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November 18, 2009

Company Report
Company Update

Activision Blizzard, Inc. ATVI: $11.69


Buy Gaming

ATVI: Strong Modern Warfare 2 Performance


Strengthens Our Optimism
THINK ACTION: Atul Bagga
We are encouraged by the strong performance of MW2 and are more 415-249-6362, abagga@thinkequity.com
comfortable with our view that 4Q MW2 sell-in could beat the Street estimate of
8-10 million (our estimate of 11 million) by a few million units. While we remain Changes Current Previous
concerned about the slow uptake of the music category and hardware bundled Rating Buy --
titles, we believe that the bottom-line impact from the underperformance in this FY09E EPS $0.63E --
category could be more than offset by the outperformance of MW2. We are FY10E EPS $0.75E --
also encouraged with the stickiness of MW2, which we believe opens up FY09E REV (M) $4,589.9E --
potential opportunity for further monetization. FY10E REV (M) $5,157.7E --

KEY POINTS: 52-Week High: $13.14


• ATVI announced today that Call of Duty: Modern Warfare 2 had sell-through 52-Week Low: $8.14
of $550 million worldwide during the first five days of launch. We estimate Shares O/S-Diluted (M): 1,332.0
that this represents a sell-through of about 8.0-8.5 titles worldwide. Market Cap (M): $15,571.1
Average Daily Volume: 16,584,457
• We are comfortable with our view that MW2 could top our estimate of 11 Short Interest: 1.9%
million units (versus the Street estimate of 8-10 million units) by a couple of Debt/Total Cap: 0.0%
million units. Net Cash Per Share: $2.12
P/E (12-month forward): 18.3x
• On the other hand, we remain concerned about the slow uptake of the music Est. Long-Term EPS Growth: 20.0%
category and especially higher-priced hardware bundled titles (Band Hero, P/E/G: 92%
DJ Hero, and Tony Hawk), which we believe creates some risk for top-line Fiscal Year-End: Dec
performance in 4Q (our estimate is $2.3 billion versus the Street estimate of REV (M) $ 2008A 2009E 2010E
$2.25 billion). However, we don't see risk to the EPS estimate (our and Street
Mar 602.0A 724.0A NA
estimate at $0.44) as the outperformance of MW2 could more than offset the
Jun 654.2A 801.0A NA
underperformance of the music category, in our view.
Sep 770.0A 755.0A NA
• We are also encouraged with the high stickiness of MW2 (5.2 million hours Dec 2343.0A 2309.9E NA
by 2.2 million users on day one, according to the company) which we believe FY 5032.0A 4589.9E 5157.7E
opens up opportunity for further monetization of the franchise. CY NA NA NA
FY P/S 3.1x 3.4x 3.0x
• Next year, we expect to see full year contribution of WOW China (estimated
at about $100 million, up from about $50 million in 2009), release of a couple CY P/S 3.1x 3.4x 3.0x
of highly anticipated and high margin games (Cataclysm and Starcraft 2), and On July 9, 2008, Activision and Vivendi Games
completed a merger to become Activision
next release of COD as growth drivers. In addition, we believe that the new Blizzard. Financials for 1Q08 and 2Q08 represent
Battle.net platform has the potential to emerge as a credible online gaming the results of Activision as a standalone entity
platform, which we believe is still not in the stock. and are not comparable.
EPS $ 2008A 2009E 2010E
• Trading at 13x 2010E EPS (net of cash), ATVI shares are not too expensive Mar 0.17A 0.08A NA
and bake in a lot of negativity (concerns about WOW and the retail
Jun 0.23A 0.08A NA
environment for gaming shares), in our view. Historically, ATVI shares have
Sep 0.07A 0.04A NA
traded at an average of 28x (range 15-75x) on forward earnings. Assuming
Dec 0.32A 0.44E NA
18-20x on 2010 earnings, plus $2.12 in cash per share, we believe that
FY 0.59A 0.63E 0.75E
shares could be valued at $17-18, which is our fair value estimate. We
CY NA NA NA
believe that a PE multiple of 18-20 is reasonable given what we view as the
superior earning profile (WOW contributes approximately 25% of FY P/E 19.8x 18.6x 15.6x
revenue—higher predictability, lower risks); strong franchises (COD, WOW, CY P/E 19.8x 18.6x 15.6x
and GH); and a solid pipeline for 2010 (Starcraft 2, Cataclysm, and strong On July 9, 2008, Activision and Vivendi Games
platform for online gaming—battle.net). completed a merger to become Activision
Blizzard. Financials for 1Q08 and 2Q08 represent
the results of Activision as a standalone entity
and are not comparable.

