision Blizzard reach to 544 million, which is the 4th largest network in the
world, only behind Facebook, YouTube and WeChat. This strong MAU basis
gives the company the potential to promote its franchises widely. Not only the
MAU basis of King was growing, but also did Activision and Blizzard grow at a
rate of 14% compared to previous year. Analysts expect this momentum will
carry forward and assist the company’s long-term growth.
UOIG 12
Figure 34: Total Prize Pool at Blizzcon World
Championship Series in 2015 and 2016
Activision Blizzard Crushes Estimates, Sees Big Future in ESports
--Yahoo Finance, May 06, 2016
The article focuses on the next potential industry--The E-sport Industry--for
Activision Blizzard lifting their revenue. The business model from Activision
Blizzard, particularly from Blizzard, is built up based on the social perspective
of competitive gaming and Esport. As the recognition of Esport has been soaring
during the last two years, the industry has been growing into a billion-dollar
industry and Activision Blizzard has positioned themselves brilliantly by
owning many famous franchises in the Esport area, including Call of Duty,
Warcraft, StarCraft, Hearthstone, Heroes of the Storm and the incoming
Overwatch. The management in Activision Blizzard is also bullishing on the
Esport Industry as well.
Source: Blizzard Entertainment Battle Net
Catalysts
Upside
Figure 35: Top Viewed Franchises of E-sport in the
United States in 2015






Source: SuperData Market Research Report
Downside

Figure 36: The Number of Subscribers of World of
Warcraft since 2013 (Millions)
StarCraft and StarCraft 2 regained popularity in South Korea, where is
the biggest E-sport industry for StarCraft franchise.
The development of virtual reality will potentially boost the gaming
industry.
Consumers are more likely to see a blockbuster movie and it would be
a tailwind for Blizzard Entertainment Studio and its upcoming Warcraft
movie and Call of Duty movie.
The Esport has become more popular and more professional gamers
and Esport audiences are joining in this booming industry.
Consumer behaviors swift from purchasing physical products to
download digital content, provided a higher margin and profitability for
the company.
Maturity of live-stream technology enables the company to provide
high-quality visual content and great experience to its customers.



The two popular competitive games--League of Legend and Dota 2-represent threats to Activision Blizzard's ambition in dominating the
Esport industry.
Stronger dollars will hurt the company’s oversee revenue and lower the
company’s financial outlook.
The MMO gaming industry is losing its popularity, which will
inevitably lower the revenue generated from World of Warcraft series.
Multinational conglomerates, such as Sony and Walt Disney Company,
start to publish games based on their franchises, representing
competition and threats to Activision Blizzard.
Comparable Analysis (20%)
Source: Blizzard Entertainment Inc.
A total of five companies were selected to perform the comparable analysis in
order to obtain the implied price target. Many factors, including both quality and
quantity factors, were taken into consideration when selected the comparables.
UOIG 13
Figure 37: Revenue and Gross Profits of Activision and
its Main Competitors. (Millions)
There are two media conglomerates were selected into the comparable analysis
due to the fact that Activision Blizzard is evolving slowly but surely to a media
conglomerates after the establishment of Blizzard Entertainment Studio and the
launch of TV series and movie based on its own franchises. In order to catch its
exposure and risk in the media industry, Walt Disney Company and Comcast
joined the comparable analysis.
Electronic Art (EA) -- 50%
Source: FactSet
Figure 38: Profitability Margin Metrics of Activision and
its Main Competitors.
“Electronic Arts Inc. develops, markets, publishes, and distributes game
software content and online services for video game consoles, Internetconnected consoles, personal computers, mobile phones, and tablets worldwide.
The company operates through EA Studios, EA Mobile, and Maxis divisions. It
develops and publishes digital interactive entertainment games primarily under
the Battlefield, FIFA Soccer, Dragon Age, and Plants vs. Zombies brand names.
The company also offers casual games, such as cards, puzzles, and word games
through pogo.com and on other platforms; and sells digital content. The
company was founded in 1982 and is headquartered in Redwood City,
California.”--Yahoo Finance
Electronic Art is the No.1 competitor with Activision Blizzard in the industry
and it is best known for many famous franchises, such as Battlefield, FIFA,
Battlefield and Dragon Age. Electronic Art was given a weighting of 50%
because of its similarity with Activision Blizzard in operating industry, product,
consumer basis, brand equity, capital structure and profitability.
Take-Two Interactive (TTWO) -- 25%
Source: FactSet
Figure 39: Enterprise Value of Activision Blizzard
and its Competitors by 2015 (Millions)
“Take-Two Interactive Software, Inc. develops, publishes, and markets
interactive entertainment for consumers worldwide. The company offers its
products under the Rockstar Games and 2K labels. It develops and publishes
action/adventure products and offers downloadable episodes, and content and
currency; and releasing titles for smartphones and tablets. The company also
develops brands in other genres, including the L.A. Noire, Bully, and Manhunt
franchises. Take-Two Interactive Software, Inc. was founded in 1993 and is
headquartered in New York, New York.”--Yahoo Finance
Take-Two Interactive Software Inc. operates its business in the same industry as
Activision Blizzard and is one of the primary competitors as well. Given the fact
that Take-Two share similarity with Activision Blizzard in operating industry,
consumer basis, product service and relatively similar growth rate, the company
was weighted at 25%.
Zynga Inc. (ZNGA) -- 15%
Source: Yahoo Finance
“Zynga Inc. develops, markets, and operates social games as live services played
on the Internet, social networking sites, and mobile platforms in the United
States, North America, Asia, and the European Union. It offers its online social
games primarily under the Slots, Words With Friends, Zynga Poker, and
FarmVille franchises. The company was formerly known as Zynga Game
Network Inc. and changed its name to Zynga Inc. in November 2010. Zynga Inc.
was founded in 2007 and is headquartered in San Francisco, California.”--Yahoo
Finance
UOIG 14
Figure 40: Cash and Cash Equivalents of Activision
Blizzard and Comparables by 2015 (Millions)
Zynga Inc. was selected as a comparable based on the similar operating industry,
product and consumer basis compared to Activision Blizzard. However, the
company was not comparable with Activision Blizzard in terms of size and
profitability. In order to fully reflect the metrics in video gaming publishing
industry, Zynga, as a major player in the industry, was still selected but given a
weighting of only 15%.
Walt Disney Company (DIS) -- 5%
Source: Yahoo Finance
Figure 41: EV/EBITDA Multiple Comparison
between Activision Blizzard and Comparables
“The Walt Disney Company, together with its subsidiaries, operates as an
entertainment company worldwide. The company operates broadcast and cable
television networks, domestic television stations, and radio networks and
stations. Its cable networks include ESPN, Disney Channels, and ABC Family,
as well as UTV/Bindass and Hungama. The company owns eight domestic
television stations. It also owns and operates the Walt Disney World Resort in
Florida that includes theme parks; hotels; vacation club properties; a retail,
dining, and entertainment complex. Further, it produces and acquires live-action
and animated motion pictures, direct-to-video content, musical recordings, and
live stage plays.”--Yahoo Finance
As the leading conglomerate giant in the media industry, Walt Disney Company
did not share too much similarity with Activision Blizzard in terms of product,
service, industry and consumer basis. However, in terms of growth rate,
profitability, and D/E ratio, these two companies look quite similar plus Disney
does produce their own franchise games as well. Also as mentioned early, as
Activision Blizzard moves to the media industry and engage in similar business
model compared to Disney, Walt Disney was selected as comparable with 5%
weighting in order to reflect the risk that Activision Blizzard exposes to.
Comcast Corporation (CMCSA) -- 5%
“Comcast Corporation operates as a media and technology company worldwide.
It operates through Cable Communications, Cable Networks, Broadcast
Television, Filmed Entertainment, and Theme Parks segments. The company
also owns the Philadelphia Flyers, as well as the Wells Fargo Center arena in
Philadelphia, Pennsylvania; and operates arena management-related businesses.
