Thoughts on Activision Blizzard’s Q4 Results

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February 12, 2010 | SIN Picks | | Author Asif

Activision Blizzard (ATVI) released its fourth quarter and full year 2009 results yesterday and instead of writing a blog post about it, I figured I would try to live tweet the earnings conference call through the account and follow up with some key highlights here.

Starcraft 2 Screenshot. More screenshots here.

The Good:

  • In the words of Activision Blizzard CFO Thomas Tippl, “we generated a record $1.2 billion of operating cash flow, which is more than ten times ahead of our next best competitor.”
  • The company ended the year with $3.3 billion in cash and investments on its balance sheet with no debt, $200 million higher than the prior year end. Activision Blizzard achieved this despite buying back 115 million shares at an average price of $10.87, completing a $1.25 billion share buyback program.
  • Activision announced another $1 billion share buyback program for 2010 and will also start paying a 15 cent annual dividend. Based on yesterday’s closing price of $10.10, the yield works out to 1.48%. This compares with a dividend yield of 1.84% for the S&P 500.
  • Starcraft 2, which has been included in many most anticipated game lists by publishers like the Wall Street Journal and PC Gamer, is set to launch beta testing at the end of February and is still on schedule for the first half of 2010. I personally signed up for the beta testing program on the new platform and hope that I get picked up for it.
  • World of Warcraft (WoW) now has 11.5 million subscribers. It has been operating normally in China since its relaunch on September 19th through Netease. The expansion pack for WoW called Wrath of Lich King is awaiting approval from Chinese authorities and could lead to further growth in China when released.
  • The new World of Warcraft expansion pack Cataclysm will be released in the second half of 2010.
  • The company reported better than expected fourth quarter results when it announced non-GAAP earnings of 49 cents per share, well ahead of expectations of 44 cents.
  • During this holiday season Call of Duty: Modern Warfare 2 broke “all” video game sales records. DJ Hero also appears to have performed better than initial reports, outselling The Beatles Rockband by Electronic Arts in Q4.
  • Non-GAAP revenue of $2.5 billion was $277 million higher than expectations of $2.23 billion. What was interesting about this performance was that adjusted Q4 2009 revenue was up 7% year-over-year despite the fact that Q4 2008 had three best selling games (Guitar Hero: World Tour, Call of Duty: World at War and World of Warcraft: Wrath of the Lich King), while Q4 2009 only had Call of Duty: Modern Warfare 2 and DJ Hero that made a significant contribution to revenue.
  • Non-GAAP operating margins for 2009 were 46% and operating margins in Q4 2009 was 49%. Tax rate in Q4 was a lower than expected 28% due to international growth.

The Bad:

  • On a GAAP basis, the company reported a loss of 23 cents in Q4, which included a 19 cents write down of intangible assets. GAAP earnings for the full year 2009 were 9 cents. GAAP revenue and earnings are much lower than the non-GAAP numbers because they don’t take deferred revenue into account. However the GAAP numbers are going to make the P/E,  P/S and other valuation ratios appear sky high to some investors and stock screeners.
  • Activision is going to significantly scale back its music offerings in 2010 to less than 10 products and expects revenue in this category to drop. Most of the highly anticipated games are slated for release in the second half of the year and the Q1 pipeline looks especially light.
  • The company does not expect the next version of Call of Duty slated for release in the 2010 holiday season to generate as much revenue as the recently released Modern Warfare 2.
  • Outlook for both Q1 2010 and full year 2010 is below analyst estimates. For Q1 2010, Activision expects non-GAAP revenue of $525 million and non-GAAP earnings of 2 cents. For the full year, the company expects to report non-GAAP revenue of $4.4 billion and earnings of 70 cents.

Overall I was very pleased with the results for Q4 and the fact that Starcraft 2 is so close to being launched. Even with the 70 cents earnings outlook for 2010, I am looking at an adjusted forward P/E of 14.43 for a company with very healthy margins, strong pipeline and a very strong balance sheet. I plan on retaining our long position both in the SINLetter Model Portfolio and in my personal portfolio.

Live tweeting the call was a lot of fun and you can read the tweets in reverse chronological order from the @specialsin account here.
Related posts:

Ten Reasons I am Buying Activision Blizzard (ATVI)

Activision Blizzard: Playing Diablo’s Advocate

Project Natal: Revolutionary Technology for an Industry in Distress?

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  1. Dave
    February 11th, 2010

    Asif, thanks for the recap and thorough following.

    One thing I wanted to put out on the table is the perspective/analysis of the competitive gaming community. I understand in general this aren’t the largest revenue generating group, however they are a core group that will contribute religiously to the bottom line.

    Nevertheless, the point I’m trying to make is, are there any analysis or research done on the competitive gaming market done within the last 5 yrs? I thought perhaps understanding the growth of this area within the US/Eur/Asia and ATVI’s share of competitive games would provide an interesting and refreshing perspective.

    WoW is being played competitively across the globe and there has been more media coverage. Starcraft to this day is still played competitively and with SCII coming out, I’m sure the competitive gaming sector will only grow more.

  2. Asif
    February 11th, 2010

    It is very interesting that you brought this up Dave. I was thinking about the exact same thing a couple of nights ago. As you mentioned, Starcraft has been played competitively and in South Korea prizes usually run into tens of thousands of dollars.

    Let me look into it and see what I can find out.

  3. Dave
    April 28th, 2010

    I just wanted to point out the revenue capabilities within an MMO, and why Blizzard is ATVI’s bread and butter.

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