|Shares Out. (in M):||1,332||P/E||15.6x||14.5x|
|Market Cap (in M):||13,520||P/FCF||10.6x||10.1x|
|Net Debt (in M):||-2,830||EBIT||1,160||1,229|
I am recommending building a position in ATVI pre 4Q09 earnings release on Wednesday, February 10 for both SHORT TERM TRADERS and LONG TERM INVESTORS.
Activision Blizzard publishes online, personal computer, console, and hand-held games worldwide. The company develops and publishes video games, as well as maintains its proprietary online-game related service, Battle.net. The company's products cover various game categories, including action/adventure, action sports, racing, role-playing, simulation, first-person action, music, and strategy. Its products include World of Warcraft, Call of Duty, Guitar Hero, Tony Hawk, Spider-Man, X-Men, James Bond, and Transformers, as well as Diablo, StarCraft and Warcraft.
Short Term Investment Thesis:
|Key Titles:||Modern Warfare 2||Modern Warfare 2 (catalogue + downloadable content)|
|Prototype (new IP)||Call of Duty 7|
|Tony Hawk Ride||Singularity (new IP)|
|Marvel Ultimate Alliance 2||Tony Hawk 2|
|Blur (new IP)|
|New Action Game (new IP)|
|Blizzard Titles:||NONE||Starcraft 2|
|World of Warcraft: Cataclysm|
|World of Warcraft: Wrath of the Lich King (CHINA)|
|Music Titles:||Guitar Hero 5||Guitar Hero 6|
|DJ Hero||DJ Hero 2|
|Band Hero||Multiple Guitar Hero SKUs|
|Guitar Hero - Metallica|
|Guitar Hero - Van Halen|
|Guitar Hero - Smash Hits|
|Movie Titles:||Transformers 2||Shrek Forever After|
|X-Men: Wolverine||Dreamworks: How to Train Your Dragon|
|Monsters vs. Aliens||James Bond|
|Ice Age 3|
Long Term Investment Thesis
Key Value Drivers
|Blizzard Franchise (MMPORG)||Activision Publishing|
|FY10 Revenue||$ 1,281||FY10 Revenue||$ 3,250|
|EBIT Margin||45%||EBIT Margin||20%|
|EBIT||$ 577||EBIT||$ 652|
|Tax Rate||30%||Tax Rate||30%|
|EBIAT||$ 404||EBIAT||$ 456|
|Plus: D&A (50%)||$ 125||Plus: D&A (50%)||$ 125|
|Less: CapEx (50%)||$ (28)||Less: CapEx (50%)||$ (28)|
|Unlevered FCF||$ 501||Unlevered FCF||$ 554|
|Cap Rate||9.0%||Cap Rate||14.0%|
|Blizzard Value||$ 5,568||Activision Value||$ 3,957|
|Sum of the Parts|
|Blizzard Value||$ 5,568|
|Activision Value||$ 3,957|
|Less: Debt||$ -|
|Plus: Cash||$ 2,830|
|Diluted shares out||1,332|
|Value per Share||$ 9.28|
Product Sales (Publishing)
Subscription, Licensing & Other (Blizzard)
Total Net Revenue (non-GAAP)
Cost of Revenue (non-GAAP)
% Product Sales
Software Royalties & Amortization
% Total Net Revenue
Intellectual Property Licenses
% Total Net Revenue
% Subscription, Licensing & Other Rev.
Gross Income (non-GAAP)
% of Total Revenue
Sales & Marketing
% of Total Revenue
% of Total Revenue
EBIT (including stock comp)
Plus: Stock based comp
EBIT Margin (non-GAAP)
Plus: D&A - only true PP&E D&A Used
Unlevered Free Cash Flow
Unlevered FCF Yield
Adjusted EBITDA (excl. stock based comp)
EV / EBITDA
FY10 guidance that will be given on 4Q09 earnings report on Wednesday, February 9, after market close
|Subject||RE: SC II delayed?|
|Entry||02/10/2010 01:17 PM|
I'm curious Nails4, why are you super bearish on WoW?
|Subject||RE: SC II delayed?|
|Entry||02/10/2010 02:08 PM|
Thanks for your post... agree w/ Starcraft II risk for short term investors... I did have it in my risk factors... As a longer term investor, I'm OK stomaching a trade down due to a delay... Perhaps a good strategy for shorter term investors is to establish 50% position ahead of quarter and load up if it trades down due to the aforementioned risk scenario playing out... I'm sure the stock will get some support from value investors at $9...