Comcast Corporation was founded in 1963 and is headquartered in Philadelphia,
Pennsylvania.”--Yahoo Finance
Source: UOIG Spreadsheet
Figure 42: Comparable Analysis Outcome
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Price Target
Current Price
Undervalued
Implied Price
Weight
$
24.153
0.00%
$
28.633
0.00%
$
158.726
0.00%
$
35.830
90.00%
$
36.698
0.00%
$
82.146
10.00%
$40.46
36.33
11.37%
Source: UOIG Projection
Comcast Corporation was selected as a comparable and given a 5% weighting
based on similar reasons as the Walt Disney Company. Particularly, Comcast
also formed the alliance with Activision Blizzard to publish their movies,
including the very first World of Warcraft, resulting that these two companies
share certain risk together.
Multiple Selection
EV/EBITDA
EV/EBITDA was selected as the main metric to evaluate the company because
EBITDA is considered as a proxy of free cash flow, which is crucially important
for any company. EBITDA also takes out the difference in amortization and
depreciation schedule. Taking all these factors into consideration, I decided to
weight EV/EBITDA for 90% of the total weighting.
UOIG 15
Figure 43: Estimated Revenue Breakdown by Platforms
in Calendar Year 2024
P/E
In terms of PV, the main reason why I selected this metric in the comparable
analysis was that all the comparables, as well as Activision Blizzard, are very
mature companies and P/E will be a good metric to use on well-established
companies. However, P/E needs to take interest expense, tax rate, depreciation
expense and amortization expense into consideration. Due to the variety in those
items, P/E is not as good as the EV/EBITDA metric. Therefore, I decided to
weight 10% on P/E.
Discounted Cash Flow Analysis (80%)
Consolidation of Activision Blizzard and King
Figure 44: Estimated Revenue Growth in Console
Segment from 2017 to 2024
As the acquisition of King Digital Entertainment closed at Feb 2016 and from
Q1 2016, the financial results of King Digital Entertainment will be consolidated
into the financial statements published by Activision Blizzard. For projection
purpose, I backup data from 2012 to 2015 to show the comparison between
Activision Blizzard and King, and then consolidate the financial results together
in order to identify the influence of King’s acquisition on Activision Blizzard’s
financial statement. For instance, after the consolidation, the deferred revenue
was projected to decrease as Days as Deferred Revenue Outstanding or as the
percentage of total revenue due to the lower deferred revenue metric from King.
Revenue Model
Before the release of Q1 earning of 2016, the revenue of Activision Blizzard
was being breakdown into different platforms, including Online, PC, Priorgeneration Console, Next-generation Console, Mobile and Other. As the
acquisition of King Digital Entertainment closed at Feb 2016, Activision
Blizzard decided to change the breakdown structure, by merging Online and PC
together to PC2 and merging Prior-generation Console and Next-generation
Console into Console.
So I projected the revenue from each platform and summed them together to
reach the total revenue. For each platform, the revenue growth has its particular
trend and is projected based on different factor.
Figure 45: Estimated Revenue Growth in PC2 Segment
from 2017 to 2024
• PC2: The revenue growth of PC will be optimistic as the majority of
Activision Blizzard’s top franchises will be beneficial from the tailwind of
Esport and the increasing popularity of current and incoming franchises. Also
the upcoming movies will assist the organic growth of PC2 revenu as well.
However, the high growth potential will be partially offset by the declining
popularity of the World of Warcraft.
• Console: As 90% of the competitive gaming is performed on PC, the revenue
growth of console segment will not be as fast as PC2 based on my projection.
However, each time when the life cycle of new console kicks in, the revenue in
this segment also will increase. With the potential benefit from visual reality
technology, I believe the growth rate of Console segment will be closed to 3%
going into perpetuity.
• Total Mobile and Ancillary: This segment represents the biggest growth
potential for Activision Blizzard as the industry of smart phone app developers
is projected to growth at an average rate of 28.5% each year until 2021. King
UOIG 16
Figure 46: Estimated Revenue Growth in Mobile and
Ancillary Segment from 2017 to 2024
Digital Entertainment was the No.1 market share holder in this industry, with a
market share of 14.9%, and I believe it will help Activision Blizzard to conquer
this new territory
• Other: In this segment, revenue is generated from media networks, studios,
and distribution businesses. As Activision Blizzard established its own studio
and started to create movies based on its franchises, I expect that this segment
will grow rapidly as movie blockbusters, at average, have been very successful
during the last few years, especially for those franchises which already have user
basis. Accordingly, this segment has the second highest growth rate into
perpetuity.
Net Working Capital Model:
Figure 47: Estimated Cost of Good Sold from 2017 to
2024 (Millions)
Depreciation
The depreciation was projected by taking the consolidated historical trend as a
starting point and then adjusted it as the percentage of revenue. Due to the fact
that Activision Blizzard does not need too many depreciable assets for business
operating purpose, the depreciation was projected to only trend up slightly until
2024 as follow the guideline provided by management team that capital
expenditures will slightly increase.
Capital Expenditure and Acquisitions
The capital expenditure was projected to slightly increase due to the guidance
form management that Activision Blizzard would continue to invest in highquality franchise creation and R&D research. Accordingly, the underlining
assumption is that the company needs to spend some capital expenditures in
order to keep up with the R&D investment.
Figure 48: Estimated SG&A from 2017 to 2024
(Millions)
The acquisition expense was not projected due to three primary factors.
 The acquisition was very rare to happen. The only acquisition conducted by
Activision Blizzard was the acquisition of King Digital Entertainment Inc.
during the last five years.
 Once an acquisition was reached, the revenue, as well as other financial
metrics, needs to be reworked, resulting in increasing uncertainty and
difficulty for projection purpose.
 Small acquisitions will likely have very slight impact on the evaluation.
Therefore, I decided not to project any acquisition happening in the model.
Inventory
Inventory was projected to decrease as the business of Activision Blizzard swift
from physical product to digital products, resulting in less inventory needed to
satisfy customers. Also because of the booming of mobile app and gaming
industry, Activision Blizzard was also going toward to this non-inventory
industry. That being said, the inventory was projected to decrease before going
into perpetuity.
Discounted Cash Flow Model
Cost of Goods Sold
The cost of goods sold was predicted to decrease based on the fact that
Activision Blizzard and its management team are determined to lower the
overall cost and achieve high profitability. Therefore, I projected the cost of
goods sold will decrease by 4.5% in the next 10 years before going to perpetuity.
UOIG 17
Selling, General and Administrative Costs
Figure 49: Beta Analysis
It was difficult to project the SG&A expenses due to the lack of guideline and
various factors that could potentially affect the SG&A expenses. In 2014, one of
the primary SG&A expense was relative to the acquisition of King. Because of
the close of King’s acquisition and no acquisition being projected going
forward, I decided to trend down the SG&A slightly, only decreasing by roughly
1.5% in the next 10 years.
BETA
Cash Adjusted
Beta
1 Year Daily Beta
1.07
1.28
0.10
30.0%
3 Year Daily Beta
1.09
1.31
0.07
60.0%
5 Year Daily Beta
0.87
1.05
0.23
0.0%
3 Year Weekly Beta
1.13
1.36
0.16
0.0%
5 Year Weekly Beta
0.90
1.08
0.10
0.0%
Vascek - Comps
1.21
1.45
-
0.0%
Vasicek - ETF
1.28
1.54
-
0.0%
Hamada - Comps
1.37
1.64
-
5.0%
Hamada - ETF
1.30
1.57
-
5.0%
Beta
1.330
The Beta was calculated by running the regression on Activision Blizzard’s
stock against the return of the market, which is the S&P 500, for the one year
daily, three year daily, five year daily, three year weekly and five year weekly.
ESTIMATE
SE Weighting
FINAL BETA
Figure 50: Final Price Target
Comparable Price Target
DCF Price Target
Final Price Target
Undervalued
$40.46
$40.08
20%
80%
$ 40.16
10.54%
100.00%
Discounted Cash Flow Assumptions
Overall the betas generated by running regressions against the S&P 500 had
small standard errors, which represents consistency and high quality of a Beta.
Accordingly, I decided to weight 60% on the Three-Year Daily Beta, which is
the CFA standard and also has the smallest standard error. I weighted another
30% on One-Year Daily Beta since it has small standard error and reflect the
current structure change better than the three-year daily Beta. The Three-Year
Daily Hamada-ETF Beta and Hamada-Comps Beta both received 5% weighting
in order to take the industrial trend into consideration.
