1. Charles R. Blyth Fund
20 Jan 2010
Technology | Gaming
Activision Blizzard: Buy Erin Parker | ecparker@stanford.edu
Ryan Rosztoczy | ryanr2@stanford.edu
Joanna Xu | joannaxu@stanford.edu
Lionel Vital | lgvital@stanford.edu
Megan Kanne | mkanne@stanford.edu
Entry Price Band: $5 - $7
Market Data:
Exit Price: $15 - $20
Time Horizon: 1 – 2 years Ticker: ATVI
Position Size: $5,000 Current Price: $10.89
Shares Outstanding: 1,307 mm
Introduction 52-Week Range: $8.67 -
$13.14
Avg Daily Volume: 11.40 mm
Investment Thesis: We want to invest in ATVI for the following reasons: Market Cap: $13.81 bn
 strong and unique subscription-based SaaS gaming model Insider Ownership: 62 %
 leading publisher of software in gaming sector Institutional Ownership: 38 %
 diversify our portfolio with exposure to high growth opportunity in gaming sector Dividend: N/A
Company Profile:
Activision Blizzard is a publisher of online, handheld, PC, and console games worldwide. They develop and publish a diverse offering of
videogames through their Activision branch which are sold in stores or online. These console, PC, and handheld games are retail items which
often carry a high one-time cost. Their Blizzard branch, alternatively, creates and sells subscription-based online games that provide consistent
revenue. These subscriptions are low cost monthly fees where revenue depends upon the number of subscribers. Activision Blizzard’s strategy
emphasizes market share growth based upon an increasing subscription base and popular retail game series.
Company Growth Direction: The recent merger of Activision and Blizzard benefits the revenue outlooks for the merged company. As the
popularity of Activision’s top videogame titles wanes, Blizzard prepares for huge releases and subscriber growth, especially in Asia. Activision
Blizzard is building a model to increase its market share by improving their competitive edge in both the online/subscription and retail realms of
the gaming industry. They are looking to duplicate recent successes including popular retail titles that reach wider audiences. The company is also
looking to increase subscription revenues by tapping international markets. With consistent market share growth, this company plans to become
an even bigger player in the gaming industry and continue their hegemony in online action/fantasy gaming.
Customers: ATVI’s customers are the consumers who enjoy their product. These or either retail or subscription customers, the former making
one time software and peripherals purchases and the latter making monthly payments for continued access to the product.

2. Charles R. Blyth Fund
20 Jan 2010
Competition: Other companies that publish video games either in retail or online. Examples of such companies include: Electronic Arts Inc.,
Sony Corporation, and Take-Two Interactive Software Inc.
Risks: Volatility created by game console wars. Revenue depends upon relatively small number of franchises as largest source of revenue.
Successful integration of Activision and Blizzard dependent upon management because Vivendi holds over 50% of commonshares implying that
ATVI is a controlled company. Thus, marketing, cost management, preserving development/distribution relationships, and overall coordination
of marketing/publishing/distribution are all key factors in how well ATVI performs. Industry and company will respond to drops in
discretionary income/rises in unemployment in 2010 based upon the discretionary nature of the product and the high number of casual gamers
that bolstered their most popular series. Recent insider trading may cast a negative light upon the company’s prospects.
Available Products: Activision: Call of Duty, Guitar Hero/Band Hero/DJ Hero, Tony Hawk, games based upon licensed properties from
LucasArts, Marvel, and DreamWorks Animation. Blizzard: World of Warcraft, Starcraft, Diablo.
Recent News
 Call of Duty Modern Warfare 2 Surpasses $1bn in Retail Sales Worldwide: MW2 continues to set sell-through records since its launch in
November, in the first five days alone the game sold $550 mm worldwide, there are only a handful of entertainment properties that breach
the $1bn mark
 Video Game Industry Prospects Poor: Console cycle is aging and demand for high-end systems has been satiated. Consumers continue
cutbacks in discretionary spending resulting in 13% drop in overall industry sales during November 2009.
 Strong holiday season for Call of Duty: Modern Warfare 2: Sold six million units in December and made $310M on first day alone,
breaking videogame records.
 Subscriptions Strong; Console Games Weak: Many of Activision’s aging console game series are seeing a drop in revenue and popularity
which is being balanced by increased subscriptions. Trend expected to continue in 2010 with three large upcoming Blizzard releases.
 New ZBoard Keyset Based on StarCraft II: SteelSeries peripheral manufacturer created a customized keyboard in preparation for the
upcoming release of Starcraft II.
 Guitar Hero Kicks Off 2010 With Great Downloadable Tracks: To jumpstart revenue from the Guitar Hero series, Activision released
downloadable singles on its website.
 S&P Ups Rating To Strong Buy: Standard & Poor’s equity analyst Jim Yin raised ATVI to Strong Buy from Hold while noting its recent
fall with the industry. He quoted strong Call of Duty sales, subscription revenue, and expansion in China as optimistic signs for stock.
Financials and Valuation

