。3 February 2019 Online Videogames 2 Americas/United States Consumer InternetActivision Blizzard, Inc(ATVI) Rating OUTPERFORM Price (01-Feb-19, US$)46.01 Target price (US$)(from 79.00) 70.00 52-week price range (US$)83.39 - 43.99 Market cap(US$ m)35,108 Enterprise value (US$ m)33,406 Target price is for 12 months. Research Analysts Stephen Ju 212 325 8662 stephen.ju@credit-suisse Philip Wang, Ph.D. 212 538 3458 philip.wang@credit-suisse Nicole D'Souza 212 325 6659 nicole.dsouza@credit-suisse Yoni Yadgaran 212 325 6206 yoni.yadgaran@credit-suisse Rationalize, Regroup, Redeploy for 2020 andBeyond ■ Event:We decrease our price target from $79 to $70, as we have madesignificant changes to our near to long term estimates. Our 2019 Adj. EPSestimate is now $2.29 vs. prior $2.70.■ Investment Case:We expect initial EPS guidance for 2019 to be down yearover year given its moves to rationalize some of its products, with the biggestchange being the move to revertDestinyback to Bungie. Givenmanagement's aim to focus on both Live Services as well as new contentdevelopment at Blizzard, we find it difficult to find fault with what is effectivelya move to allocate capital to the highest ROI-potential projects. While wecontinue to modelDiablo Immortalto see release in 2019 (per priordisclosure from NetEase) we have elected to assume more meaningfulcontribution in 2020, which we anticipate will see Activision return to morerobust growth especially as we expect a fullDiablosequel by 2021. Wedecreased our target price to $70 from $79 as we eliminateDestinyrelatedrevenue and reduced estimates forHeroes of The Storm . We maintain ourOutperform rating on the following thesis points: 1) ability to produce andmaintain high quality franchise content, 2) management executionconsistency, 3) strong positioning in the long-term sector transition from CPGto online as well as to mobile. ■ Valuation:Our $70 price target (vs. prior $79) is based on DCF that uses an11% weighted average cost of capital and 3% terminal growth. Lack ofcommercial traction for any of Activision's game releases presents a risk toour estimates. Share price performance ATVI.OQS&P 500 INDEX Apr-18Jul-18Oct-18Jan-19 40 50 60 70 80 90 On 01-Feb-2019 the S&P 500 INDEX closed at 2705.85 Daily Feb01, 2018 - Feb01, 2019, 02/01/18 = US$73.35 Quarterly EPSQ1Q2Q3Q4 2017A0.310.430.600.94 2018E0.380.410.521.26 2019E0.600.400.390.89 Financial and valuation metrics Year12/17A12/18E12/19E12/20E EPS (CS adj.) (US$)2.292.572.292.57 Prev. EPS (US$)--2.703.28 P/E rel. (%)99.0108.9129.8128.0 Revenue (US$ m)7,156.07,451.07,079.27,504.5 EBITDA (US$ m)3,328.83,054.62,717.42,758.6 OCFPS (US$)2.902.542.432.66 P/OCF (x)21.918.118.917.3 EV/EBITDA (current)10.411.312.712.5 Net debt (US$ m)-323-1,702-3,252-2,898 ROIC (%)15.9625.1020.0622.48Number of shares (m)763.05IC (current, US$ m)9,139.00 BV/share (Next Qtr., US$)14.9EV/IC (x)3.4 Net debt(Next Qtr., US$ m)-1,702.0Dividend (current, US$)- Net debt/tot eq (Next Qtr.,%)-14.8 Source: Company data, Thomson Reuters, Credit Suisse estimates 3 February 2019 Online Videogames 3 Activision Blizzard, Inc (ATVI) Price (01 Feb 2019):US$46.01 ; Rating:OUTPERFORM ; Target Price:(from 79.00) 70.00 ; Analyst:Stephen Ju Income Statement12/17A12/18E12/19E12/20E Revenue (US$ m)7,156.07,451.07,079.27,504.5 EBITDA (US$ m)3,3293,0552,7172,759 Depr. & amort.