All Betas need to be adjusted by cash due to the massive non-operating cash
hold by Activision Blizzard. After the adjustment, the final Beta for Activision
Blizzard arrived at 1.330
Terminal Growth Rate
The terminal growth rate was calculated by terminal WACC times the
reinvestment rate in the terminal year, ending up reaching the terminal growth
rate of 2.24%.
Figure 52: Price Targets and Recommendation from
Major Investment Banks
Recommendation
As the acquisition of Major League Gaming and King Digital Entertainment Inc
and the establishment of Activision Blizzard Studio are both online, Activision
Blizzard is well positioned to boost its top and bottom line tremendously in the
next few years. Especially taking the consideration of massive successful
franchises possessed by Activision Blizzard, we can be confident to predict that
the company would enter the next period of growth with its fundamental valuefocus business model.
With a 20% weighting assigned on comparable analysis and an 80% weighting
on Discounted Cash Flow analysis, a target price of $40.16 was reached and
represented an undervaluation of 10.54%.
Source: Wall Street Journal
Therefore, as both internal and external factors will play in the favor of
Activision Blizzard, I highly believe in the long-term success of the company
and recommend a Buy for both Tall Firs and DADCO portfolio.
UOIG 18
05/13/2016
Appendix 1 – Comparable Analysis
Comparables Analysis
ATVI
Activision
Blizzard Inc.
($ in millions)
Stock Characteristics
Current Price
Beta
Max
$103.26
1.10
Min
$2.38
0.83
Median
$60.76
1.03
Weight Avg.
$48.03
1.02
EA
Electronic Art
TTWO
Take-Two
Interactive
$36.33
1.10
50.00%
$61.85
1.05
25.00%
$34.18
1.07
ZNGA
Zynga Inc
15.00%
DIS
Walt Disney
Company
CMCSA
Comcast
Corporation
$2.38
0.83
5.00%
$103.26
1.03
5.00%
$60.76
0.97
Size
Short-Term Debt
Long-Term Debt
Cash and Cash Equivalent
Non-Controlling Interest
Preferred Stock
Diluted Basic Shares
Market Capitalization
Enterprise Value
4,563.00
51,515.00
5,628.00
4,130.00
2,444.12
172,523.54
200,380.52
1,070.00
111.26
2,220.47
1,150.47
3,229.00
932.97
20,341.51
17,112.51
434.10
3,214.40
2,573.60
300.00
537.95
27,505.97
28,880.87
4,078.00
5,384.00
744.58
27,050.65
25,744.65
3,229.00
328.88
20,341.51
17,112.51
1,215.00
111.26
3,802.99
2,587.99
1,070.00
932.97
2,220.47
1,150.47
4,563.00
12,773.00
4,269.00
4,130.00
1,670.77
172,523.54
189,720.54
4,119.00
51,515.00
5,628.00
1,870.00
2,444.12
148,504.52
200,380.52
Growth Expectations
% Revenue Growth 2016E
% Revenue Growth 2017E
% EBITDA Growth 2016E
% EBITDA Growth 2017E
% EPS Growth 2016E
% EPS Growth 2017E
34.62%
10.61%
141.10%
98.70%
49.64%
217.60%
4.50%
4.80%
8.90%
2.70%
0.00%
6.90%
6.90%
7.60%
14.00%
7.10%
13.60%
9.70%
9.38%
8.29%
37.62%
24.39%
12.44%
44.44%
34.62%
10.61%
45.39%
10.61%
49.64%
11.54%
6.90%
7.60%
14.00%
14.90%
14.90%
17.30%
18.10%
10.30%
34.00%
7.10%
14.70%
9.70%
4.50%
9.40%
141.10%
98.70%
0.00%
217.60%
7.70%
4.80%
8.90%
2.70%
13.60%
6.90%
6.8%
5.2%
10.2%
4.5%
12.6%
7.5%
72.83%
31.03%
33.32%
23.58%
16.51%
.47%
5.65%
1.48%
48.80%
21.54%
30.81%
12.17%
62.34%
21.76%
25.35%
16.47%
68.80%
31.03%
32.74%
21.26%
72.83%
30.28%
33.32%
23.58%
48.80%
16.29%
18.57%
12.17%
70.98%
0.47%
5.65%
1.48%
45.02%
27.98%
30.81%
17.32%
16.51%
21.54%
33.26%
10.95%
$2,749.00
0.28
2.11
62.08
0.00
$26.00
15.93
$178.09
0.02
0.16
37.44
$199.00
0.16
1.98
10.33
$26.00
62.08
$20.97
15.93
$0.00
-
$448.00
0.09
1.00
38.85
$2,749.00
0.28
2.11
9.59
$79,284.00
$25,430.00
$17,076.00
$26,371.00
$9,784.00
$9,401.00
$731.10
$518.90
$3.40
$41.30
$10.80
$0.02
$4,844.00
$3,528.00
$1,467.00
$1,614.00
$1,142.00
$97.00
$9,770.07
$3,987.19
$2,451.36
$3,085.60
$1,550.72
$773.95
$6,278.53
$4,319.45
$1,948.51
$2,055.80
$1,334.77
$104.71
$4,844.00
$3,528.00
$1,467.00
$1,614.00
$1,142.00
$97.00
$1,799.00
$878.00
$293.00
$334.00
$219.00
$35.00
$731.10
$518.90
$3.40
$41.30
$10.80
$0.02
$56,489.00
$25,430.00
$15,806.00
$17,407.00
$9,784.00
$4,933.00
$79,284.00
$13,087.00
$17,076.00
$26,371.00
$8,683.00
$9,401.00
4.10x
15.31x
338.37x
27.86x
27.87x
205.60x
1.44x
2.22x
8.83x
7.60x
8.66x
17.10x
2.53x
4.85x
11.73x
10.60x
11.81x
17.63x
2.66x
4.63x
59.98x
12.34x
13.34x
45.82x
4.10x
5.96x
13.21x
12.52x
13.20x
20.27x
3.53x
4.85x
11.66x
10.60x
11.28x
17.81x
1.44x
2.95x
8.83x
7.75x
8.66x
17.37x
1.57x
2.22x
338.37x
27.86x
27.87x
205.60x
3.36x
7.46x
12.00x
10.90x
15.21x
17.63x
2.53x
15.31x
11.73x
7.60x
11.81x
17.10x
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Interest Expense
Debt/EV
Leverage Ratio
Interest Coverage Ratio
Operating Results
Revenue
Gross Profit
EBIT
EBITDA
Net Income
Capital Expenditures
Multiples
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
UOIG 19
05/13/2016
Appendix 2 – Revenue Model
Revenue Model
In millions
PC2
Q1
2011A
2012A
1639.00
1661.00
2013A
2014A
2015A
Q2
03/31/2016A 06/30/2016E
Q3
Q4
09/30/2016E
12/31/2016E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
1252.00
1418.00
1499.00
400.00
462.50
430.80
499.10
1792.40
2053.61
2270.74
2465.41
2627.46
2773.89
2914.61
3047.90
1.34% (24.62%)
13.26%
5.71%
3.63%
25.00%
20.00%
15.00%
19.57%
14.57%
10.57%
8.57%
6.57%
5.57%
5.07%
4.57%
3179.66
4.32%
32.17%
32.14%
27.49%
32.40%
32.08%
24.31%
28.55%
29.43%
29.84%
30.08%
30.09%
29.99%
29.85%
29.67%
29.51%
2150.00
2391.00
765.00
617.70
455.70
774.61
2613.00
2816.42
2993.42
3151.62
3286.66
3411.06
3531.63
3647.64
3758.34
(9.63%)
11.21%
.92%
10.50%
8.50%
10.50%
9.28%
7.78%
6.28%
5.28%
4.28%
3.78%
3.53%
3.28%
3.03%
51.27%
52.58%
43.27%
33.93%
37.73%
41.62%
40.37%
39.34%
38.45%
37.64%
36.88%
36.17%