Please see analyst certification (Reg. AC) and other important disclosures on pages 4-6 of this report.
November 18, 2009
Company Report
Company Update

VALUATION:
Given that ATVI shares are trading at approximately an 13x PE on 2010E earnings (net of cash), current multiples suggest a
lot of negativity (concerns about WOW and the retail environment for gaming shares), in our view. Historically, ATVI shares
have traded at an average of 28x (range 15-75x) on forward earnings. Assuming 18-20x on 2010 earnings, plus $2.12 in
cash per share, we believe that shares could be valued at $17-18, which is our fair value estimate. We believe that a PE
multiple of 18-20 is reasonable given what we view as the superior earning profile (WOW contributes approximately 25% of
revenue—higher predictability, lower risks); strong franchises (COD, WOW, and GH); and solid pipeline for 2010 (Starcraft
2, Cataclysm, and strong platform for online gaming—battle.net).

INVESTMENT RISKS:
Gaming continues to be a hit-or-miss-driven business, and predicting successful titles versus unsuccessful titles
is extremely difficult. The risk is especially high for the new and unproven IPs, and the company's reliance on the new IPs
and the titles in the established franchises to reach the revenue target opens the company to risk of a revenue miss.

Macro headwinds and popularity of the used games and free-to-play online games. Given the current macro
headwinds, used games and free-to-play online games create higher substitute competition for video games.

The industry is dependent on the console cycle. An unexpected start of the new console cycle would likely
constrain the revenue growth and affect profitability of gaming vendors.

Foreign currency exchange risk. The company generates almost one-half of its revenue from international operations,
which exposes the company to foreign currency exchange risks.

COMPANY DESCRIPTION:
Activision Blizzard publishes online, PC, console, and hand-held games worldwide. The company develops and publishes
video games, and offers an online-game-related service, Battle.net. The company offers games in various genres:
first-person shooting, music, massively multiplayer online role-playing, strategy, action/adventure, sports, and racing. Its top
franchises include Guitar Hero, Call of Duty, Worldwarcraft, Tony Hawk, Spider-Man, X-Men, James Bond, Transformers,
Diablo, StarCraft, and Warcraft. The company is headquartered in Santa Monica, California, and is a subsidiary of Vivendi
S.A.

Page 2
Activision Blizzard, Inc.
ATVI
Date of Report: 11/5/09
Income Statement
All Figures in Millions, US$
except for share and per share data
Year Year 2009E Year Year
FY December 2007 Sep-08 Dec-08 2008 Mar-09 Jun-09 Sep-09 Dec-09 2009E 2010E
Product Sales 3,055.0 461.0 1,319.0 3,165.0 690.0 747.0 411.0 1,043.9 2,891.9 3,674.2
Q/Q Growth NM NM -48% 8% -45% 154%
Y/Y Growth NM NM 4% 2% 6% -11% -21% -9% 27%
Subscription, Licensing & Other revenues 892.0 297.0 320.0 1,154.0 291.0 291.0 292.0 301.7 1,175.7 1,417.7
Q/Q Growth NM NM -9% 0% 0% 3%
Y/Y Growth NM NM 29% 18% 0% -2% -6% 2% 21%
Change in Deferred Revenue 40.0 12.0 705.0 713.0 (256.0) (237.0) 52.0 964.3 523.3 65.9

Total Revenues 3,987.0 770.0 2,344.0 5,032.0 724.0 801.0 755.0 2,309.9 4,589.9 5,157.8
Q/Q Growth NM 204.4% -69% 11% -6% 206%
Y/Y Growth NM 24.0% 26% -21% -20% -2% -1% -9% 12%

Cost of Goods
Total Cost of Goods Sold 387.0 1,226.0 346.0 352.0 359.0 1,065.5 2,122.5 2,209.3
Percent of Total Revenues 50.3% 52.3% 47.8% 43.9% 47.5% 46.1% 46.2% 42.8%

Gross Profit 383.0 1,118.0 378.0 449.0 396.0 1,244.5 2,467.5 2,948.4
Percent of Total Revenues 49.7% 47.7% 52.2% 56.1% 52.5% 53.9% 53.8% 57.2%

Operating Expenses
Product Development 114.0 176.0 111.0 116.0 111.0 152.5 490.5 520.6
Percent of Total Revenues 14.8% 7.5% 15.3% 14.5% 14.7% 6.6% 10.7% 10.1%
Sales & Marketing 100.0 233.0 78.0 114.0 131.0 194.0 517.0 571.8
Percent of Total Revenues 13.0% 9.9% 10.8% 14.2% 17.4% 8.4% 11.3% 11.1%
General & Administrative 55.0 64.0 70.0 63.0 79.0 78.5 290.5 304.0
Percent of Total Revenues 7.1% 2.7% 9.7% 7.9% 10.5% 3.4% 6.3% 5.9%
Total Operating Expenses 269.0 473.0 259.0 293.0 321.0 425.0 1,298.0 1,396.4
Percent of Total Revenues 34.9% 20.2% 35.8% 36.6% 42.5% 18.4% 28.3% 27.1%

Operating Profit 994.0 114.0 645.0 1,200.0 119.0 156.0 75.0 819.4 1,169.4 1,552.1
Percent of Total Revenues 24.9% 14.8% 27.5% 23.8% 16.4% 19.5% 9.9% 35.5% 25.5% 30.1%

