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Activision Blizzard, Inc. (ATVI)

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.

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Activision Blizzard, Inc. (ATVI)

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  1. Activision Blizzard, Inc. (ATVI) Minjoo Kim, Keng Hoe Wong, Qing Yi Yu, Salta Muslim-Ali, Vincent Yu & Vrushank Vora NME W11: Greg Yun

  2. Introduction • Largest pure-video game developer/publisher • Merger of Vivendi Games and Activision in 2007 • Majority Owned by Vivendi SA • N.A., Europe & Asia

  3. Product Line

  4. Product Line (Continued)

  5. Thesis Industry: • 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

  6. Industry Outlook

  7. 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

  8. 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. 4 2010 Game Growth by Segment by Newzoo Fig. 2 2010 Revenue Breakdown of Industry from Newsweek

  9. 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

  10. Company Thesis

  11. 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

  12. 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

  13. 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

  14. 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 Growth Fig. 8 US MMOG Breakdown May 2010

  15. 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

  16. Competitive Advantages (Continued)

  17. Competitive Advantages (Continued)

  18. Future Releases 2012 2012 2012 2011 2012

  19. 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

  20. 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%

  21. 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

  22. 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.

  23. Quant Thesis

  24. Base case Assumptions

  25. Low & High Case Assumptions

  26. DCF Output: Base Case

  27. DCF Output: Low and High Case

  28. DCF Sensitivity

  29. Football Field

  30. Comparables

  31. Comparables

  32. 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

  33. Questions?

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