35.51%
34.88%
2006.01
2206.61
2416.24
2633.70
2857.57
3086.17
10.50%
10.00%
9.50%
9.00%
8.50%
8.00%
25.27%
26.12%
26.97%
27.82%
28.64%
% Growth
11.25%
% of Total Revenue
34.47%
34.21%
27.32%
Console Total
2439.00
2186.00
2379.00
% Growth
4.68% (10.37%)
8.83%
45.02%
51.91%
48.77%
703.00
629.00
433.00
418.00
243.00
226.80
340.60
636.85
1447.25
1628.16
1815.39
68.18% (10.53%) (31.16%)
(3.46%)
182.56%
320.00%
160.00%
135.00%
246.23%
12.50%
11.50%
9.82%
8.96%
16.70%
15.89%
25.36%
31.02%
23.05%
23.34%
23.86%
24.47%
407.00
356.00
47.00
120.38
116.00
142.50
425.88
479.12
529.43
574.43
611.77
648.47
684.14
718.35
750.67
26.01% (12.53%)
(2.08%)
5.60%
45.00%
25.00%
19.63%
12.50%
10.50%
8.50%
6.50%
6.00%
5.50%
5.00%
4.50%
6.94%
6.78%
6.87%
6.96%
7.01%
7.01%
7.01%
7.01%
6.99%
6.97%
$2,053.06 $6,278.53
$6,977.30
$7,608.98
11.13%
9.05%
% of Total Revenue
Total Mobile and Ancillary
% Growth
% of Total Revenue
51.29%
418.00
10.58%
8.79%
14.48%
13.72%
Other
259.00
306.00
323.00
% Growth
5.56%
18.15%
5.56%
5.45%
6.30%
7.05%
% of Total Revenue
Total Revenue
% Growth
7.63%
3.23%
8.43%
8.64%
$4,755.00 $4,856.00 $4,583.00 $4,408.00 $4,664.00
$1,455.00
$1,427.38
$1,343.10
-
-
-
6.93%
2.12%
(5.62%)
9.23%
(3.82%)
5.81%
-
34.62%
$8,197.47 $8,732.50 $9,249.66 $9,764.08 $10,271.45 $10,774.84
7.73%
6.53%
5.92%
5.56%
5.20%
4.90%
ARPS: Average Revenue per Subscribers. It is calculated as the average of four quarters in a fiscal year
King Digital Entertainment
Mobile and ancillary
% Growth
63.90
164.41
1884.30
- 157.29% 1046.10%
2269.40
2011.00
542.23
469.44
486.94
447.17
1945.78
20.44% (11.39%)
(3.00%)
(4.00%)
(3.00%)
(3.00%)
(3.24%)
UOIG 20
05/13/2016
Appendix 3 – Working Capital Model
Days in Year
366
365
365
365
Activision Blizzard
Total Revenue
Current Assets
Accounts Receivable
Days Sales Outstanding A/R
% of Revenue
Inventory
Days Inventory Outstanding
% of Revenue
Short-term Investment
Days Short-term Investment Outstanding
% of Revenue
Software Development
Days Software Development Outstanding
% of Revenue
Intellectual Property Licneses
Days IPL Outstanding
% of Revenue
Deferred Income Taxes
Days Deferred Income Taxes Outstanding
% of Revenue
Other Current Assets
Days Other Current Assets Outstanding
% of Revenue
Total Current Assets
% of Revenue
Current Liabilities
Accounts Payable
Days Payable Outstanding
% of Revenue
Deferred Revenue
Days Deferred Revenue Outstanding
% of Revenue
Accrued Expenses and Other Liabilities
% of Revenue
Current Portion of Long-term Liability
% of Revenue
Total Current Liabilities
% of Revenue
Current Ratio
366
365
365
365
Working Capital Model
($ in millions)
Days in Year
2013A
2014A
2015A
$4,856.00 $4,583.00 $4,408.00 $4,664.00
707.00
515.00
659.00
679.00
53.29
41.02
54.57
53.14
14.56%
11.24%
14.95%
14.56%
209.00
171.00
123.00
128.00
49.47
43.86
31.29
31.36
4.30%
3.73%
2.79%
2.74%
416.00
33.00
10.00
8.00
31.35
2.63
0.83
0.63
8.57%
.72%
.23%
.17%
164.00
367.00
452.00
336.00
12.36
29.23
37.43
26.30
3.38%
8.01%
10.25%
7.20%
11.00
11.00
5.00
30.00
0.83
0.88
0.41
2.35
.23%
.24%
.11%
.64%
487.00
321.00
36.71
25.57
10.03%
7.00%
321.00
413.00
444.00
383.00
24.19
32.89
36.76
29.97
6.61%
9.01%
10.07%
8.21%
$2,315.00 $1,831.00 $1,693.00 $1,564.00
47.67%
39.95%
38.41%
33.53%
343.00
355.00
325.00
284.00
81.41
91.06
82.67
69.57
7.06%
7.75%
7.37%
6.09%
1657.00
1389.00
1797.00
1702.00
124.89
110.62
148.80
133.20
34.12%
30.31%
40.77%
36.49%
652.00
636.00
625.00
625.00
13.43%
13.88%
14.18%
13.40%
25
0.55%
$2,652.00 $2,405.00 $2,747.00 $2,611.00
54.61%
52.48%
62.32%
55.98%
87.29%
76.13%
61.63%
59.90%
($ in millions)
Total Revenue
Current Assets
Accounts Receivable
% of Revenue
% of Revenue
Current Liabilities
Accounts Payable
% of Revenue
Income Tax Payable
Days Charges Outstanding
% of Revenue
Other Liabilities
% of Revenue
% of Revenue
Current Ratio
366
365
365
365
Consolidate
2012A
Days in Year
2012A
2013A
2014A
2015A
$164.41 $1,880.00 $2,261.00 $2,011.00
33.40
74.35
20.32%
$33.40
20.32%
218.26
42.37
11.61%
$218.26
11.61%
332.14
53.62
14.69%
$332.14
14.69%
197.53
35.85
9.82%
$197.53
9.82%
31.94
19.43%
2.05
1.25%
39.67
24.13%
$73.66
44.80%
172.10
108.68
9.15%
118.72
74.97
6.31%
317.29
16.88%
$608.11
32.35%
137.63
71.57
6.09%
232.63
120.97
10.29%
404.58
17.89%
$774.84
34.27%
101.32
60.73
5.04%
167.57
100.44
8.33%
329.18
16.37%
$598.07
29.74%
45.34%
35.89%
42.87%
33.03%
($ in millions)
Total Revenue
2012A
2013A
2014A
2015A
$5,020.41 $6,463.00 $6,669.00 $6,675.00
Current Assets
Accounts Receivable
740.40
733.26
991.14
876.53
53.98
41.41
54.25
47.93
% of Revenue
14.75%
11.35%
14.86%
13.13%
Inventory
209.00
171.00
123.00
128.00
31.19
21.01
22.26
% of Revenue
4.16%
2.65%
1.84%
1.92%
416.00
33.00
10.00
8.00
Days Short-term Investment Outstanding30.33
1.86
0.55
0.44
% of Revenue
8.29%
.51%
.15%
.12%
164.00
367.00
452.00
336.00
Days Software Development Outstanding11.96
20.73
24.74
18.37
% of Revenue
3.27%
5.68%
6.78%
5.03%
11.00
11.00
5.00
30.00
0.80
0.62
0.27
1.64
% of Revenue
.22%
.17%
.07%
.45%
487.00
321.00
Days Deferred Income Taxes Outstanding36.71
25.57
% of Revenue
9.70%
4.97%
321.00
413.00
444.00
383.00
Days Other Current Assets Outstanding 23.40
23.32
24.30
20.94
% of Revenue
6.39%
6.39%
6.66%
5.74%
$2,348.40 $2,049.26 $2,025.14 $1,761.53
% of Revenue
46.78%
31.71%
30.37%
26.39%
Current Liabilities
Accounts Payable
374.94
527.10
462.63
385.32
96.15
79.02
67.01
% of Revenue
7.47%
8.16%
6.94%
5.77%
Deferred Revenue
1657.00
1389.00
1797.00
1702.00
Days Deferred Revenue Outstanding 120.80
78.44
98.35
93.07
% of Revenue
33.01%
21.49%
26.95%
25.50%
