Equity Report AND Template

Pompeu
Investment Club
EQUITY
RESEARCH
March 2020

Activision CEO

Company
Overview
Activision I
Blizzard
Ac,vision Bizzard, Inc., American developer of electronic
games, was created as a fusion between Ac,vision and
Vivendi Games.
Company Overview
The firm owns ,tles such as Call of
Duty, Diablo, World of Warcra;,
Overwatch or Guitar Hero, and in 2016
acquired the mobile games developer,
King, with one of its most important
franchises, Candy Crus
In 2018, Ac,vision Blizzard had
$7,500M of net income. Its revenues
come from console ($2,538M), PC
($2,180M), mobile and ancillary
($2,175M) and others ($607M).
The firm is structured by three different
segments:
• King Digital Entertainment
(Candy Crush, Farm Heroes,
Pet Rescue y Bubble Witch):
2 7 . 8 6 % o f a l l reve n u e s
($2,090M)
Activision Blizzard also has its own e-
sports competition, the Major League
Gaming, and a division based on
television and film content, named
Activision Blizzard Studios.
• Ac,vision (Call of Duty,
Skylanders o Crash Bandicoot):
3 6 . 5 % o f a l l r e v e n u e
($2,738M)
• Blizzard Entertainment (World
of Warcra;, StarCra;, Diablo,
Hearthstone y Heroes of the
Storm): 30.21% of all revenue
($2,266M)

NASDAQ: ATVI
(Price performance):
Senior Coorporate Management
Company Overview
03
Activision Blizzard is an American video game
holding company based in Santa Monica,
California, initially incorporated in 1979, then
reincorporated in 1992, continuing with the
merger between Activision, Inc. and Vivendi
Games (the parent company of Blizzard
Entertainment) in 2008.
By 2010 Activision Blizzard became the largest
videogame publishing company in the world. The
company joined the S&P 500 index in 2015 and
joined the Fortune 500 in 2017. Activision Blizzard
is traded on the NASDAQ stock exchange under
the ATVI ticker.

Company Overview
Business Units
The company is divided into five business units:
Activision Publishing, Inc. which specializes in
publishing and developing console games;
Blizzard Entertainment, Inc. which primarily develops
personal computer (PC) games;
King Digital Entertainment, which specializes in
publishing and developing mobile games, Major League
Gaming, which is in charge of Activision Blizzard’s eSport
endeavours, and Activision Blizzard Studios, a motion
picture production unit.
In this report Activision Publishing, Blizzard
Entertainment and King Digital Entertainment will be the
topic of discussion.
Activision
Publishing, Inc.
-
Activision Publishing, Inc.
(“Activision”) specializes in
developing and publishing
software products and
entertainment content,
particularly for the console
platforms.
Some key franchises for Activision
are Call of Duty, Skylanders, and
Tony Hawk’s. Activision’s Call of
Duty franchise has been the
number one console franchise
globally for the past 9 years out
of 10. In 2010 Activision entered
into a partnership with Bungie,
Inc. to publish games of the
Destiny Franchise. This
relationship was terminated with
the end of the 2018 calendar year.
Blizzard
Entertainment, Inc.
-
Blizzard Entertainment, Inc.
(“Blizzard”) is a subsidiary of
Activision Blizzard. The
company was initially founded
in 1991 by university students.
Today it forms part of Activision
Blizzard after a merger between
Activision and Vivendi Games. The
company focuses primarily on the
development and publishing of
software and entertainment
content, particularly for the PC
platform. Key franchises are
World of Warcraft, StarCraft,
Diablo, Hearthstone, and
Overwatch. Blizzard
Entertainment’s flagship
conference is BlizzCon hosted in
California every year.
King Digital
Entertainment
-
Ki n g D i g i t a l E n t e r t a i n m e n t
(“King”) is primarily a publisher
and developer of interactive
entertainment content and
services, especially for mobile
platforms.
Some of King’s key franchises are
Candy Crush, Farm Heroes, and
Bubble Witch. Activision Blizzard
acquired King for $5.9 billion in 2015
and operates as an independent
entity within the company. Activision
Blizzard went ahead with the
purchase as the acquisition served as
an ideal point of entry into the
fastest growing business segment of
the gaming industry. With the
completion of the acquisition
Activision Blizzard boasts with the
largest videogame network with a
user count of approximately 350
million.

