atvi

Analyst: Victor Sula, Ph.D. Initial Report April 14th, 2009

4/13/09

ATVI daily

11.25 11.00 10.75 10.50 10.25 10.00 9.75 9.50 9.25 9.00 8.75 Š BigCharts.com

60 40 20

Millions

volume

0

Feb

Mar

Apr

MARKET DATA

Share Statistics (04/07/09)

2007

NASDAQ

2008

%Chg

Symbol

ATVI

Revenues, $ Mn.

1348.8

3,026

124.5%

Current price

$10.83

Gross margin

70.8%

39.2%

-31.6bp

Low/ High 52 weeks

$8.14 - 19.28

Operating margin

13.0%

-7.7%

-21.0bp

Average Volume

12,362,652

Net margin

16.8%

-3.5%

-20.3%

Market Capitalization

$14,523 Mn

Dil. Shares Outstanding

1,307.2 Mn

0.38

-0.05

n/m

EPS, $

Source: Yahoo Finance, Analyst Estimates

Recommendation Activision has a strong and visible lineup of key franchises scheduled for 2009, along with several new projects that have the potential to sell well.

Armed with a $3 billion cash pile and being a debt-free company, ATVI has also the potential to strengthen its intellectual property portfolio. Accordingly we rate ATVI as a Speculative Buy.

Investment Highlights On July 9, 2008, game publisher Activision Inc., French telecom and entertainment giant Vivendi S.A., the parent owner of Blizzard Entertainment and Sierra Entertainment, merged, creating Activision Blizzard Inc. (Nasdaq: ATVI) - the world’s largest third-party game publisher worth $18.9 billion at that time. Vivendi S.A. contributed Vivendi Games valued at $8.1 billion, plus $1.7 billion in cash in exchange for approximately 52% stake in ATVI at closing. The business combination brought together a number of top-selling franchises under one roof, ATVI surpassing publishing kingpin Activision Blizzard Inc. (NASDAQ: ATVI)

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Analyst: Victor Sula, Ph.D. Initial Report April 14th, 2009

Incorporated in 1979, Activision Blizzard Inc. is an online and personal computer, console and hand-held game publisher. The Company develops, publishes and distributes video games, as well as maintains its proprietary online game-related service, Battle.net. ATVI’s products cover diverse game categories, including action, adventure, action sports, racing, role-playing, simulation, first-person action, music-based gaming and strategy.

The Company’s product portfolio includes such best selling products as Call of Duty, Guitar Hero, Quake, Tony Hawk, Over the Hedge, X-Men, Spider-Man, James Bond and Transformers, as well as Diablo, StarCraft, Warcraft and World of Warcraft. The Company maintains operations in the U.S., Canada, the United Kingdom, France, Germany, Italy, Japan, Australia, Sweden, Spain, the Netherlands and South Korea. ATVI is based in Santa Monica, Calif., and is a subsidiary of Vivendi S.A. The Company is included in the Nasdaq 100 Index.

STOCK PERFORMANCE (%)

3 Mo.

Price Change

12.5

1 Yr.

3 Yr. (Ann)

-20.0

58.2

Last Qtr.

12 Mo.

3 Yr CAGR

Revenues EPS

6,241 n/m

124.5 n/m

n/a n/a

RETURN ON EQUITY (%)

RGLD

Ind Avg

S&P 500

-1.82 n/a

6.31 16.40

25.51 20.66

GROWTH (%)

2008 5 Yr. Avg.

Activision NVIDIA Corporation Blizzard Inc. (NASDAQ: (NASDAQ: NVDA) ATVI)

Electronic Arts as the world’s most profitable third-party gamesoftware publisher. After the merger, Activision and Blizzard Entertainment continue to exist as separate entities, while Sierra Entertainment was closed down.

For fiscal year 2008, ATVI was the No. 1 U.S. console and handheld game publisher for the first time ever. Guitar Hero® III: Legends of Rock™ was the No. 1 best-selling game in the U.S. and Europe in dollars. In the same year, Call of Duty® 4: Modern Warfare™ was the No. 2 best-selling game in the U.S. and Europe in unit terms. The Company also developed the No. 1 and No. 2 moviebased games worldwide Spider-Man and Transformers. ATVI is currently developing sequels to the Guitar Hero and Call of Duty franchises, Wolfenstein, Marvel Ultimate Alliance 2: Fusion, Prototype, and Singularity, among other titles. During 2008, Blizzard released World of Warcraft: Wrath of the Lich King, the second expansion pack of World of Warcraft, which accounts now more than 11 million subscribers. Blizzard is currently developing sequels to the StarCraft and Diablo franchises.

In 2008, ATVI revenues grew by 25% on a non-GAAP comparable basis, reaching $5,032 million, which is a record for the Company.