Accrued Expenses and Other Liabilities 654.05
754.72
857.63
792.57
% of Revenue
13.03%
11.68%
12.86%
11.87%
39.67
342.29
404.58
329.18
% of Revenue
.79%
5.30%
6.07%
4.93%
$2,652.00 $2,405.00 $2,747.00 $2,611.00
% of Revenue
54.61%
52.48%
62.32%
55.98%
Current Ratio
88.55%
85.21%
73.72%
67.47%
UOIG 21
05/13/2016
Appendix 4 – Working Capital Model (Continue)
Days in Year
365
366
365
365
365
($ in millions)
Total Revenue
Current Assets
Accounts Receivable
% of Revenue
Inventory
% of Revenue
Days Short-term Investment Outstanding
% of Revenue
Days Software Development Outstanding
% of Revenue
% of Revenue
Days Deferred Income Taxes Outstanding
% of Revenue
Days Other Current Assets Outstanding
% of Revenue
% of Revenue
Current Liabilities
Accounts Payable
% of Revenue
Deferred Revenue
Days Deferred Revenue Outstanding
% of Revenue
Accrued Expenses and Other Liabilities
% of Revenue
% of Revenue
% of Revenue
2011A
2012A
2014A
2015A
92
92
91
Q1
Q2
Q3
Q4
03/31/2016A
06/30/2016E
09/30/2016E
12/31/2016E
366
2016E
365
2017E
365
2018E
365
2019E
366
2020E
365
2021E
365
2022E
365
2023E
366
2024E
$4,755.00 $4,856.00 $4,583.00 $4,408.00 $4,664.00
$1,455.00
$1,427.38
$1,343.10
$2,053.06 $6,278.53 $6,944.90 $7,536.53 $8,078.05 $8,559.88 $9,017.72 $9,453.35
$9,874.92 $10,285.44
649.00
707.00
515.00
659.00
679.00
49.82
53.29
41.02
54.57
53.14
13.65%
14.56%
11.24%
14.95%
14.56%
144.00
209.00
171.00
123.00
128.00
32.36
49.47
43.86
31.29
31.36
3.03%
4.30%
3.73%
2.79%
2.74%
360.00
416.00
33.00
10.00
8.00
27.63
31.35
2.63
0.83
0.63
7.57%
8.57%
.72%
.23%
.17%
137.00
164.00
367.00
452.00
336.00
10.52
12.36
29.23
37.43
26.30
2.88%
3.38%
8.01%
10.25%
7.20%
22.00
11.00
11.00
5.00
30.00
1.69
0.83
0.88
0.41
2.35
.46%
.23%
.24%
.11%
.64%
507.00
487.00
321.00
38.92
36.71
25.57
10.66%
10.03%
7.00%
396.00
321.00
413.00
444.00
383.00
30.40
24.19
32.89
36.76
29.97
8.33%
6.61%
9.01%
10.07%
8.21%
$2,215.00 $2,315.00 $1,831.00 $1,693.00 $1,564.00
46.58%
47.67%
39.95%
38.41%
33.53%
383.00
23.95
26.32%
102.44
20.00
7.04%
296.00
18.51
20.34%
354.00
22.14
24.33%
$1,135.44
78.04%
365.44
23.55
25.60%
98.76
20.50
6.92%
302.54
19.50
21.20%
343.66
22.15
24.08%
$1,110.40
77.79%
338.02
23.15
25.17%
92.33
20.50
6.87%
262.78
18.00
19.57%
321.18
22.00
23.91%
$1,014.31
75.52%
513.35
513.35
531.34
535.31
529.51
536.17
541.69
541.96
22.75
29.93
27.93
25.93
23.93
22.93
21.93
20.93
25.00%
8.18%
7.65%
7.10%
6.55%
6.26%
6.01%
5.73%
139.65
139.65
150.05
158.09
164.44
168.54
172.59
175.89
20.00
26.02
25.52
25.02
24.52
24.02
23.52
23.02
6.80%
2.22%
2.16%
2.10%
2.04%
1.97%
1.91%
1.86%
383.54
383.54
433.02
478.17
521.37
560.32
604.26
646.40
17.00
22.36
22.76
23.16
23.56
23.96
24.46
24.96
18.68%
6.11%
6.24%
6.34%
6.45%
6.55%
6.70%
6.84%
507.62
507.62
568.75
623.39
674.82
720.14
765.67
807.84
22.50
29.59
29.89
30.19
30.49
30.79
30.99
31.19
24.73%
8.09%
8.19%
8.27%
8.35%
8.41%
8.49%
8.55%
$1,544.17 $1,544.17 $1,683.15 $1,794.96 $1,890.14 $1,985.17 $2,084.21 $2,172.09
75.21%
24.59%
24.24%
23.82%
23.40%
23.19%
23.11%
22.98%
539.07
19.93
5.46%
178.52
22.52
1.81%
688.75
25.46
6.97%
849.28
31.39
8.60%
$2,255.63
22.84%
559.95
19.93
5.44%
180.08
22.02
1.75%
729.48
25.96
7.09%
887.79
31.59
8.63%
$2,357.30
22.92%
390.00
343.00
355.00
325.00
284.00
87.65
81.41
91.06
82.67
69.57
8.20%
7.06%
7.75%
7.37%
6.09%
1472.00
1657.00
1389.00
1797.00
1702.00
112.99
124.89
110.62
148.80
133.20
30.96%
34.12%
30.31%
40.77%
36.49%
694.00
652.00
636.00
625.00
625.00
14.60%
13.43%
13.88%
14.18%
13.40%
0.00
0.00
25.00
0.00
0.00
0.00%
0.00%
.55%
0.00%
0.00%
$2,556.00 $2,652.00 $2,405.00 $2,747.00 $2,611.00
53.75%
54.61%
52.48%
62.32%
55.98%
150.00
29.28
10.31%
1207.00
75.49
82.96%
901.00
61.92%
64.00
4.40%
$2,322.00
159.59%
144.52
30.00
10.13%
1117.08
72.00
78.26%
877.84
61.50%
262.64
4.60%
$2,402.08
168.29%
128.36
28.50
9.56%
1065.72
73.00
79.35%
812.58
60.50%
241.76
4.50%
$2,248.41
167.40%
199.01
199.01
206.85
209.65
209.10
204.75
206.79
207.67
28.50
37.18
35.18
33.18
31.18
29.18
28.18
27.18
9.69%
3.17%
2.98%
2.78%
2.59%
2.39%
2.29%
2.20%
1669.52
1669.52
1794.69
1885.63
1954.72
1995.49
2058.58
2106.22
74.00
97.32
94.32
91.32
88.32
85.32
83.32
81.32
79.50%
26.59%
25.84%
25.02%
24.20%
23.31%
22.83%
22.28%
1221.57
1221.57
1330.38
1421.11
1498.98
1562.71
1637.28
1706.92
59.50%
19.46%
19.16%
18.86%
18.56%
18.26%
18.16%
18.06%
328.49
328.49
342.52
349.09
349.94
345.13
345.55
343.34
4.00%
5.23%
4.93%
4.63%
4.33%
4.03%
3.83%
3.63%
$3,418.58 $3,418.58 $3,674.44 $3,865.48 $4,012.74 $4,108.08 $4,248.20 $4,364.16
166.51%
54.45%
52.91%
51.29%
49.67%
47.99%
47.11%
46.17%
207.54
26.18
2.10%
2146.04
79.32
21.73%
1773.17
17.96%
338.90
3.43%
$4,465.64
45.22%
205.92
25.18
2.00%
2172.94
77.32
21.13%
1836.60
17.86%
332.42
3.23%
$4,547.88
44.22%
48.90%
46.23%
45.11%
50.51%
51.83%
% of Accounts Receivable Quick
85%
% of Inventory Quick
65%
Current Ratio
2013A
91
86.66%
87.29%
76.13%
61.63%
59.90%
45.17%
45.17%
45.81%
46.44%
47.10%
48.32%
49.06%
49.77%
UOIG 22
05/13/2016
Appendix 5 – Discounted Cash Flow Model
Activision Blizzard
Discounted Cash Flow Analysis
($ in millions)
2013A
2014A
2015A
($ in millions)
Consolidate
2013A
2014A
2015A
($ in millions)
2013A
2014A
2015A
Total Revenue
$1,885.00
$2,262.00
$2,014.00
Total Revenue
$4,583.00
$4,408.00
$4,664.00
Total Revenue
$6,468.00
$6,670.00
% YoY Growth
1044.92%
20.00%
(10.96%)
% YoY Growth
(5.62%)
(3.82%)
5.81%
% YoY Growth
28.83%
3.12%
.12%
577.99
701.90
608.94
1423.00
1435.00
1490.00
Cost of Goods Sold
$2,000.99
$2,136.90
$2,098.94
Cost of Goods Sold
% Revenue
30.66%
31.03%
30.24%
$1,307.01
$1,560.10
$1,405.06