Operating
Model
Activision Blizzard focuses on developing
enduring franchises
with regular content updates in order to maintain constant and predictable
revenue streams.
Although most of the franchises are developed by internal studios, Activision Blizzard
periodically engages independent third-party developers to create content on their behalf.
And from time to time, Activision Blizzard acquires license rights to publish and/or
distribute software products created by independent third-party developers.
Digital Produtcs
Most of Activision Blizzard products are available in a digital
format, which allows consumers to purchase and download
content directly. This is possible due to partnerships with
Microsoft Corporation, Sony Interactive Entertainment Inc.,
Apple, Google, Nintendo Co., Ltd. and Facebook. Blizzard
uses its proprietary online gaming services, Blizzard
Battle.net, to distribute most of Blizzard’s content and
selected Activision content directly to PC consumers.
Physical Products
Physical products are available for sales in outlets
around the world, they are sold primarily on massmarket
retailers such as Target or Walmart, on consumer
electronics stores such as Best Buy, on game specialty
store such as GameStop, and other stores as Amazon.
04
Key Operating Statics
In 2019, Activision Blizzard achieved the net revenues
of $6.489 billion coming from its three segments.
The percentage of sales by region have not changed
significantly with respect to 2018.
Revenues from Activision equal to 37% of their net
revenues, generating the largest chunk, while Blizzard
Entertainment generating only 29% of revenues.
The revenue distribution of the company is fairly even
amongst its three major business units.

Employees
As of December 31, 2019, Activision Blizzard
had approximately 9,200 total full-time and
part-time employees.
In a shareholder meeting the management
board announced an employee cut of
approximately 750 personnel from 2018
despite Activision Blizzard earning record
revenues.
Lay-Offs
The lay-offs mainly affected nonmanagement
divisions to reduce overall costs
across the development business units.
The CEO Answer
The company’s CEO Robert Kotick justified
the layoffs with a promise of the
reinvestment of the saved resources towards
development teams and an increased focus
on eSports and the core games of Activision
Blizzard.
Operating Model

Shareholders
In July of 2008 Activision merged with
Vivendi games, the videogames division
of Vivendi SA, which culminated with the
incorporation of the Blizzard business
division into the resulting holding
company.
Since then Activision Blizzard stock has
been owned in its majority by Institutional
investors (92,38% of the shares)
As of December 2019, the five major
investors of Activison Blizzard were:
FMR LLC, The Vanguard Group, Capital
International Investors, Capital World
Investors and BlackRock, Inc.

Corporate
Governance
How are they organised?
Activision Blizzard Board of Directors is
formed by eight independent directors
and two non-independent directors,
Robert Kotick Activision’s CEO, and Brian
Kelly the Chairman of the Board.
The Board has three standing committees
- each of which operates under a written
charter approved by the Board of
Directors
the Audit Committee, responsible for
selecting, evaluating, and overseeing the
company’s independently registered
public accounting firm;
the Compensation Committee,
responsible of discharging the Board’s
responsibilities relating to compensation
paid to the firms’ directors and executive
officers; and the Nomination
and Corporate Governance
Committee whose purpose is to
recruit director nominees, and to
evaluate the Board and its
committees as well as to assess
the appropriate engagement
with stockholders.
Additionally, the executive
officers are in charge of the
execution of Activision Blizzard’s
mission, vision and strategy .
Board members assess their
management’s performance and
review succession planning for
the senior-most officers.

