Activision Blizzard Pitch

Activision Blizzard

Sector Manager: Conor Davis

Senior Analyst: Anna Kylkilahti

Analysts: Michael Moyles, Robertas Rimkus

T R I N I T Y S M F

Summary of Investment Thesis

• Track record of consistently acquiring and maintaining highly profitable video

game franchises

• Acquisition of King to provide mobile potential for established Activision

Franchises

• Expansion into unconventional markets to unlock additional revenue streams

• Shift from physical to digital sale of video games to increase margins

• Increasing adoption of next-gen consoles should boost growth

Company OverviewT R I N I T Y S M F

T R I N I T Y S M F

Introduction: Company Snapshot

Recommendation BUY

Current Price £16.69

Price Target £21.66

Upside 29.7%

Timeline 3/4 years

Market Cap. £103.359B

52wk range $18.55-$37.51

P/E 24.9

Div. Yield 0.6%

FCF Yield 5.57%

Analyst Consensus BUY-50

0

50

100

150

200

250

30

/11

/20

12

31

/01

/20

13

31

/03

/20

13

31

/05

/20

13

31

/07

/20

13

30

/09

/20

13

30

/11

/20

13

31

/01

/20

14

31

/03

/20

14

31

/05

/20

14

31

/07

/20

14

30

/09

/20

14

30

/11

/20

14

31

/01

/20

15

31

/03

/20

15

31

/05

/20

15

31

/07

/20

15

30

/09

/20

15

ATVI

Nasdaq

Graph of Percentage Price Change versus Date, Nov 2012 – Nov 2015

T R I N I T Y S M F

Business Overview

• The company develop games across the mobile,

console and PC platforms

• 5th largest gaming company in 2014

• Expected growth in mobile division with their $5.9

billion acquisition of Kings Inc.

• Increase in digital downloads will increase margins as

the need for CD manufacturing and distribution is

decreased • Focus on publishing fewer, more focused

blockbuster titles

• Formation of Activison Blizzard Studios will develop

“Skylander Academy” and a Call of Duty series

• Legendary Pictures developing Warcraft to be

released next summer along with upcoming

expansion pack

• This may help stimulate growth in this once

popular game

• Recent expansion in toys and movies

53%37%

10%

9 Months Ended 30 September

NorthAmerica

Europe

Asia

27%

14%

14%8%4%

2%

7%

5%

6%

13%

Est. Revenue by Franchise 2016 ($mm)

Call of Duty

Density

World of Warcraft

Skylanders

Overwatch

Call of Duty (China)

Hearthstone

Heors of the Storm

Other PC

T R I N I T Y S M F

Management

• Robert Kotick – President & CEO

• More than 25 years of experience with approximately 175 million shares

• Longest serving CEO of any public technology company

• Dennis Durkin – Chief Financial Officer

• Has been the CFO since 2012 and prior he worked as the corporate vice president of Microsoft’s

interactive entertainment business

• Brian Hodous – Chief Customer Officer

• Became CCO in 2008 in connection with the Activision merger with Viendi Games

• Michael Morhaime- Chief Executive Officer of Blizzard

• Co-founder of Blizzard and became CFO during the Viendi Games merger

• Thomas Tippl – Chief Operating Officer

• Has been COO since 2010 and prior to this he was CCO & CFO

• Nick van Dyk – Co-Head Activison Blizzard Studios

• Former Senior Vice President of Corporate Strategy at The Walt Disney Company

Company OverviewT R I N I T Y S M F

TRINITY SMF

Industry & Competitive Positioning•Main Competitors: Blockbuster games

•EA

EA's sport and racing games are not a direct threat to Activision, however Battlefield is a direct competitor

to Activision’s cash cow Call of Duty, and Star Wars and Titanfall are aimed at the same market as ATVI's

game Destiny.

We believe Activisions outperforms in customer retention and reputation, and in having its own standalone

franchises.