69.34%
68.97%
69.76%
473.43
639.64
523.23
25.12%
28.28%
25.98%
6.36
14.84
27.35
% Revenue
.34%
.66%
1.36%
Research and Development
110.50
177.93
198.44
Gross Profit
Gross Margin
Selling General and Administrative Expense
% Revenue
Depreciation and Amortization
% Revenue
Cost of Goods Sold
% Revenue
Gross Profit
Gross Margin
% Revenue
% Revenue
% Revenue
31.05%
32.55%
31.95%
$3,160.00
$2,973.00
$3,174.00
68.95%
67.45%
68.05%
1096.00
1129.00
1114.00
23.91%
25.61%
23.89%
108.00
90.00
95.00
2.36%
2.04%
2.04%
584.00
571.00
646.00
% Revenue
Gross Profit
Gross Margin
% Revenue
$6,678.00
30.94%
32.04%
31.43%
$4,467.01
$4,533.10
$4,579.06
69.06%
67.96%
68.57%
$1,569.43
$1,768.64
$1,637.23
24.26%
26.52%
24.52%
$114.36
$104.84
$122.35
% Revenue
1.77%
1.57%
1.83%
$694.50
$748.93
$844.44
12.65%
5.86%
7.87%
9.85%
12.74%
12.95%
13.85%
10.74%
11.23%
Other Expense
-
-
-
Other Expense
-
-
-
Other Expense
-
-
-
% Revenue
-
-
-
% Revenue
-
-
-
% Revenue
-
-
-
Earnings Before Interest & Taxes
$716.72
$727.69
$656.04
% Revenue
38.02%
32.17%
32.57%
% Revenue
Interest Expense
-
-
-
Interest Expense
% Revenue
-
-
-
% Revenue
Non-Operating Loss (Income)
% Revenue
Earnings Before Taxes
1.73
(42.35)
(21.19)
.09%
(1.87%)
(1.05%)
714.99
770.04
677.23
37.93%
34.04%
33.63%
146.68
193.42
159.01
20.51%
25.12%
23.48%
Net Income
$568.31
$576.62
$518.22
Net Margin
30.15%
25.49%
25.73%
6.36
14.84
27.35
% Revenue
Less Taxes (Benefits)
Tax Rate
Add Back: Depreciation and Amortization
Add Back: Interest Expense*(1-Tax Rate)
$1,372.00
$1,183.00
$1,319.00
29.94%
26.84%
28.28%
53.00
202.00
198.00
1.16%
4.58%
4.25%
Net Interest (Income)
-
-
-
% Revenue
-
-
-
% Revenue
3.03%
2.96%
1.73
(42.35)
(21.19)
.03%
(.63%)
(.32%)
2,033.99
1,751.04
1,798.23
% Revenue
31.45%
26.25%
26.93%
309.00
146.00
229.00
455.68
339.42
388.01
23.43%
14.88%
20.43%
22.40%
19.38%
21.58%
Net Income
$1,010.00
$835.00
$892.00
Net Income
$1,578.31
$1,411.62
$1,410.22
Net Margin
22.04%
18.94%
19.13%
Net Margin
24.40%
21.16%
21.12%
108.00
90.00
95.00
114.36
104.84
122.35
40.58
171.94
157.55
$1,158.58
$1,096.94
$1,144.55
Tax Rate
30.49%
26.15%
27.09%
% Revenue
25.28%
24.89%
24.54%
218.26
332.14
197.53
Current Assets
1,831.00
1,693.00
1,564.00
11.58%
14.68%
9.81%
% Revenue
39.95%
38.41%
598.07
.82%
% Revenue
29.70%
$198.00
% Revenue
1,121.00
Operating Cash Flow
774.84
$202.00
24.04%
$545.57
34.25%
$53.00
981.00
$591.46
608.11
29.58%
Interest Expense
22.25%
$574.67
32.26%
$1,975.04
28.65%
1,319.00
Operating Cash Flow
% Revenue
$1,910.69
32.29%
28.78%
-
Current Liabilities
$2,088.72
% Revenue
% Revenue
-
% Revenue
-
Current Assets
% Revenue
Tax Rate
40.58
171.94
157.55
$1,733.25
$1,688.40
$1,690.12
% Revenue
26.80%
25.31%
25.31%
Current Assets
2,049.26
2,025.14
1,761.53
33.53%
% Revenue
31.68%
30.36%
26.38%
Operating Cash Flow
Current Liabilities
2,405.00
2,747.00
2,611.00
Current Liabilities
3,013.11
3,521.84
3,209.07
% Revenue
52.48%
62.32%
55.98%
% Revenue
46.58%
52.80%
48.05%
Net Working Capital
($963.85)
($1,496.70)
($1,447.54)
% Revenue
(91.30%)
(29.85%)
(28.67%)
($289.85)
($532.85)
$49.16
74.00
107.00
111.00
1.14%
1.60%
1.66%
Net Working Capital
($389.85)
($442.70)
($400.54)
Net Working Capital
($574.00)
($1,054.00)
($1,047.00)
% Revenue
(20.68%)
(19.57%)
(19.89%)
% Revenue
(12.52%)
(23.91%)
(22.45%)
($52.85)
($52.85)
$42.16
($237.00)
($480.00)
$7.00
Change in Working Capital
74.00
107.00
111.00
1.61%
2.43%
2.38%
% Revenue
Acquisitions
-
17.96
3649.57
% Revenue
-
.27%
54.65%
-
-
-
% Revenue
-
-
-
% Revenue
Acquisitions
-
17.96
44.57
% Revenue
-
.79%
2.21%
Acquisitions
-
-
3605.00
% Revenue
-
-
77.29%
UOIG 23
05/13/2016
Appendix 6 – Discounted Cash Flow Model (Continue)
($ in millions)
Total Revenue
2011A
2012A
$4,755.00
2013A
2014A
2015A
$4,856.00
$4,583.00
$4,408.00
$4,664.00
Q1A
Q2E
Q3E
Q4E
2016
2016
2016
2016
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
$1,455.00
$1,427.38
$1,343.10
$2,053.06
$6,278.53
$6,977.30
$7,608.98
$8,197.47
$8,732.50
$9,249.66
$9,764.08
$10,271.45
$10,774.84
% YoY Growth
6.93%
2.12%
(5.62%)
(3.82%)
5.81%
-
-
-
-
34.62%
11.13%
9.05%
7.73%
6.53%
5.92%
5.56%
5.20%
4.90%
Cost of Goods Sold
1624.00
1542.00
1423.00
1435.00
1490.00
466.12
443.20
414.35
635.42
$1,959.09
2,142.24
2,298.14
2,434.89
2,550.15
2,654.92
2,763.52
2,866.04
2,963.40
% Revenue
Gross Profit
Gross Margin
% Revenue
% Revenue
% Revenue
34.15%
31.75%
31.05%
32.55%
31.95%
32.04%
31.05%
30.85%
30.95%
31.20%
30.70%
30.20%
29.70%
29.20%
28.70%
28.30%
27.90%
27.50%
$3,131.00
$3,314.00
$3,160.00
$2,973.00
$3,174.00
$988.88
$984.18
$928.75
$1,417.63
$4,319.45
$4,835.06
$5,310.84
$5,762.58
$6,182.35
$6,594.73
$7,000.56
$7,405.41
$7,811.44
65.85%
68.25%
68.95%
67.45%
68.05%
67.96%
68.95%
69.15%
69.05%
68.80%
69.30%
69.80%
70.30%
70.80%
71.30%
71.70%
72.10%
72.50%
1001.00
1139.00
1096.00
1129.00
1114.00
328.00
328.30
315.63
482.47
1,454.39
1,602.31
1,732.15
1,849.72
1,952.98
2,050.14
2,144.64
2,235.53
2,323.54
21.05%
23.46%
23.91%
25.61%
23.89%
22.54%
23.00%
23.50%
23.50%
23.16%
22.96%
22.76%
22.56%
22.36%
22.16%
21.96%
21.76%
21.56%
148.00
120.00
108.00
90.00
95.00
24.88
24.55
23.37
34.49
107.29
121.33
134.59
147.46
159.71
171.94
184.43
197.10
209.99
3.11%
2.47%
2.36%
2.04%
2.04%
1.71%
1.72%
1.74%
1.68%
1.71%
1.74%
1.77%
1.80%
1.83%
1.86%
1.89%
1.92%
1.95%
629.00
604.00
584.00
571.00
646.00
175.00
186.99
177.29
269.98
809.25
913.27
1,011.17
1,105.77
1,195.41
1,284.70
1,356.15
1,426.62
1,496.54
13.23%
12.44%
12.74%
12.95%
13.85%
12.03%
13.10%
13.20%
13.15%
12.89%
13.09%
13.29%
13.49%
13.69%
13.89%
13.89%
13.89%
13.89%
Other Expense
