Activision Blizzard, Inc. (ATVI)Minjoo Kim, Keng Hoe Wong, Qing Yi Yu, Salta Muslim-Ali, Vincent Yu & Vrushank Vora

NME W11: Greg Yun

Introduction

• Largest pure-video game developer/publisher

• Merger of Vivendi Games and Activision in 2007• Majority Owned by Vivendi

SA

• N.A., Europe & Asia

Stock Summary

Company Name:Activision Blizzard

Stock Symbol:ATVIMarket

Capitalization: $ 13,404 MMShare Price: $ 11.17

LTM Revenue: $ 4,447 MMLTM Net Income: $ 418 MM

Forward P/E:15.5x

Product Line

Product Line (Continued)

ThesisIndustry:

• Growing Chinese Market

• Move towards digital revenue channels

• Move towards non-casual games from casual games

Company:

• Consistent trend of quality “hit releases”

• Ability to innovatively monetize revenue opportunities

• Commitment to increasing shareholder value

Quant: Analysts are undervaluing company due to

• 4Q failure to meet GAAP revenue expectations

• Cancellation of Guitar Hero

Industry Outlook

Industry Trend (Global)

• 52.9 billion (2009) / 86.8 billion (2014)

• Projected CAGR of 10.6 Percent

• Growth in industry• MMOG gaming• Online gaming• Mobile gaming

Fig. 1 Media Spending Growth

Outlook by Segment from PwC

Industry Trend (Regional)• Current Generation Console - 23% Growth• First-Person Action Genre - 29% growth N.A./Europe

sales• Wii/Handheld Devices – Decrease in Sales

• Top 10 titles - 37% of U.S. sales• Digital Distribution – 14% Growth in N.A./Europe

sales

Fig. 2 2010 Revenue Breakdown

of Industry from Newsweek

Fig. 4 2010 Game Growth

by Segment by Newzoo

Industry Trend (China)

• 26% increase in Chinese gamers accounted for 61% increase in 2009 global online game revenue

•20.9% CAGR of online game market through 2014

• MMOGs account for 77% of online revenue growth

• Piracy is barrier to entry•

Company Thesis

Revenue Sources/Channels• Subscription/

Licensing: 31%• Product Sales:

69%• Digital Sales: 30%

Overall / 20% Growth

• International Operations: 46%• Asia 6% Overall /

32% Growth

Fig. 5 ATVI Revenue Growth in 2009 Year-End Data

World of Warcraft

• 12 million subscribers (monthly US / hourly China) / Value Added Services• $3.5 million in one day on a virtual horse

• WoW: Cataclysm was fastest-selling PC game ever

Fig. 6 MMOG Breakdown May 2008 Fig. 7 MMOG Subscriptions 2011

World of Warcraft (China)

• 5% of China’s $3 billion MMO market• 1.5 million paying customers

in first month• In 2008, one of three MMOs

in China with over 1 million peak computer users (PCU)

• 5.5 million Asian Users /2.6 million PCU

• 55% Royalty - NetEase

Market Strategy

• Consolidate energies on high-margin hits• WoW & CoD – 62% of Revenue• CoD Downloadable Content – $21

million in 24 hours (Record for Xbox Live)

• Expand in China• WoW: Cataclysm• CoD: China F2P

• Digital GrowthFig. 8 US MMOG Breakdown May 2010

Competitive Advantages

• Quality Assurance with Big Recognizable Hits• #1 Publisher in N.A. / Europe• CoD: Black Ops was #1 Title Worldwide: $1

billion revenue• 3/5 Top PC Titles in N.A./Europe

• In-line with Industry Trends• 20% Digital Growth / Only 30% of total revenues• Market Leaders in non-casual gaming titles• Console Game Leader

• Crowd Effect• Online Community in Battle.net

Competitive Advantages (Continued)

Competitive Advantages (Continued)

Future Releases2012

2012

2012

20112012

Recent News

• Canceled Guitar Hero/Tony Hawk Series• Laid off 500 Employees• Shares dropped 8% on February 10th

• Non-GAAP EPS of 53 cents beat 4Q expectations• Year End GAAP EPS increased 33 cents• Year End Non-GAAP EPS Increased by 15%• Quarter End GAAP EPS dropped 20 cents• Year End Non-GAAP Revenues 20% Growth

Shareholder Strategy

• 2009: $1.2 billion in shares repurchased• 2010: $1.5 billion in shares to be purchased

• Three-Year Total – $3.7 billion• Cash Dividends increased by 10%

Portfolio/Investment Risk Factors

• Deterioration of Economic Condition• Controlled Company• Lack of Franchise/Hit Diversification• GAAP defers increasingly online-generated

revenue

• Current tech holdings• PWRD: Perfect World

Company Thesis

Consistent trend of quality “hit releases”; ability to innovatively monetize revenue opportunities, especially in alignment with the current industry trends; and commitment to increasing shareholder value; demonstrate that ActivisionBlizzard to be a consistently successful leading innovator in the gaming market.

