ATVI



|Activision Blizzard, Inc. |(ATVI – NASDAQ) |$15.54* |

Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.

Reason for Report: 1Q13 Earnings Update

Prev. Ed.: Apr 11, 2013; 4Q12 Earnings Update (broker material considered till Feb 22, 2013)

Brokers’ Recommendations: Positive: 90.0% (18 analysts); Neutral: 10.0% (2); Negative: 0.0% (0)

Prev. Ed: 17, 2, 0

Brokers’ Target Price: $16.72 (↑ $0.94 from last edition; 17 analysts) Brokers’ Avg. Expected Return: 7.6%

*Note: Although dated Jul 5, 2013, share price and brokers’ material are as of May 23, 2013.

Note: A Flash update on 1Q13 earnings was done on May 9, 2013.

Note: The tables below (Revenues, Margins and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table are taken from reports that did not have accompanying spreadsheet models

Portfolio Manager Executive Summary

Activision Blizzard, Inc. (ATVI) is a worldwide online and console videogame publisher and developer. The analysts believe that the following factors should be taken into consideration while investing in the stock:

• Activision’s portfolio comprises popular franchises like Call of Duty, World of Warcraft and Skylanders.

• Activision has entered into a strategic partnership with Bungie to develop new games

• Activision’s FY12 top line expanded 11.1% y/y to $4.99 billion while its earnings per share increased 26.9% y/y to $1.18. Growth was attributable to new titles sale and operating efficiencies.

• Activision’s competitors include Electronic Arts Inc., Take Two Interactive, THQ, Walt Disney Interactive, to name a few.

Of the 20 analysts covering the stock, 18 analysts provided positive ratings while the remaining 2 analysts adopted a neutral stance. Target prices range from a low of $13.00 to a high of $22.00, with the average being $16.72 (7.6% upside from the current price).

Bullish Stance (Buy or equivalent outlook) – 18 analysts or 90.0% – These analysts are positive about the company’s initiatives in new intellectual property (IP), strong cash flow, portfolio of proven franchises, active product pipeline, management's focus on high-margin growth vehicles and technological advances. Apart from this, Activision has recognized the digital medium as a genuine revenue stream that is likely to benefit the company, going forward. Activision’s Call of Duty and Skylanders have performed exceedingly well and continue to be the most successful revenue-generating franchises for the company. Additionally, game releases will further add to the company’s top line.

Neutral Stance (Neutral or equivalent outlook) – 2 analysts or 10.0% – Macroeconomic headwinds that can possibly affect the consumer demand for video games software induce the analysts to remain on the sidelines. The analysts are cautious about the lower-than-expected operating leverage in the business models that could result in lower margins and thereby, affect the business. They also remain cautious about the declining subscriber base of World of Warcraft. Moreover, Activision’s lack of a diversified revenue source and overdependence on the subscriptions of Call of Duty and World of Warcraft franchises remain matters of concern in the long run.

General Outlook

The market for consumer technology/entertainment products is becoming increasingly competitive with new companies entering the market and increased activity from existing providers. Most of the analysts expect the video game industry to return to a normalized level through a combination of improved profitability in core packaged goods businesses and a shift in the mix to a greater percentage of higher-growth, higher-margin digital revenues. Activision is the leader in both these fronts. Activision’s strong Blizzard IP, in addition to the industry-leading digital platform will drive better-than-expected industry growth for the company. The analysts expect the total revenue to decrease at a three-year CAGR (2012–2015) of (2.4%) and EPS (CAGR 2012-2015) to increase (2.0%).

Jul 5, 2013

Overview

Based in Santa Monica, Calif., Activision Blizzard Inc. is a worldwide pure-play console and online game publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry. The company has operations in the U.S., Canada, United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, Norway, Denmark, the Netherlands, Romania, Australia, Chile, India, Japan, South Korea, China and the region of Taiwan.

Activision Blizzard, Inc. operates under three segments:

1) Activision Publishing comprises the business of Activision, Inc. which publishes interactive entertainment software and peripherals and certain studios, assets and titles.

2) Blizzard consists of the business of Blizzard Entertainment, Inc. and its subsidiaries which publish traditional games and online subscription-based games in the Massively Multiplayer Online Role Playing Game (MMORPG) category.