25.00
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
% Revenue
.53%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$1,328.00
$1,451.00
$1,372.00
$1,183.00
$1,319.00
$461.00
$444.34
$412.47
$630.70
$1,948.51
$2,198.16
$2,432.93
$2,659.62
$2,874.25
$3,087.95
$3,315.34
$3,546.16
$3,781.37
27.93%
29.88%
29.94%
26.84%
28.28%
31.68%
31.13%
30.71%
30.72%
31.03%
31.50%
31.97%
32.44%
32.91%
33.38%
33.95%
34.52%
35.09%
Interest Expense
-
-
53.00
202.00
198.00
52.00
53.53
51.71
79.04
236.28
234.67
195.04
144.54
84.12
15.10
-
-
-
% Revenue
-
-
1.16%
4.58%
4.25%
3.57%
3.75%
3.85%
3.85%
3.76%
3.36%
2.56%
1.76%
.96%
.16%
-
-
-
-
-
% Revenue
(3.00)
(7.00)
-
-
-
-
-
-
% Revenue
(.06%)
(.14%)
-
-
-
-
-
-
1,331.00
1,458.00
1,319.00
981.00
1,121.00
409.00
390.82
360.76
551.66
1,712.23
1,963.49
2,237.89
2,515.08
2,790.13
3,072.84
3,315.34
3,546.16
3,781.37
% Revenue
27.99%
30.02%
28.78%
22.25%
24.04%
28.11%
27.38%
26.86%
26.87%
27.27%
28.14%
29.41%
30.68%
31.95%
33.22%
33.95%
34.52%
35.09%
246.00
309.00
309.00
146.00
229.00
73.00
91.84
82.97
129.64
377.46
440.70
511.24
584.62
659.72
738.85
807.11
873.94
943.25
18.48%
21.19%
23.43%
14.88%
20.43%
17.85%
23.50%
23.00%
23.50%
22.04%
22.44%
22.84%
23.24%
23.64%
24.04%
24.34%
24.64%
24.94%
Net Income
$1,085.00
$1,149.00
$1,010.00
$835.00
$892.00
$336.00
$298.97
$277.78
$422.02
$1,334.77
$1,522.79
$1,726.65
$1,930.46
$2,130.42
$2,333.99
$2,508.23
$2,672.22
$2,838.12
Net Margin
22.82%
23.66%
22.04%
18.94%
19.13%
23.09%
20.95%
20.68%
20.56%
21.26%
21.82%
22.69%
23.55%
24.40%
25.23%
25.69%
26.02%
26.34%
148.00
120.00
108.00
90.00
95.00
24.88
24.55
23.37
34.49
107.29
121.33
134.59
147.46
159.71
171.94
184.43
197.10
209.99
40.58
171.94
157.55
42.72
40.95
39.82
60.47
183.95
182.00
150.48
110.95
64.23
11.47
0.00
0.00
0.00
Tax Rate
Operating Cash Flow
-
-
-
-
-
-
-
-
-
-
$1,233.00
$1,269.00
$1,158.58
$1,096.94
$1,144.55
$403.60
$364.47
$340.97
$516.98
$1,626.02
$1,826.12
$2,011.73
$2,188.86
$2,354.35
$2,517.40
$2,692.66
$2,869.32
$3,048.11
% Revenue
25.93%
26.13%
25.28%
24.89%
24.54%
27.74%
25.53%
25.39%
25.18%
25.90%
26.17%
26.44%
26.70%
26.96%
27.22%
27.58%
27.93%
28.29%
Current Assets
2,215.00
2,315.00
1,831.00
1,693.00
1,564.00
1,135.44
1,110.40
1,014.31
1,544.17
1,544.17
1,690.03
1,810.12
1,914.78
2,020.61
2,131.86
2,236.10
2,337.33
2,459.09
% Revenue
46.58%
47.67%
39.95%
38.41%
33.53%
78.04%
77.79%
75.52%
75.21%
24.59%
24.22%
23.79%
23.36%
23.14%
23.05%
22.90%
22.76%
22.82%
Current Liabilities
2,556.00
2,652.00
2,405.00
2,747.00
2,611.00
2,322.00
2,402.08
2,248.41
3,418.58
3,418.58
3,690.23
3,899.87
4,067.86
4,185.36
4,350.32
4,498.88
4,634.65
4,752.42
% Revenue
53.75%
54.61%
52.48%
62.32%
55.98%
159.59%
168.29%
167.40%
166.51%
54.45%
52.89%
51.25%
49.62%
47.93%
47.03%
46.08%
45.12%
44.11%
($341.00)
($337.00)
($574.00)
($1,054.00)
($1,047.00)
($1,186.56)
($1,291.68)
($1,234.11)
($1,874.41)
($1,874.41)
($2,000.21)
($2,089.75)
($2,153.08)
($2,164.74)
($2,218.46)
($2,262.79)
($2,297.32)
($2,293.33)
(7.17%)
(6.94%)
(12.52%)
(23.91%)
(22.45%)
(81.55%)
(90.49%)
(91.88%)
(91.30%)
(29.85%)
(28.67%)
(27.46%)
(26.27%)
(24.79%)
(23.98%)
(23.17%)
(22.37%)
(21.28%)
$4.00
($237.00)
($480.00)
$7.00
($139.56)
($105.13)
$57.58
($640.31)
($827.41)
($125.79)
($89.54)
($63.34)
($11.66)
($53.71)
($44.33)
($34.53)
111.00
24.01
24.27
22.56
33.88
104.71
119.85
134.51
149.01
163.10
177.39
192.14
207.26
222.80
2.07%
Net Working Capital
% Revenue
% Revenue
72.00
73.00
74.00
107.00
$3.99
1.51%
1.50%
1.61%
2.43%
2.38%
1.65%
1.70%
1.68%
1.65%
1.67%
1.72%
1.77%
1.82%
1.87%
1.92%
1.97%
2.02%
Acquisitions
-
-
-
-
3605.00
-
-
-
-
-
-
-
-
-
-
-
-
-
% Revenue
-
-
-
-
77.29%
-
-
-
-
-
-
-
-
-
-
-
-
-
$1,161.00
$1,192.00
$1,321.58
$1,469.94
($2,578.45)
Unlevered Free Cash Flow
Discounted Free Cash Flow
$519.15
$445.33
$260.83
$1,123.41
$519.15
$435.34
$249.26
$1,049.49
Discount Period
EBITDA
EBITDA Margin
EBITDA Growth
0
0.25
0.5
0.75
$2,348.72
$1,832.06
$1,966.76
$2,103.19
$2,202.91
$2,393.73
$2,544.85
$2,696.59
$2,821.32
$1,563.04
$1,532.40
$1,496.54
$1,431.52
$1,420.58
$1,379.25
$1,334.70
$1,275.30
1.75
2.75
3.75
4.75
5.75
6.75
7.75
8.75
$1,476.00
$1,571.00
$1,480.00
$1,273.00
$1,414.00
$485.88
$468.89
$435.84
$665.19
$2,055.80
$2,319.49
$2,567.52
$2,807.08
$3,033.96
$3,259.89
$3,499.77
$3,743.26
$3,991.36
31.04%
32.35%
32.29%
28.88%
30.32%
33.39%
32.85%
32.45%
32.40%
32.74%
33.24%
33.74%
34.24%
34.74%
35.24%
35.84%
36.44%
37.04%
6.44%
(5.79%)
(13.99%)
11.08%
NA
NA
NA
NA
45.39%
12.83%
10.69%
9.33%
8.08%
7.45%
7.36%
6.96%
6.63%
UOIG 24
05/13/2016
Appendix 7 – DCF Assumption
Discounted Free Cash Flow Assumptions
Tax Rate
Considerations
24.94% Terminal Growth Rate
Risk Free Rate
2.26%
1.83% Terminal Value
Cash Adjusted Beta
1.33 PV of Terminal Value
Market Risk Premium
6.45% Sum of PV Free Cash Flows
30,689
Avg. Industry Debt / Equity
13,872
Avg. Industry Tax Rate
12,209
Current Reinvestment Rate
9.50%
19.58%
264.91%
% Equity
86.90% Firm Value
26,082
Reinvestment Rate in Year 2024E
21.93%
% Debt
13.10% Total Debt
4,119
Implied Return on Capital in Perpetuity
10.31%
5,384
Terminal Value as a % of Total
53.2%
31,372
Implied 2016E EBITDA Multiple
12.7x
Cost of Debt
4.47% Cash & Cash Equivalents
CAPM
10.43% Market Capitalization
WACC
9.50% Fully Diluted Shares
Terminal Risk Free Rate
745
2.76% Implied Price
$42.13
Terminal CAPM
11.36% Current Price
$36.33
Terminal WACC
10.31% Undervalued
15.98%
Implied Multiple in Year 2024E
Free Cash Flow Growth Rate in Year 2024E
4.0x
2.53%
Additional Discounted Free Cash Flow Assumptions
Operating Cash % of Rev.