Quant Thesis

Historical Growth Summary

($ in millions of US dollars) CAGRFiscal Year Ending: 12/31 2006 2007 2008 2009 2010

2006-2010

Revenues

$1,388.6

$1,349.0

$3,026.0

$4,279.0

$4,447.0 33.8%

Growth -2.9% 124.3% 41.4% 3.9%  Operating Income 73.4 178.0 (40.0) 406.0 798.0 81.6%

Growth 142.5% -122.5% 96.6%  

EBITDA 173.7 241.0 345.0 753.0 996.0 54.7%

Growth 38.7% 43.2% 118.3% 32.3%  

Net Income 89.3 228.0 81.0 538.0 747.0 70.0%

Growth   155.2% -64.5% 564.2% 38.8%  

Historical Margins($ in millions of US dollars)  Fiscal Year Ending: 12/31 2006 2007 2008 2009 2010     Revenues $1,388.6 $1,349.0 $3,026.0 $4,279.0 $4,447.0 Gross Margin 27.1% 67.7% 39.2% 46.1% 52.2%Operating Margin 5.3% 13.2% -1.3% 9.5% 17.9%EBITDA Margin 12.5% 17.9% 11.4% 17.6% 22.4%Net Income Margin 6.4% 16.9% 2.7% 12.6% 16.8%   Assets 1,891.5 2,613.1 14,465.0 13,742.0 13,406.0 Asset Turnover 0.7x 0.5x 0.2x 0.3x 0.3x Return on Assets 4.7% 8.7% 0.6% 3.9% 5.6%   Shareholders' Equity 1,408.9 1,866.4 11,527.0 10,756.0 10,203.0 Financial Leverage 1.3x 1.4x 1.3x 1.3x 1.3x Return on Equity 6.3% 12.2% 0.7% 5.0% 7.3%

Historical Financial Health($ in millions of US dollars)  Fiscal Year Ending: 12/31 2006 2007 2008 2009 2010     Debt $- $- $- $- $- Shareholders' Equity 1,408.9 1,866.4 11,527.0 10,756.0 10,203.0            Operating Income 73.4 178.0 (40.0) 406.0 798.0 Interest Expense - 3.0 3.0 4.0 -            Current Assets 1,484.4 2,177.4 5,259.0 5,329.0 5,385.0 Inventory 85.7 153.4 262.0 241.0 112.0 Current Liabilities 441.5 725.7 2,084.0 2,507.0 2,907.0            Debt/Equity 0.00 0.00 0.00 0.00 0.00Current Ratio 3.36 3.00 2.52 2.13 1.85Quick Ratio 3.17 2.79 2.40 2.03 1.81

Interest Coverage

No Interest

Exp 59.33 N/A 101.50

No Interest

Exp

Base case AssumptionsHistorical Financials

  2006 2007 2008 2009 2010Revenue Growth N/A -2.85% 124.31% 41.41% 3.93%Operating Margin 5.29% 13.19% -1.32% 9.49% 17.94%Effective Tax Rate 24.37% -29.21% 200.00% -29.80% 9.27%Depreciation & Amortization 7.22% 4.67% 12.72% 8.11% 4.45%Capital Expenditures 1.68% 5.04% 1.52% 1.61% 2.18%NWC as % of Revenue 17.12% 19.50% 5.72% -9.89% -23.16%

Growth and WACC Assumptions  2011 2012 2013 2014 2015           Base  Revenue Growth $3,993.6 $4,051.6 $4,375.7 $4,813.3 $5,390.9 Operating Margin 18.4% 18.4% 18.4% 18.4% 18.4%Effective Tax Rate 15.8% 15.8% 15.8% 15.8% 15.8%Depreciation & Amortization 3.0% 3.0% 3.0% 3.0% 2.2%Capital Expenditures 2.2% 2.2% 2.2% 2.2% 2.2%NWC as % of Revenue 2.0% -4.0% -1.0% 0.0% 1.0%   Tax Rate 15.8%       Alternative Beta 0.65Terminal Growth Rate Assumption 2.50%Market Rate 9.00%Terminal Shares Outstanding 1,200.0

Low & High Case Assumptions

Low  Revenue Growth -15.0% 1.0% 5.0% 7.0% 9.0%Operating Margin 18.4% 18.4% 18.4% 18.4% 18.4%