3) Distribution consists of the warehousing, logistics and distribution of interactive entertainment software and hardware products to third party publishers.

For more information, please visit, .

Note: Activision Blizzard’s fiscal year ends on Dec 31.

Key investment considerations as identified by the analysts are as follows:

|Key Positive Arguments |Key Negative Arguments |

|Activision has a strong product pipeline |Limited presence in the social networking games |

|Strong franchises and long-term licensing agreements enable the company |Rising production and marketing costs would impact the company’s |

|to expand its reach across different markets |operating margin expansion |

|The company has a strong balance sheet with no debt |Competition from Electronic Arts, Take Two Interactive and other leading |

| |video game publishers is a headwind for Activision |

| |Sluggish macroeconomic environment remains a major drawback for the video|

| |game industry |

Jul 5, 2013

Long-Term Growth

Activision’s EPS is projected to grow at approximately 13.3% over the next five years. Activision is a well-established player in the interactive entertainment software sector based on a diversified product portfolio and enjoys a large customer base. Improved performances by Activision’s wholly-owned franchises and exclusive licenses are expected to help drive sales growth and market share gains over time. Activision’s operations have a significant operating leverage potential, given the opportunities of expansion in China and the increasing online penetration.

Analysts believe that the continuous strong performance from Activision’s leading franchises such as Call of Duty, Skylanders and World of Warcraft, would be a positive catalyst, going forward. Moreover, Activision’s strong product pipeline along with new IP, in collaboration with Bungie, and a new franchise from Blizzard Entertainment are expected to be the long term positives for the company.

Analysts expect that the company’s shift from being a game publisher to a game services platform provider in the next couple of years would aid the company’s efforts to solidify its online revenue base.

Most of the analysts believe that Activision’s strong balance sheet provides it with more-than-required capital to remain competitive for attractive license opportunities, as well as to develop new wholly-owned intellectual properties.

Jul 5, 2013

Target Price/Valuation

Provided below is the summary of ratings and valuation as compiled by Zacks Research Digest:

|Rating Distribution |

|Positive |90.0%↑ |

|Neutral |10.0%↓ |

|Negative |0.0% |

|Max Target Price |$22.00↑ |

|Min Target Price |$13.00 |

|Avg. Target Price |$16.72↑ |

|Analysts w. Target Price/Total |17/20 |

Risks to the attainment of the price target include changes in game-release timing, greater-than-expected deterioration of the average selling price for game software, increased competition, options investigation impact, increasing product development costs and lower-than-expected consumer demand for video game hardware.

Recent Events

On May 8, 2013, Activision Blizzard Inc. reported 1Q13 results. Highlights are as follows:

• Revenues on a non-GAAP basis were up 37.0% y/y to $804.0 million

• Non-GAAP EPS came in at $0.17, up from $0.06 from the year-ago quarter

Revenues

According to the 1Q13 company press release, revenues on a non-GAAP basis jumped 37.0% from the year-ago quarter to $804.0 million. Reported revenues surpassed management’s guidance of $690.0 million as well as the Zacks Consensus Estimate of $706.0 million.

The better-than-expected revenue growth was primarily attributed to solid performance from the Call of Duty, Skylanders and World of Warcraft franchises. Moreover, the recently released game, StarCraft II: Heart of the Swarm, also contributed to the revenue growth. However, subscriber loss in World of Warcraft continued as it lost 1.3 million subscribers, during the quarter, and had 8.3 million subscribers at the end of 1Q13.

On a geographical basis, revenues from North America, Europe and Asia-Pacific reported y/y increase of 57.0%, 22.0% and 11.0% to $423.0 million, $318.0 million and $63.0 million, respectively.

Provided below is a summary of revenues as compiled by Zacks Research Digest:

|Total Revenues ($ in million) |1Q12A |

|Copy Editor |Kamalika Pramanik |

|Content Ed. |Aniruddha Ganguly |

|QCA |Sejuti Banerjea |

|Lead Analyst |Aniruddha Ganguly |

|No. of brokers reported/Total | |

|brokers | |

|Reason for Update |1Q13 Earnings Update |

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July 5, 2013

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