|Subject||RE: RE: RE: SC II delayed?|
|Entry||02/10/2010 06:57 PM|
Thanks for your comments... I started doing my work on the name last fall w/ the hope that the low margin, but high revenue contributing music business would be weak over the holiday season due to a weak consumer and particularly tough comps (wall street estimates were a bit too high) after running so well for the past three years... I do agree with you that it is a shrinking franchise that has no shot of reaching its previous highs but it does have an attractive installed base that can be milked for profit... It was interesting to hear on today's call that Guitar Hero sales in FY09 was up for the XBOX360 and PS3 platforms... FY10 could benefit from the console price cuts in '09 as the casual PS2 gamer upgrades to the PS3 platform, but I'm not counting on that in my model... Demand is outstripping supply for the PS3 currently... Blueray is catching on, and PS3 actually has 60% market share (surpised me)... and Best Buy is pushing BlueRay hard, as its in their best interest... BlueRay DVD's had about the same floor space as regular DVDs based on my last store visit... I think it's smart that they are focusing only on Guitar Hero and DJ Hero and not band hero... Band Hero takes up too much space in the house, and it's tough to get a band together if everyone is bored w/ the product, that was definitely a fad...
To address the comment about WoW high margin revenue coming only once every 3-5 years, I would say that the release schedule should be very favorable over the next 3 years... you have Starcraft 2 and WoW: Cataclysm in '10... this will be followed by Starcraft expansion packs (2 more) in 2011/2012... you have the potential of Diablo coming in say 2012, possibly sooner... with each of these launches I would expect it to have a positive impact to the WoW subscriber base, which should provide lift to the $1.2b in subscription revenue recorded in '09, which was flat despite not having a WoW release in 2 years... and I strongly believe there is ample opportunity to monitize the battle.net platform in the coming years... Starcraft 2 will have access to battle.net for free w/ purchase of the game... that is where you will meet to challenge opponents, participate in tournaments, download/buy new maps, socialize... I highly doubt that if Starcraft 2 hits critical mass over the next 2-3 years, I doubt that they will let people play on Battle.net for free... or at minimum you can bet that they will monitize this customer base (value added services, micro transactions, etc)... The chat between games (WoW chatting w/ Starcraft 2) feature is pretty neat too, which should help fend off some cannibilization (it's top of mind at Blizzard) concerns... I can envision the company just charging one subscription price for access of all of Blizzard games in the future via battle.net, which would likely grow the subscriber community from 11.5m people today to somewhere much greater... I was impressed at Blizzard's 4Q09 operating margins of 49%...
Concerns around WoW losing steam and shrinking are absolutely valid... WoW Cataclysm should help w/ continued growth as they upgrade the beginner level content, which was neglected as Blizzard developers were focused on their core gamer, designing the coolest stuff for the areas only high level players can access... they stated on the call that the product is very sticky once a player passes Level 10... so they're really focusing on improving the entry level play experience, and track record should suggest that they will be successful... if WoW were to become obsolete, I believe Blizzard would be in the best seat to displace it (likely the unnamed next MMPORG the studio is working on)... on obsolesence, I would still argue there's a long tail... people still play Ultima Online (10+ years old)... people still log on to play text based MUDs (20+ years old)... the social bonds keep people coming back for a long time... and it's difficult to reach the critical mass that WoW has... I'm very wary of many of the chinese companies that think they have mastered the process of developing many successful MMPORGs, like GAME... the barriers to entry are too high... while this argument could be used agaist Blizzard, Blizzard is buffeted from it's strong repuation and customer loyalty... go to BlizzCon... it's nuts.
Thanks for everyone's interest... I think the earnings call luckily helped prove out some of the bullish bullet points I listed in my original writeup... biggest risk going forward here is if Battle.net runs into a few bumps in the road, causing a delay in Starcraft launch, which doesn't really hurt my long term thesis...
|Subject||GAAP vs non-GAAP|
|Entry||02/12/2010 11:38 AM|
Can give an example that demonstrates how net deferred revenue is created and how it is treated under GAAP and ATVI's non-GAAP metric?
|Subject||RE: GAAP vs non-GAAP|
|Entry||02/16/2010 09:46 AM|
GAAP Revenue for a majority of the packaged software that ATVI sells is recognized over a period of 12 months... Non-GAAP Revenue adjusts for changes in deferred revenue, and is a bit more accurate to the cash flow generation from quarter to quarter... Due to huge 4Q seasonality inherent in this consumer driven business, ATVI sells a lot of games in the december quarter, but most of that revenue goes directly into deferred revenue, and will be recognized over the course of the following year... As such, decenber Non-GAAP revenue will always be significantly higher than GAAP revenue... This trend reverses significantly in the March quarter, where Non-GAAP revenue is significantly lower than GAAP revenue... Non-GAAP revenue is down due to seasonality and weak new release schedule, while GAAP revenue benefits from strong software sales over the holidays...