CFO
In January of 2019 Activision appointed Dennis Durkin
as Chief Financial Officer as well as President of
Emerging Businesses.
Dennis Durkin joined the Company in March 2012 as
Chief Financial Officer and served in the role until May
2017.
During his period as CFO some remarkable
accomplishments were the successful buyback of
shares from Vivendi and the acquisition of King. Later
he served as Chief Corporate Officer from May 2017
until January 2019. Prior to joining the Company in
2012, Mr. Durkin held a number of positions of
increasing responsibility at Microsoft Corporation, most
recently serving as the Corporate Vice President and
Chief Operating and Financial Officer of Microsoft's
interactive entertainment business, which included the
Xbox console.
CEO
Robert Kotick has been CEO of Activision Blizzard since
February 1991, following his purchase of a significant
interest in the Company, which was then on the verge of
insolvency.
He held the position of Chairman and Chief Executive
Officer from February 1991 until July 2008, when he
became President and Chief Executive Officer. He served
as President from July 2008 until June 2017, when
Collister Johnson began serving as President and Chief
Operating Officer.
COO
Collister Johnson has served as President and Chief
Operating Officer since June 2017.
Prior to this role, he held a number of positions of
increasing responsibility at Activision Blizzard since
2008, serving as the chief financial officer and head of
operations of Activision Publishing, chief operating
officer of studios for Activision, and senior vice
president and chief of staff to our Chief Executive
Officer.

Financial Overview
Activision Blizzard’s total revenues were
$6.486 billion as of the end of calendar year
2019
Activision Blizzard’s total revenues were
$6.486 billion as of the end of calendar
year 2019, which is a 13.48% drop from its
previous year’s revenues of $7.500 billion.
FY 2018 saw record revenues for the
company, therefore 2019 revenues are
considered to be high overall (only a 1.8%
drop from FY 16, $6.608 billion).
Activision Blizzard reports its revenues
broken down by their main operating
regions, the Americas with a 51% share,
EMEA holding 35% and Asia Pacific with
14%.
The largest single revenue generating
country is the United States.
The company’s exploration of transitioning
to microtransactions and downloadable
expansion packs-based monetization
seem to have increased their operating
income in all regions in comparison with
FY 17 as the profit margin on these
products are significantly higher than on
standard videogame sales.
FY 18 was Activision Blizzard best
performing year ever due to the large
amount of franchise launches and in-game
content delivered. As their results are still
driven by new releases, the lower number
of releases show their financial impact in
the financial results of 2019.
Due regulatory and cost differences
between regions, such as China’s recent
licensing ban on newly developed
videogame titles and requirements to
completely rewrite segments of
videogames on certain occasions, below
we present a graph of operating income
by region.
Through observing the results of the net
operating income by region, it becomes
evident that despite lower net revenues for
Activision Blizzard in FY 19 the company
has become more profitable through its
cost-reduction efforts in terms of labour
cost cutting and reduction of sales and
marketing expenses.

Financial Overview
For our revenue forecast, we anticipate Activision Blizzard to
maintain the rough one-third distribution of its revenues across its
segments with a very flat line growth for the next 10 years.
Our forecasts take into account a potential
downturn in the market, the supply-chain disruption
caused by the Covid-19.
The increasing market penetration of virtual and
augmented reality videogames and the past
performance of Activision Blizzard in terms of its
MAU count, revenues and new titles released.
In our forecast we remained as neutral as possible
in terms of monthly active user count and in-game
user investment to arrive at the most accurate
figures possible.
Activision’s main MAU driver, Call of Duty, allows for
a great deal of uncertainty in terms of user
engagement and revenues.
For King, there has been a decreasing trend in its
MAU and revenue growth as the average revenue
per user is slowly declining.
Blizzard’s MAU and customer engagement is heavily
dependent on its periodic release of new content for
its popular games as there is a strong seasonality
observed with its MAU trends.
For this reason, we have plotted our optimistic,
neutral and pessimistic forecasts on the chart
below taking into account the upcoming releases
announced by each of the subsidiaries of
Activision Blizzard.
As there is no accurate information available for
years 2023-2030, the revenues forecasted in this
period are derived purely from the average trends
of the past performance of the company.
Activision Blizzard maintains its robust
commitment to “remaining a worldwide leader in
the development publishing and distribution of
high-quality interactive entertainment content and
services”.
The three key pillars in spotlight are “expanding
audience reach”;
“driving deeper consumer engagement”; and
“providing more opportunity for player
investment”.