•Ubisoft

Has three major continuing franchises – the Tom Clancy series, Assassin’s Creed and Farcry. Ubisofts

games can credibly compete with Activision's but as a smaller company it is unlikely to match its ability to

continuosly bring forward new succesful franchises.

•Take-Two Interactive

Take-Twos franchises include: Grand Theft Auto, NBA and Borderlands.

•Industry and Trends

•->A huge industry of $91.5 billion in revenue (NewZoo)

•->Growing mobile game industry , mobile gaming becoming more and more attractive , yet most

of the revenue growth comes from Asia which might prove difficult to enter

•->Economy and Consumer confidence seems to be picking up , this means that more money is

going to be spent on entertainment as it tends to be the main spending of discretionary income ,

gaming industry is set to benefit.55% of Activision’s revenue comes from North America whose

consumers are

•->Video game industry is getting huge exposure through competitive and non competitive

gaming events such as E3 and Gamescom , World Championships in League of Legends ,

Counter Strike and DoTA.

•Activision recent news

•-> Outperformed expectations in both revenue and net income of 3rd Quarter

•->Announced Acquisition of King Inc. ( to be discussed in detail)

•->Main Cash Cow ‘’ Call of Duty’’ still popular , providing $550 million in revenue in the first week

of sale

•->Dividends Grew more than usual , by 3 c instead of 1c compared to the last few years.

Digital sales

•Digital sales are a new trend which let’s users to directly download games without any need of hardware discs. This cuts out retailers and increases profit margins for publishers from 65% up to around 85%•Digital Game Sales grew by 11% this year , while digital console games sales grew by 29%•Activision reported that more than half of their revenue comes from digital sales and that figure is due to increase year on. 55% digital sales reported in Q2 of 2015•3 out of 5 biggest game publishers earn more from digital sales

Mobile Games Industry

•Estimated revenue from mobiles games in 2014 were $25 billion (NewZoo) that’s a 40% rise compared to $17 billion in 2013•Estimate of 2015 revenues are $29 billion (digi-capital) $30 billion (NewZoo)•Mobile game market expected to grow by around 17% year on year•Biggest market at the moment is Asia with over $12.5 billion in revenue followed by NA with $5 billion and Europe with $3.2 billion (figures from 2014)•While markets in the west are starting to mature , Asian markets continue to grow and thrive in the mobile game sector.

Financial OverviewT R I N I T Y S M F

T R I N I T Y S M F

Income Statement

• Decide on the lines that are important from the statement. The lines included below are only a suggestion

• Include ratios and metrics that measure the financial standing of the company

• Should be brief and easy to understand, do not put the entire statement here

2014A 2015E 2016E 2017E

Revenue $4,408M $4,665M $6,560M $6,853M

Revenue Growth -3.82% 5.4% 40,6% 5,17%

Operating Income $1,183M $1190M $1768M $1967M

Net Income $835M $912M $1260M $1520M

EPS $1.13 $1.38 $2.12 $2.25

EPS Growth 18.95% 22.12% 53,62% 6,13%

DPS $0.20 $0.23

DPS Growth 5% 15%

T R I N I T Y S M F

Balance Sheet & Cash Flow Statement

2014A $ in mil. 2015E $ in mil. 2016E $ in mil. 2017E $ in mil.

Cash and Equivalents 4848 5412 6632 7882

Total Assets 14746 15401 16811 18092

Total Debt 4324 4028 6320 5978

Total Liabilities 7513 7306 7687 7815

Shareholders Equity 7233 8095 9124 10277

Cash Flow Operations 1292 1349 1400 1440

Capital Expenditure -107 -96 -103 -106

Free Cash Flow 1185 1246 1312 1370

Summary Using TTM Figures

Total Revenue $4,887 M up $480M compared

to 2014

Gross Margin 65.7%

EBITDA $2030 M up $500Mcompared to 2014

EBITDA Margin 26.74 up 4% from 2014

ROE/ROA 14.63/7.78 up 2%each from 2014

EPS Current $1.49 upfrom $1.13

compared to 2014

Total Debt $4028M P/E 25.1 compared to 34.7 industry Avg

Total Debt/Equity 0.51 Div. Yield 0.61% , $0.23

T R I N I T Y S M F

Debt Analysis

• $4028M long term debt , planning to borrow another 2.3 billion to fund the acquisition of King Inc. in Q2 of

2016

• $1.9 billion from a term loan

• $1.5 billion senior notes at 5.625% due in 2021

• $750 million senior notes at 6.125% due in 2023.