Total Non-GAAP Adjustment 316.0 792.0 1,348.0 (60.0) (62.0) 66.0 745.8 689.8 448.0
GAAP Operating Profit 994.0 (202.0) (147.0) (148.0) 179.0 218.0 9.0 73.6 479.6 1,104.1
Percent of Total Revenues -26.2% -6.3% -2.9% 24.7% 27.2% 1.2% 3.2% 10.4% 21.4%

Total Other Inc/(Expense) 42.4 24.0 18.0 46.0 10.0 - 11.0 11.0 32.0 44.0
Percent of Total Revenues 1.1% 3.1% 0.8% 0.9% 1.4% 0.0% 1.5% 0.5% 0.7% 0.9%

Profit Before Taxes 1,036.4 138.0 663.0 1,246.0 129.0 156.0 86.0 830.4 1,201.4 1,401.1
Percent of Total Revenues 26.0% 17.9% 28.3% 24.8% 17.8% 19.5% 11.4% 36.0% 26.2% 27.2%

Income Taxes 129.9 54.0 233.0 442.3 18.0 44.0 31.0 257.4 350.4 434.3
Tax Rate 12.5% 39.1% 35.1% 35.5% 14.0% 28.2% 36.0% 31.0% 29.2% 31.0%

GAAP Income Taxes 129.9 (62.0) (58.0) (80.0) - 23.0 5.0 21.2 49.2 333.6
Tax Rate 12.5% 34.8% 45.0% 78.4% 35.0% 10.6% 25.0% 25.0% 9.6% 29.1%

Non-GAAP Net Income 906.4 84.0 430.0 803.7 111.0 112.0 55.0 573.0 851.0 966.8
Percent of Total Revenues 22.7% 10.9% 18.3% 16.0% 15.3% 14.0% 7.3% 24.8% 18.5% 18.7%
Change Vs Year Ago 5.9% 13.6%

GAAP Net Income 906.4 (116.0) (71.0) (22.0) 189.0 195.0 15.0 63.5 462.5 814.5
Non-GAAP EPS (Diluted) 0.96 0.06 0.32 0.59 0.08 0.08 0.04 0.44 0.64 0.75
Y/Y Growth NM NM -93% -37% NM NM NM 37% 9% 16%

GAAP EPS 0.96 (0.08) (0.05) (0.02) 0.14 0.15 0.01 0.05 0.35 0.63
Diluted Shares (in Millions) 946.0 1,390.0 1,326.0 1,358.0 1,359.0 1,332.0 1,297.0 1,293.0 1,320.3 1,294.5

Source: Company Reports and ThinkEquity Estimates


Atul Bagga
ThinkEquity LLC
415-249-6362

Page 3
November 18, 2009
Company Report
Company Update

COMPANIES MENTIONED IN THIS REPORT:


Company Exchange Symbol Price Rating
NetEase.com, Inc. NASDAQ NTES $41.94 Buy

Important Disclosures
Analyst Certification
I, Atul Bagga, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject
securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed in this research report.

The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total
revenues, a portion of which is generated by investment banking activities.

ThinkEquity LLC makes a market in NetEase.com, Inc. and Activision Blizzard, Inc. securities; and/or associated persons may sell to or
buy from customers on a principal basis.

Rating History for: Activision Blizzard, Inc. (ATVI) as of 11-17-2009


07/12/07 06/15/09
D:NR I:B
21

18

15

12

6
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
2007 2008 2009

Created by BlueMatrix

Page 4
November 18, 2009
Company Report
Company Update

Rating History for: NetEase.com, Inc. (NTES) as of 11-17-2009


12/16/08
I:B
48

40

32

24

16

8
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
2007 2008 2009

Created by BlueMatrix

Rating Definitions
Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier
Buy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including
previously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600
Montgomery Street, San Francisco, California, 94111.

Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquity
recommends initiating or increasing exposure to the stock.

Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stock
is fairly valued.

Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquity
recommends decreasing exposure to the stock.

Distribution of Ratings, Firmwide

ThinkEquity LLC

IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [B] 115 63.90 9 7.83
HOLD [H] 59 32.80 2 3.39
SELL [S] 6 3.30 0 0.00

This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The
information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The
opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past
performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or
implied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall
there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or
qualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clients

Page 5
November 18, 2009
Company Report
Company Update

of ThinkEquity LLC.

Recipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of their personal financial
advisors before making any investment decisions based on this report. Stocks mentioned in this report are not covered by ThinkEquity
LLC unless otherwise mentioned.

Additional information on the securities mentioned is available on request. In the event that this is a compendium report (covers more than
six ThinkEquity LLC-covered subject companies), ThinkEquity LLC may choose to provide specific disclosures for the subject companies
by reference. To request more information regarding these disclosures, please call: 866-288-8206, or write to: Director of Research,
ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Stocks mentioned in this report are not covered by
ThinkEquity LLC unless otherwise mentioned.

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Copyright 2009 ThinkEquity LLC, A Panmure Gordon Company

Page 6

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