Expanding
Audience Reach
Activision Blizzard is already a proud host of a gamers network
of approximately 350 million users worldwide, which they
focus on expanding through building on their well-established
franchises and creating compelling new ones.
On consoles Activision is due to release its new Call of Duty
(Black Ops 5) in the last quarter of 2020, which is expected to
drive sales significantly, especially with the release of the two
new consoles: PlayStation 5 and Xbox Series X.
There are also speculations about Blizzard Entertainment
releasing Overwatch 2 in 2020/2021.
During their latest BlizzCon, Blizzard Entertainment’s conference,
they announced the release of Diablo: Immortal later in 2020, solely
for the mobile platform, the currently fastest growing segment of the
industry with record sale potentials.
Recent news published by the company also saw light to promising
teasers to the release of Diablo IV in late 2020/early 2021 as a
continuation to the Diablo franchise 8 years after the release of
Diablo III.
Driving Deeper Costumer
Engagement
Blizzard’s World of Warcraft is looking forward
to an expansion later this year with the release
of World of Warcraft: Shadowlands on
December 31st of 2020.
The latest expansion released for the game brought in an increase of revenues of 30%
for the quarter of the release and a further 8% increase for the quarter after, which
will amount for a significant revenue boost for the company early 2021.
Activision Blizzard also popularised the
appearance of the free-to-play gaming model
amongst some of its titles, which was recently
revolutionised by Fortnite’s debut on the
videogame market late 2017.
The new model is expected to drive deeper
engagement by allowing consumers to play
without any up-front costs providing them
with investment opportunities through
purchasable content via microtransactions.

Providing More
Opportunities for
As players engage with games across a more diverse range of consoles,
Activision Blizzard now develops most of their games for all major consoles
(PC, PS4 and Xbox One), and Overwatch 2 for Nintendo’s Switch. About the
new generation of consoles (PS5 and Xbox Series X) the company has not
confirmed anything yet, but the company is expected to release its newest
06
The additional investment opportunities offered through
purchasable downloadable content have proven to be an
effective way to drive deeper consumer engagement with certain
titles, especially amongst core fans of franchises
. This model tends to be more stable and prove to be a good
indicator of true consumer engagement due to their recurring
nature. Activision Blizzard has also began experimenting with
additional revenue generating consumer investment
opportunities such as film, television and eSports.
Investment into
development/
Marketing
Capital Markets Development
ATVI, trading on the NASDAQ exchange, opened 2019 at the
price of $47.13 and closed the year at $58.40, gaining a total
of 23.9% in 2019.
The stock had a robust upwards trend throughout 2019
without any large disturbances. ATVI reported revenues 1%
ahead of investors’ expectations and EPS by 4% for FY 19.
The upcoming monthly active user drivers such as Call of
Duty, World of Warcraft expansion, Diablo Immortal and new
console releases alongside the in-game revenues from
content expansions and micro-transaction should prove for
exciting movements in financial results of 2020.
From the table below one can observe that the marketing
spending makes up a significant part of ATVI expenses in the last
years, and although they still are, in the past two years they have
decreased their spending on selling and marketing expenses.
The highest increase in selling and marketing expenses was
noticeable in 2016 and 2017, with $1210 million and $1380
million spent respectively, correlated with the release of several of
their biggest titles.
Research and development costs are predicted to increase
slightly as they plan to release several bigger titles later this year.
In line with Mr. Kotick’s words, research and development
expenses are predicted to increase for the future as management
shifts resources from non-management labour to R&D expenses.
Activision Blizzard beat all the EPS targets for its four
quarters of 2019 showing better than expected overall
performance for the FY 19, with strong signs of a continued
upwards trend in revenues for FY 20 with big title releases
such as Diablo Immortal, Diablo IV, expansion for World of
Warcraft and the new Call of Duty. A strong contributing
factor to the Q4 EPS is predicted to be the shift from an ingame
Season Pass to a better monetizable Battle Pass (as
seen in other multiplayer shooter games) and an increased
transition towards smooth cross platform play.
The release of World of Warcraft Classic also had a significant
impact on quarterly Monthly Active Users count, enabling
Blizzard Entertainment to capitalise upon the returning
players with upcoming expansion release