(930)(503)(429)(174) EBIT (US$)2,3992,5512,2882,585 Net interest exp(159)(125)(66)(60) PBT (US$)2,2402,4262,2222,525 Income taxes(878)(83)(359)(411) Profit after tax1,3622,3431,8632,114 Minorities---- Reported net income (US$)1,7481,9801,7772,020 Other NPAT adjustments0000 Adjusted net income1,7481,9801,7772,020 Cash Flow12/17A12/18E12/19E12/20E EBIT2,3992,5512,2882,585 Net interest(159)(125)(66)(60) Change in working capital1,233(770)(44)(100) Cash flow from operations2,2131,9591,8892,093 CAPEX(155)(172)(140)(145) Free cashflow to the firm2,0581,7871,7501,948 Acquisitions---- Divestments80000 Cash flow from investments(197)(235)(140)(145) Net share issue(/repurchase)3,6939100 Dividends paid(236)(259)(200)(202) Changes in Net Cash/Debt1,9651,3791,550(354) Balance Sheet (US$)12/17A12/18E12/19E12/20E AssetsCash & cash equivalents4,7134,4025,9525,598 Account receivables9181,052871951 Other current assets8439001,0071,121 Total current assets6,5206,3937,8577,690 Total fixed assets294325309281 Investment securities0000 Total assets18,71718,03319,19618,992 Liabilities Total current liabilities3,6632,8092,6802,767 Total liabilities9,2556,5116,3826,469 Shareholder equity9,46211,52212,81412,524 Total liabilities and equity18,71718,03319,19618,992 Net debt(323)(1,702)(3,252)(2,898) Per share12/17A12/18E12/19E12/20E No. of shares (wtd avg)764771778786CS adj. EPS2.292.572.292.57 Prev. EPS(US$)--2.703.28 Dividend (US$)0.000.000.000.00 Free cash flow per share2.692.322.252.48 Earnings12/17A12/18E12/19E12/20E Sales growth (%)8.44.1(5.0)6.0EBIT growth (%)2.86.3(10.3)13.0 Net profit growth (%)4.713.3(10.2)13.6 EPS growth (%)3.712.3(11.0)12.5 EBITDA margin (%)46.541.038.436.8 EBIT margin (%)33.534.232.334.4 Pretax margin (%)31.332.631.433.6 Net margin (%)24.426.625.126.9 Valuation12/17A12/18E12/19E12/20E EV/Sales (x)4.864.484.504.29EV/EBITDA (x)10.411.312.712.5 EV/EBIT (x)14.513.113.912.5 P/E (x)20.117.920.117.9 Price to book (x)3.73.12.82.9 Asset turnover0.40.40.40.4 Returns12/17A12/18E12/19E12/20E ROE stated-return on (%)18.818.914.615.9 ROIC (%)16.025.120.122.5 Gearing12/17A12/18E12/19E12/20E Net debt/equity (%)(3.4)(14.8)(25.4)(23.1) Interest coverage ratio (X)15.120.434.643.0 Quarterly EPSQ1Q2Q3Q4 2017A0.310.430.600.94 2018E0.380.410.521.26 2019E0.600.400.390.89 Company Background Activision develops, publishes and distributes interactiveentertainment software. Blue/Grey Sky ScenarioOur Blue Sky Scenario (US$)(from 95.00) 75.00 We have also elected to run a Blue Sky and Grey Sky scenario forATVI shares leveraging historic P/E multiples on next twelve monthearnings estimates. Activision historically traded in a range of ~10x- 29x with an average of ~17.7x and a standard deviation of ~4.9xduring the past several years. In terms of upside potential, we applya ~29.0x peak multiple to our 2020 EPS estimate and derive a bluesky scenario of $75. Our Grey Sky Scenario (US$)(from 41.00) 33.00 As we think about where we will be at the end of 2019, we apply alower bound P/E multiple of 12.8x (average less one standarddeviation) to our 2020 EPS estimate of $2.57, to derive a grey skyscenario of $33. Share price