Non-GAAP operating income for 2008 on a comparable basis was $1.2 billion, a 21% increase year-over-year, translating into a 24% non-GAAP operating margin. The Company projects profit at 0.61 a share for 2009, on revenue of $4.7 billion. The revenue forecast includes a negative impact of $400 million from a stronger dollar and a reduction of $200 million from its lower margin distribution and co-publishing businesses. ATVI’s first-quarter forecasts missed Wall Street expectations, which estimated earnings of $0.67 a share on revenue of $5.17 billion for full-year, according to Reuters Estimates.

On December 31, the Company had approximately $3.1 billion in cash and investments. ATVI’s CEO Robert Kotick said the Company is preparing to spend some of its $3 billion cash pile on acquisitions. The most popular suggestion is buying bankrupt Midway

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Analyst: Victor Sula, Ph.D. Initial Report April 14th, 2009

P/S comparison

Adjusted results. The results of Activision, Inc. prior to July 9, 2008 are not included as part of the company’s historical financial statements.

Source: Reuters.com; SEC Filings

games primarily for its Mortal Kombat fighting game franchise.

Another popular suggestion among analysts is Take Two Interactive Software Inc., meaning ATVI could possibly secure the Grand Theft Auto franchise, whose fourth installment generated $500 million in its first week of sales last year.

ATVI’s shares are down more than 20% over the past 12 months.

However, the Company’s shares have outperformed its rivals, who have been cutting jobs and delaying games launching. The publisher’s stock recently broke above the $10 level, a price which seemed to be offering some resistance. The Company’s shares are up around 20% this year, while rival Electronic Arts’ stock is down around 5%; shares of Take Two Interactive are down around 18%; and THQ Inc.’s stock has tumbled around 45%.

Financial analysis The historical financial statements of ATVI prior to July 9, 2008, are those of Vivendi Games Inc., as Vivendi is deemed to be the acquirer. For this reason, the Company provides numbers as nonGAAP comparables and they represent an apples-to-apples comparison for the combined company on a year-over-year basis.

Each of ATVI’s four operating segments’ net revenues increased for the year ended December 31, 2008, compared to the same period in 2007. For the fiscal year 2008, ATVI’s non-GAAP net revenues were $5.0 billion, the highest in the Company’s history and the Company’s GAAP net revenues were $3.0 billion. ATVI had a non-GAAP operating income of $1.1 billion and a GAAP operating loss of $233 million and a loss per share of $0.11. For 2009, ATVI expects GAAP net revenues of $4.2 billion, and GAAP earnings per diluted share of $0.22.

The Company’s cash, cash equivalents and investment portfolio, comprised primarily of cash and cash equivalents, was $3 billion at December 31, 2008. On November 5, 2008, ATVI announced that its board of directors has authorized a stock repurchase program under which the Company can repurchase up to $1 billion of the Company’s common stock. Under this authorization ATVI purchased $126 million, or approximately 13 million shares, of common stock at an average price of $9.68 per share.

Activision NVIDIA Corporation Blizzard Inc. (NASDAQ: (NASDAQ: NVDA) ATVI)

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Analyst: Victor Sula, Ph.D. Initial Report April 14th, 2009

Industry analysis

INCOME STATEMENT* Net Sales ($mil) EBITDA ($mil) EBIT ($mil) Net Income ($mil) BALANCE SHEET Cash & Equiv. ($mil) Total Assets ($mil) Total Debt ($mil) Equity ($mil) PROFITABILITY EBITDA Margin Operating Margin Sales Turnover Return on Assets Return on Equity DEBT Current Ratio Debt/Capital Interest Expense ($mil) Interest Coverage SHARE DATA Shares outstand.(mil) EPS Book value / share Institutional Own % Avg Daily Volume

FY 2007 31-Dec-07

FY 2008 31-Dec-08

1,348.8 955.9 247.5 -187.0 179.6

3,026 1,187.0 -789.7 -187.0 -233.0

62.0 879.0 0.0 240.0

2,958 14,701 0.0 11,527

18.3% 13.0% 1.53 16.8% 94.6%

-26.1% -7.7% 0.26 -0.7% -0.9%

0.75 0.00 0.00 n/m

2.37 0.00 0.00 n/m

591.0 946.0 0.38 -0.11 1.36 15.54 NA 42% 11,055,967 12,362,652

* Adjusted results. The results of Activision, Inc. prior to July 9, 2008 are not included as part of the company’s historical financial statements.

Considered by some as a curiosity in the mid-1970s, the computer and video gaming industries have grown from niche markets to mainstream. Overall computer and video game industry hardware, software and peripheral sales climbed to $22 billion in 2008, with entertainment software sales comprising $11.7 billion of that total figure—a 22.9% jump over the previous year, according to the Entertainment Software Association (ESA) report.