Activision Blizzard beat all the EPS targets for its four
quarters of 2019 showing better than expected
overall performance for the FY 19, with strong signs
of a continued upwards trend in revenues for FY 20
with big title releases such as Diablo Immortal,
Diablo IV, expansion for World of Warcraft and the
new Call of Duty. A strong contributing factor to the
predicted to be the shift from an in-game Season Pass to a
better monetizable Battle Pass (as seen in other multiplayer
shooter games) and an increased transition towards smooth
cross platform play. The release of World of Warcraft Classic
also had a significant impact on quarterly Monthly Active
Users count, enabling Blizzard Entertainment to capitalise
upon the returning players with upcoming expansion release
During 2019, Activision Blizzard released 6 videogames and announced 5 to be released in
2020. Although announcement and release dates aren’t always correlated with stock price
movements, these events usually bring about a surge in stock trading volume and, at times,
price movements too. Highlighted in yellow, are the videogame releases & announcements
causing the largest movements on the stock market.

Industry Outlook
The videogame market was valued at $152.1bn in
2019, growing 10.3% YoY from $137.8bn, which is in
line with the previous year’s YoY growth of 10.9%
The industry’s largest market, APAC accounting for almost 50%
of revenues, grew from $71.4bn to $72.2bn, which was strongly
affected by China’s licencing freeze that lasted for 9 months.
North America grew from $32.7bn to $39.6bn showing huge
potential for Activision Blizzard as it is home to over 50% of its
revenues.
EMEA grew from $28.7bn to 34.7bn with strong signs of further
growth. Latin American showed significant growth as it increased
the size of its market from $5bn to $5.6bn
The gaming industry has three main sub-markets: console
games, PC games and tablet/mobile games.
Tablet/mobile games account currently for the biggest share of
players and is expected to continue growing until representing
nearly the half of the players in the next years. PC gaming is
expected to decline and consoles to remain stable.
The industry’s outstanding performance can be attributed to
two main factors.
• Firstly, the gaming space has seen a shift in revenue
sources lately. The increased popularity of free-to-play
games a new source of revenues has emerged: in-game
microtransactions. Players are now able to purchase ingame
items such as cosmetics for real money making it
one of the most prevailing ways of monetization
07
The new trend
• Secondly, the variety of platforms available for
gaming are constantly growing, transforming
towards a more portable set up. Gaming studios
increasingly focus on smartphones as the driver of
growth as in 2019 the market share of mobiles and
tablets accounted for 45% with a value of $68.5bn.
This comes in light with a push towards a
subscription-based cloud-based model such
Google’s Stadia or Apple’s Apple Arcade, providing
access to an arsenal of games for a fixed monthly
fee on portable devices.
The new trend is ushering videogame developers to come up
with new ways of monetization such as the creation of in
game virtual economies.
They are either built by the developers or are outsourced to
be overseen by third parties such as DMarket, which has
opened a niche in the videogame market.
Industry experts are expecting a robust growth in B2B
solutions for videogame economies, assisting with the
building and managing of such in game economies, which
will significantly improve gaming experience and increase
activity as individual players can collect, trade, and start up
small in-game operations with their items.