High  Revenue Growth -10.0% 4.5% 9.0% 11.0% 13.5%Operating Margin 18.4% 18.4% 18.4% 18.4% 18.4%

Terminal Growth Rate Assumption 2.00%Terminal Shares Outstanding 1,200.00

Terminal Growth Rate Assumption 3.00%

Terminal Shares Outstanding 1,200.0

DCF Output: Base CaseScenario: Base

Terminal Growth Rate:  2.50%  Terminal Shares Outstanding: 1,200.0  

Weighted Average Cost of Capital: 7.15%     

Present Value of Forecasted Cash Flows: 2,958  Present Value of Perpetual Cash Flows: 12,609  

Present Value of Total Cash Flows: 15,567  Value of Debt: 0  Value of Cash: 3,508  

Value of Equity: 19,075        

Value of Equity Per Share: $15.90  Range (in %): 10%  

      Value Per Share Range: $14.31 - $17.49

      Current Price of Stock:   $11.12  

      P/V Ratio: 0.64x - 0.78x

   Potential Upside: 28.7% - 57.2%

   

DCF Output: Low and High CaseScenario:

Downside Upside  

Terminal Growth Rate:  2.00%     3.00%  Terminal Shares Outstanding:  1,200.0     1,200.0  

Weighted Average Cost of Capital:  7.15%     7.15%           

Present Value of Forecasted Cash Flows:  2,500     3,097  

Present Value of Perpetual Cash Flows:  10,219     15,206  

Present Value of Total Cash Flows:  12,719     18,303  Value of Debt:  0     0  Value of Cash:  0     3,508  

Value of Equity:  12,719     21,811              

Value of Equity Per Share:  $10.60     $18.18  Range (in %):  10%     10%  

            Value Per Share Range: $9.54 - $11.66 $16.36 - $19.99

            Current Price of Stock:   $11.12     $11.12  

            P/V Ratio: 0.95x - 1.17x 0.56x - 0.68x

         Potential Upside: -14.2% - 4.8% 47.1% - 79.8%

           

DCF SensitivityDCF Valuation Sensitivity Analysis      

WACC 7.15% WACC Sensitivity 0.50%Terminal Growth Rate 2.50%

Term. Growth Sensitivity 0.25%

   

  WACC

  $15.90 6.15% 6.65% 7.15% 7.65% 8.15%

  2.00% $17.65 $16.08 $14.82 $13.78 $12.91

Terminal 2.25% $18.46 $16.71 $15.32 $14.19 $13.25

Growth 2.50% $19.39 $17.42 $15.88 $14.64 $13.62

Rate 2.75% $20.45 $18.22 $16.51 $15.14 $14.02

  3.00% $21.68 $19.13 $17.20 $15.69 $14.47

Football Field

ComparablesTrading Comparables Valuation

($ in millions except for per share data)

ATVI Multiplier Low Mult.  

High Mult.

Price (low)  

Price high) Include?

EV/Revenue (2011E) $3,900.00 0.5x - 1.2x $4.43 - $6.82 Yes

EV/Revenue (2012E) $4,540.00 0.4x - 1.1x $4.56 - $7.04 YesEV/EBITDA (2011E) $1,434.00 9.2x - 14.1x $13.94 - $19.83 YesEV/EBITDA (2012E) $1,727.00 7.3x - 13.3x $13.42 - $22.03 YesP/E (2011E) $0.72 19.1x - 27.5x $13.76 - $19.77 YesP/E (2012E) $0.88 15.6x - 35.0x $13.74 - $30.83 YesP/B $0.00 1.6x - 2.6x $0.00 - $0.00 Yes                

   Value Range: $9.12 - $15.19

    Suggested Premium: -18.0% - 36.6%

ComparablesValuation Comps

($ in millions except for per share data) ATVI ERTS TTWO THQIPrice Per Share $10.95 18.40 16.24 5.61 Market Capitalization 13,140.0 6,151.1 1,521.7 381.1 Shares Outstanding 1,200.0 334.3 93.7 68.0          Estimated EPS (2011E) $0.72 $0.67 $0.85 $(0.28)Estimated EPS (2012E) $0.88 $0.86 $1.04 $0.16 Estimated Revenue (2011E) 3,900.0 3,760.0 1,110.0 803.0Estimated Revenue (2012E) 4,540.0 3,940.0 1,290.0 861.0Estimated EBITDA (2011E) 1,434.0 465.0 94.0 -4.0Estimated EBITDA (2012E) 1,727.0 588.0 165.0 28.0

Summary

• Company strength is aligned with industry trends

• Beginning to capitalize on tremendous market potential in China

• Leading innovator in the market; consistent history of hits

• Analysts don’t believe stock can overcome Guitar Hero cancellation

Questions?