According to the latest research from NPD, combined video game software unit sales across the world’s three largest games markets - the United States, the United Kingdom and Japan - grew 11% in 2008. The NPD Group revealed that, in 2008, total U.S. video game console software sales reached $8.9 billion (189.0 million units), PC game sales hit $701.4 million (29.1 million units), and portable software topped last year’s record sales with $2.1 billion (79.5 million units) in revenue. Overall, retailers sold approximately 297.6 million computer and video games last year.

The growth comes from both United States and UK, with respective increases of 15% and 26%. Japan did not fare as well, experiencing a 13% decline in 2008, which can largely be attributed to a decline in portable software, followed by console software.

Nintendo took five of the top 10 positions, with Activision and Take Two each getting two spots. Three of the games in the Americas top ten list have a shot at topping $1 billion in revenues worldwide.

Overall video game sales seem to be holding up relatively well in a difficult economy. In 2009, even as demand in other industries has plunged, video games have shown resilience. U.S. sales of video game hardware and software rose 13% in January from a year earlier, according to market researcher NPD. Overall in 2009, the global video game software market should continue doubledigit growth as the audience for entertainment is expanding as games have become an integral part of leisure time. There are seven games in 2009 that are likely to release, and which likely will sell more than 3 million copies worldwide. Among them are Dragon Quest IX, Gran Turismo 5, Call of Duty Next and other.

Valuation ATVI was formed by combining Activision, one of the world’s leading independent publishers of interactive entertainment, and Vivendi Games, Vivendi’s interactive entertainment business, Activision Blizzard Inc. (NASDAQ: ATVI)

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Analyst: Victor Sula, Ph.D. Initial Report April 14th, 2009

Consensus Estimates ATVI

FY 2009 31-Dec-09

FY 2010 31-Dec-10

EPS, $ Revenue, $Mil

0.63 4,746

0.73 5,199

Consensus estimates are provided by Thomson Financial

Rev. consensus estimates, $Mil. Ticker Symbol

Revenue

2009

2010

%Chg

ERTS THQI TTWO KNM MSFT DIS

4,115 803.7 1,174 n/m 60,952 35,767

4,280 814.9 1,354 n/m 74,900 36,923

4.0% 1.4% 15.3% n/m 22.9% 3.4%

Median ATVI

1,174 4,746

1,354 5,199

15.3% 9.6%

which includes Blizzard Entertainment’s World of Warcraft, the world’s No. 1 subscription-based massively multiplayer online role-playing game, which currently has 11.5 million subscribers around the world. ATVI is the No. 1 third-party console and handheld software publisher for North America in dollars. The Company had a No. 1 selling title or franchise on every major platform, console, handheld, PC and online subscription. In 2008, the Company had four top 10-best selling PC titles in dollars in North America and Europe.

ATVI plans to launch three franchises in 2009, the first-person shooter game “Singularity,” the action game “Prototype” and a still-to-be named racing game. In addition, while operating semiautonomously under the terms of the merger, Blizzard is also in a good position to have an excellent 2009, with the release of the second expansion for World of Warcraft and Starcraft II. The Company entered into the distribution business to obtain distribution capacity in Europe for its own products, while supporting the distribution infrastructure with third-party sales.

In addition, ATVI plans to expand its presence in China and Korea, where Blizzard has had great success but Activision products have not really had any success there.

In our view, the Company’s achievements and purposed milestones are very important accomplishments and make us to believe the Company has potential for value appreciation.

Comparative analyses

EPS consensus estimates, $ Ticker Symbol

EPS

2009

2010

%Chg

ERTS THQI TTWO KNM MSFT DIS

-0.35 -1.31 0.12 n/a 1.75 1.70

0.95 0.04 1.09 n/a 1.95 1.90

-371% -103% 808% n/m 11% 11%

Median ATVI

0.63 2.87

0.73 2.62

-5.60% 16%

Company Name 04.08. 09 Electronic Arts Inc. THQ Inc. Take Two Interactive Software Inc. Konami Corp.

Microsoft Corp.

Walt Disney Corp.

Median Activision Blizzard

Ticker Price per Mrkt.

Symbol Share, Cap. $ Mn $

P/E

P/S

2009

2010 2009

2010

ERTS THQI TTWO

19.17 3.50 7.73

6,169 235 640

-54.8 -2.7 64.4

-54.8 -2.7 64.4

-54.8 -2.7 64.4

-54.8 -2.7 64.4

KNM MSFT DIS

15.58 18.76 19.12

2,141 166,787 35,493

n/a 10.7 11.2 10.7

n/a 10.7 11.2 10.7

n/a 10.7 11.2 10.7

n/a 10.7 11.2 10.7

ATVI

10.42

13,621

16.54

16.54

16.54 16.54

Source: Thomson Reuters.

Activision Blizzard Inc. (NASDAQ: ATVI)

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Analyst: Victor Sula, Ph.D. Initial Report April 14th, 2009

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We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable.

To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).

We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www. finra.org.

All decisions are made solely by the analyst and independent of outside parties or influence.

I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

Activision Blizzard Inc. (NASDAQ: ATVI)

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