3. Charles R. Blyth Fund
20 Jan 2010
Balance Sheet Trends
 Cash has been steadily increasing from $354mm in 2006 to $2.9bn in 2008
 There has been a similar trend in accounts receivable
 More than half of the company’s assets are in Goodwill and Intangibles
 While accounts payable and expenses have been rising accordingly the company has no long term debt
Revenue vs. Cost Growth
2006 2007 2008
Revenue 1468 1337.88 3026
% Growth -8.86% 126.18%
Cost of Revenue 940.36 382.02 1839
% Growth -59.38% 381.39%
SG&A 379.76 330.3 735
% Growth -13.02% 122.52%
R&D 132.65 384.81 592
% Growth 190.09% 53.84%
Income Statement Trends
 Company made net loss of $107mm in 2008 because SG&A and R&D expenses surpassed revenue
 As a result, retained earnings were negative
 Cost of revenue grew faster than revenue in 2008
Cash Flow Statement Trends
 Deferred tax liability account (as a result of differences in tax and GAAP accounting standards) means ATVI will have to pay more in taxes in
the future
 Cash from operating activities is positive and has been steadily increasing from $86mm in 2006 to $379mm in 2008
 Company has been making steady capital expenditures
 Company has received most funding from stock issuances

4. Charles R. Blyth Fund
20 Jan 2010
VALUATION - DISCOUNTED CASH FLOW METHOD
Historical Projected Terminal
2006 2007 2008 2009 2010 2011 2012 2013
0 1 2 3 4 5
Free Cash Flow Calculation
EBITDA 160 242 152 939 1,033 1,136 1,249 1,374
Less: Taxes on EBITDA 69 104 65 404 444 (398) (437) (481)
Less: Capex (96) (68) (46) (31) (34) (38) (42) (46)
Add: Working Capital Impact - 65 (243) 17 19 20 22 -
Unlevered Free Cash Flow $ 343 $ (72) $ 1,328 $ 1,461 $ 721 $ 793 $ 847
Discounted Cash Flow $ 1,328 $ 1,350 $ 616 $ 626 $ 619 $ 650
DCF Enterprise Value Calculation
Terminal Value Calculation
Terminal Growth Rate 5.00%
Terminal Enterprise Value 20,431.07
Discounted Terminal Value 14,917.75
Enterprise Value 18,128.93
Enterprise Value Net Debt 18,128.93
Share Price $13.87

5. Charles R. Blyth Fund
20 Jan 2010
Market Multiples Growth Rates Margins
Price Percent of Value Price / Earnings EV / EBITDA EV / Revenue Revenue EPS EBITDA CY 09E
FT Sector / Company 07/31/09 LTM High ($ mm) CY 09E CY 10E CY 09E CY 10E CY 09E CY 10E CY 09E CY 10E LT Growth CY 09E CY 10E P / E / G
Bucket Name
ATVI $ 10.89 82.88% $ 14,236 14.5 x 12.5 x 7.3 x 6.4 x 2.3 x 2.1 x 10.28% 7.23% 16 % 31.31% 32.87% 0.9 x
ERTS 17.03 71.68% 5,500 35.9 22.2 10.0 7.4 0.9 0.9 0.94% -1.02% 16 9.37% 12.80% 2.3
TTWO 10.08 80.19% 839 (17.5) 8.0 (43.5) 7.1 1.0 0.7 -5.14% 40.34% 13 -2.20% 9.63% (1.4)
SNE 33.99 99.65% 34,110 48.0 N/A N/A N/A 0.5 N/A 8.14% N/A 11 N/A N/A 4.6

6. Charles R. Blyth Fund
20 Jan 2010