• With large revenues and with the addition of King Inc., ATVI is in a good position to repay its debts at a steady

pace

ValuationT R I N I T Y S M F

T R I N I T Y S M F

Valuation

Name P/E FwdP/E

EPS Gr. 2015

EPS Gr.2016

Div Yield Div. Cover ROE EBITDA Mkt. Cap

YTD. Perf

ActivisionBlizzard

24.9 23.6 (14.9%) 23.6% 0.6% 14.61% 1.53B 27.23B 84,81%

EA 27.3 19.5 0% 13.43% N/A N/A 28.85% 1.14B 21.41B 46.49%

Disney 23.47 20.45 10.10% 9.7% 0.9% 3.36% 15.58B 187.83B

24.62%

Ubisoft N/A 22.45 N/A 18% N/A N/A (0,03%) (90.96M) 2.92B 76.49%

Take Two Interactive

N/A 20.75 (52.97) (41.92%) N/A N/A 7.76% (144.68M)

3.00B 26,22%

T R I N I T Y S M F

Implied Multiples Valuation

Metric Median Industry Value

Implied Price

P/E 25.54 38.16

FWD P/E 25.4 33.65

P/B 4.70 51.30

Average Price $41,03(+10.32%)

EV/EBITDA Model

EBITDA: 1,354B Low Base High

EV/EBITDA 26.73 29.7 32.67

EV 36.192,42 40.213,80 44.235,18

+ Cash 6.326

- Debt 7.209

Value of Equity 35.309,42 39.330,80 43.352,18

No. Shares 731.184M

Per Share Value (£) 48.29 53.72 59.29

Potential Upside 29.67% 44.35% 59.21%

T R I N I T Y S M F

Football Field Valuation

50%Implied multiples

$41.03

30%EV/EBITDA

Low

10%EV/EBITDA

Base

10% EV/EBITDA

High

= 46.258 (+24,34%)

RiskT R I N I T Y S M F

T R I N I T Y S M F

Qualitative Risk

• The release of Fallout 4 by Bethesda may have stunted the sales of Call of Duty: Black Ops 3 in the American

market

• The high cost of DLC for Destiny annoyed their customers

• Star Wars: Battlefront will take away from some major titles

• Risk involved with the acquisition of Kings Inc.

• Failing recently due to the decreased popularity of Candy Crush

• Many see it as a positive to acquire King as it has 500 million users and with Activison’s brands they will

have a new inflow of content, yet with declining revenues and popularity of King’s games, acquiring King

may cause problems for Activision

• Investment into Activison Blizzard Studios and the move towards cinema with Warcraft can be cause for

concern as pervious video game companies ventures into cinema have failed, e.g. Nintendo

• Economic growth in the US will increase consumer discretionary income, the entertainment industry will feel

the benefit of this. The gaming market should in turn see increased revenues and with Activision as the 5th

largest in the industry it is set to benefit

T R I N I T Y S M F

Portfolio Positioning & Current Holdings

• Fits in with the SMF outlook that is bullish on the US consumer sector

• Diversifies away from a significant exposure to the Chinese market

• Divests risk away hardware

T R I N I T Y S M F

Summary of Investment Thesis

• Track record of consistently acquiring and maintaining highly

profitable video game franchises

• Acquisition of King to provide mobile potential for established

Activision Franchises

• Expansion into unconventional markets to unlock additional revenue

streams

• Shift from physical to digital sale of video games to increase margins

• Increasing adoption of next-gen consoles should boost growth