Operating Cash Estimate
Comparable Price Target
DCF Price Target
Final Price Target
Undervalued
2.00% Non-Operating Cash
5,290.72
93.28 Research Asset (5-year Average)
$40.46
$42.13
20%
80%
$ 41.80
15.06%
100.00%
861.45
UOIG 25
05/13/2016
Appendix 8 – Sensitivity Analysis
Implied Price
Undervalued/(Overvalued)
1.8%
2.3%
2.8%
3.3%
1.13
$44.05
$45.79
$47.78
$50.08
$52.77
1.23
$41.05
$42.50
$44.15
$46.03
$48.20
1.33
$38.43
$39.65
$41.03
$42.58
$44.36
1.43
$36.12
$37.16
$38.32
$39.62
$41.09
1.53
$34.07
$34.96
$35.95
$37.05
$38.28
Adjusted Beta
Adjusted Beta
1.3%
1.3%
1.8%
2.3%
2.8%
3.3%
1.53
(6.21%)
(3.76%)
(1.05%)
1.97%
5.37%
1.43
(0.57%)
2.29%
5.47%
9.06%
13.11%
1.33
5.78%
9.15%
12.93%
17.21%
22.10%
1.43
(0.57%)
2.29%
5.47%
9.06%
13.11%
1.53
(6.21%)
(3.76%)
(1.05%)
1.97%
5.37%
Implied Price
1.8%
2.3%
2.8%
3.3%
10.50%
$36.26
$37.39
$38.66
$40.09
$41.73
10.00%
$37.32
$38.50
$39.82
$41.31
$43.02
9.50%
$38.43
$39.65
$41.03
$42.58
$44.36
9.00%
$39.58
$40.86
$42.29
$43.91
$45.76
8.50%
$40.79
$42.11
$43.60
$45.28
$47.21
WACC
WACC
1.3%
1.3%
1.8%
2.3%
2.8%
3.3%
10.50%
(0.19%)
2.91%
6.40%
10.36%
14.88%
10.00%
2.73%
5.97%
9.60%
13.72%
18.42%
9.50%
5.78%
9.15%
12.93%
17.21%
22.10%
9.00%
8.96%
12.46%
16.39%
20.85%
25.94%
8.50%
12.26%
15.91%
20.01%
24.65%
29.95%
Implied Price
1.3%
1.8%
2.3%
2.8%
3.3%
3.76%
$36.75
$37.77
$38.90
$40.17
$41.60
3.26%
$37.55
$38.67
$39.91
$41.31
$42.90
2.76%
$38.43
$39.65
$41.03
$42.58
$44.36
2.26%
$39.40
$40.75
$42.27
$44.01
$46.01
1.76%
$40.47
$41.96
$43.66
$45.62
$47.89
Terminal Risk
Free Rate
Terminal Risk
Free Rate
1.3%
1.8%
2.3%
2.8%
3.3%
3.76%
1.16%
3.97%
7.09%
10.58%
14.52%
3.26%
3.36%
6.43%
9.86%
13.72%
18.09%
2.76%
5.78%
9.15%
12.93%
17.21%
22.10%
2.26%
8.45%
12.15%
16.35%
21.13%
26.64%
1.76%
11.39%
15.50%
20.18%
25.57%
31.82%
UOIG 26
05/13/2016
Appendix 9 – Sensitivity Analysis (Continue)
Implied Price
1.3%
1.8%
2.3%
2.8%
3.3%
28.9%
$38.53
$39.76
$41.15
$42.72
$44.51
26.9%
$38.48
$39.71
$41.09
$42.65
$44.43
24.9%
$38.43
$39.65
$41.03
$42.58
$44.36
22.9%
$38.38
$39.60
$40.97
$42.52
$44.29
20.9%
$38.33
$39.54
$40.91
$42.45
$44.21
Tax Rate
Tax Rate
1.3%
1.8%
2.3%
2.8%
3.3%
28.9%
6.07%
9.45%
13.26%
17.58%
22.51%
26.9%
5.92%
9.30%
13.10%
17.39%
22.30%
24.9%
5.78%
9.15%
12.93%
17.21%
22.10%
22.9%
5.64%
8.99%
12.76%
17.03%
21.90%
20.9%
5.50%
8.84%
12.60%
16.85%
21.70%
Additional Sensitivity Tables
Additional Senstivity Tables
1.8%
2.3%
2.8%
3.3%
31.9% $
38.43 $
39.65 $
41.03 $
42.58 $
44.36
26.9% $
38.43 $
39.65 $
41.03 $
42.58 $
44.36
21.9% $
38.43 $
39.65 $
41.03 $
42.58 $
44.36
16.9% $
38.43 $
39.65 $
41.03 $
42.58 $
44.36
11.9% $
38.43 $
39.65 $
41.03 $
42.58 $
44.36
Reinvestment
Rate in Year
2024E
Reinvestment
Rate in Year
2024E
1.3%
1.3%
1.8%
2.3%
2.8%
3.3%
31.9%
5.78%
9.15%
12.93%
17.21%
22.10%
26.9%
5.78%
9.15%
12.93%
17.21%
22.10%
21.9%
5.78%
9.15%
12.93%
17.21%
22.10%
16.9%
5.78%
9.15%
12.93%
17.21%
22.10%
11.9%
5.78%
9.15%
12.93%
17.21%
22.10%
Additional Sensitivity Tables
Additional Senstivity Tables
1.8%
2.3%
2.8%
3.3%
5.07% $
38.17 $
39.38 $
40.72 $
42.25 $
43.99
4.77% $
38.05 $
39.24 $
40.57 $
42.09 $
43.81
4.47% $
38.05 $
39.24 $
40.57 $
42.09 $
43.81
4.17% $
38.17 $
39.38 $
40.72 $
42.25 $
43.99
3.87% $
38.43 $
39.65 $
41.03 $
42.58 $
44.36
Cost of Debt
Cost of Debt
1.3%
1.3%
1.8%
2.3%
2.8%
3.3%
5.07%
5.1%
8.4%
12.1%
16.3%
21.1%
4.77%
5.4%
8.8%
12.5%
16.8%
21.6%
4.47%
5.8%
9.1%
12.9%
17.2%
22.1%
4.17%
6.1%
9.5%
13.3%
17.7%
22.6%
3.87%
6.5%
9.9%
13.8%
18.1%
23.1%
UOIG 27
05/13/2016
Appendix 10 – Sources
Activision Blizzard Investor Relation
Activision Blizzard Annual Reports
Activision Blizzard Earning Transcript
Activision Press Release
Factset
Fortune
Forbes
Google Finance
KPMG Tax Rate Table
Mojo Box Office
Newzoo E-Sport Industry Research
Sec.gov
Seeking Alpha
Statista
Tall Firs Portfolio Annual Report
The Superdata E-sport Market Brief
Wall Street Journal
Yahoo Finance
UOIG 28

Activision Blizzard - University of Oregon Investment Group

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