SWOT
Analysis
We present a SWOT analysis
indicating the situation of the
company in its industry context
Strengths
the company is recognized as the market
leader and its game sagas are among the most
purchased games in the world each year.
It also has a very loyal customer base.
Opportunities
the release of the ninth generation of consoles is
expected to have a great impact on revenues especially
in the regions where the company is more present (North
America and Europe).
Deals with Microsoft and Sony to sell their games in
combination with the new consoles are expected.
New consoles will allow better quality of the games and
experiences for players, allowing for increases in revenue
(through better pricing and incentives to purchase
expansion packs that complete the experience) and
fostering loyalty.
Weakness
consumers have a high level of exigency for
the games and complaints about some
characteristics of the new releases that
potentially harm sales are common.
The presence of the company in Asia-Pacific,
where customers are easier to monetize with
in-game purchases, is relatively low compared
to its presence in other regions.
Threats
The market has very big competitors. In mobile games,
there is fierce competition of Tencent, that domains that
market and continues to grow its influence. In the PC
market, League of Legends continues to be the most
popular game.
As well in the revenues generated globally by esports.
Another challenge is that the impact of the new
generation of consoles is expected to be shared by
various important competitors in the US that can reduce
by much the share of the extra revenue the company will
obtain.
Finally, the introduction of new regulation in China aiming
at decreasing the time individuals and especially children
spend playing, could represent a decrease in revenues
and opportunities to expand.

Risks
1 Risks
Activision Blizzard conducts a significant share of their business
outside of the United States, and thus derive significant revenues
from international trade from Europe, Asia and Australia. Moving
forward, they expect sales from emerging market to form
significant part of their revenue streams.
As such, Activision Blizzard is expected to become more exposed
to the systematic risk of foreign trade as well as the economic
and political implications of doing business with emerging
markets. Moreover, deterioration of relations with any of the
countries they do business with could cause significant losses in
revenues.
The most recent example is China’s strict regulatory approval,
thus the Chinese government’s decision to revoke its approval for
the games of Activision Blizzard could result in a
negative impact on its business.
2 Covid-19
Recently, events such as Game Developers Conference (GDC) in San
Francisco, were cancelled due to the wildfire-like spread of the
coronavirus as companies like Facebook, Sony, Electronic Arts,
Microsoft, Amazon, Activision, etc. have pulled out. E-sport events
are being cancelled or getting moved such as the Overwatch
League.
Weeks 6 and 7 were scheduled to be played in Guangzhou,
Hangzhou and Shanghai, and now they have been moved to Seoul,
South Korea. This was due to the forecast of having matches at
half-empty venues because of the widespread panic.
The impact of the Coronavirus is estimated to be minimal on
Activision Blizzard due to its low market capitalisation in Asia and
the virtual distribution business model, however, a very important
factor to take into account for the long run is that Activision
Blizzard have operations in the China. So, the outbreak could lead
to game delays as security requirements and software tools make
remote-access impossible if restrictions extends into months. Late
2020 is the critical launch time frame for the next generation of
consoles from Microsoft and Sony. Both console makers manufacture
their hardware in China. And if next generation consoles are

3
Regulations/Politics
When talking about regulations, the most severe
example as mentioned before would be China, whose
body of game licensing was shifted to the Publicity
Department of the Communist Party of China, resulting in a halt in
the licensing of new games from March 28, 2018 for 9 months,
which spread fears of further uncertainty in the industry.
Other aspects that could affect Activision more closely are:
Counterparty risks relating to customers, licensees, licensors, and
manufacturers; Intellectual property claims; Piracy and
unauthorized copying of their products; risks and uncertainties of
conducting business outside the U.S.
4
Macro Economic Conditions
The spread of coronavirus increasingly affects the
global economic situation whilst policymakers fail to
contain its wildfire-like spread. Stock market has already
seen severe drops, but further harm could be cause if
economic activity slows down further. The Fed responded this
month by cutting interest rates by half a percentage point, with
potential further monetary stimulus expected. If the global
economy enters into a recession, the sales of videogames and
microtransactions are predicted to plummet as they aren’t
considered to be necessities, although their addictive nature
might counteract some of this downturn.
Other factors that could harm the Actvision Blizzard company,
which some of them are mentioned by them could be: Substantial
influence of third-party platform providers over their products
and costs; Rapid changes in technology and industry standards;
competition, including from other forms of entertainment; their
ability to sell products at assumed pricing levels; their ability to
attract, retain, and motivate skilled personnel; their ability to
increase the number of users they have by taking out an
outstanding game.
08

Pompeu
Investment Club
EQUITY
RESEARCH
March 2020