performance ATVI.OQS&P 500 INDEX Apr-18Jul-18Oct-18Jan-19 40 50 60 70 80 90 On 01-Feb-2019 the S&P 500 INDEX closed at 2705.85 Daily Feb01, 2018 - Feb01, 2019, 02/01/18 = US$73.35 Source: Company data, Thomson Reuters, Credit Suisse estimates 3 February 2019 Online Videogames 4 Activision Blizzard, Inc. (ATVI): Rationalize, Regroup,Redeploy for 2020 and Beyond We expect initial EPS guidance for 2019 to be down year over year given its moves torationalize some of its products. The biggest change was the recently-announced move torevertDestinyback to Bungie - we were previously anticipating a third iteration in thefranchise as a potential catalyst for 2020. Given management's aim to focus on both Live Services as well as new contentdevelopment at Blizzard, we find it difficult to criticize what is effectively a move to allocatecapital to the highest ROI-potential projects.Despite the uncertain game approval environment in China, we continue to modelDiabloImmortalto see release in 2019 (per prior disclosure from NetEase). That said we have itmodeled to arrive in 4Q19 to contribute more meaningfully in 2020. We hence expect 2020to be the year to see Activision return to a more robust growth path especially as weanticipate a fullDiablosequel by 2021. We have made the following changes to our medium-to-longer term estimates: Decreased estimates forHeroes of The Stormwith both user and ARPU decliningover time given Blizzard's decision to redeploy developersAdded season pass estimates forBlack Ops 4AddedCrash Team Racing Nitro-Fueledwith 500k units in 2019 AddedWarcraft III: Reforgedwith 1.5 million units in 3Q19 Separated out mobile game projection franchise by franchise with a standaloneChina version forCall of Duty ,DiabloandWorld of Warcraftrespectively. Eliminated allDestinyreleases and microtransactions estimates Changes to our 4Q18, 2019, and 2020 forecasts are as shown below.Figure 1: Activision Blizzard, Inc. – CS Estimate Revisions USD in millions, unless otherwise stated 4Q184Q18%4Q18%20192019%2019%20202020%2020% PriorFX-OnlyΔCurrentΔPriorFX-OnlyΔCurrentΔPriorFX-OnlyΔCurrentΔ Non-GAAP Net Revenue3049.13039.7-0.3%3024.0-0.8%7387.47373.3-0.2%7079.2-4.2%8336.48318.3-0.2%7504.5-10.0% Adjusted EBITDA1319.41313.2-0.5%1315.8-0.3%2847.82838.3-0.3%2443.6-14.2%3459.33447.8-0.3%2758.6-20.3% Adjusted EPS$1.26$1.25-0.5%$1.26-0.3%$2.70$2.69-0.4%$2.29-15.4%$3.28$3.27-0.4%$2.57-21.7% Source: Company data, Credit Suisse estimates Our unit sales estimate forCall of Duty: Black Ops 4stands at ~24 million units in 2018and 29 million units over the life of the title. And we present below a sensitivity study ofwhat the upside potential and downside risk could be based on a unit volume range of 21million units to 28 million to our 2018 Revenue and Adjusted EPS estimates.Figure 2: Activision Blizzard, Inc. –Call of Duty: Black Ops 4SensitivityAnalysis Units (mm)21.022.023.024.025.026.027.028.0 Revenue ($mm)7302.47351.97401.57451.07500.57550.17599.67649.1 EPS$2.47$2.50$2.54$2.57$2.60$2.63$2.67$2.70 Call of Duty Black Ops 4(in millions) Source: Company data, Credit Suisse estimates Each incremental million units yield about ~$0.03 in EPS. Our updated release slate for the packaged goods titles is as shown below: 。。。。。。