We recently learned that Blizzard has drastically changed the upcoming Cataclysm feature Path of the Titans. It’ll still be there, but not really. This and a couple other omissions have left some people wondering whether Blizzard is pushing too fast to release Cataclysm, while others stand by Blizzard’s PR people in saying that the expansion “will be released when it’s ready.”
So what’s the truth? If you’re smart you must realize that the truth is always somewhere on the spectrum between two extremes. Maybe a better question is: How much influence does ActivisionBlizzard’s (I’ll use ATVI, it’s stock symbol for the rest of the post) upper management have on the development and release of Cataclysm? To get close to the answer, I believe, will require us to understand their Financials. So let’s get to it. (All my data comes directly from ATVI’s financial statements on their website and from NASDAQ.com).
A rather common but erroneous measure of a company’s financial position is its stock price. I’ve put in a graph of their stock price over the past 12 months. What do you notice?
For one it appears that the stock price as been A) Trending lower and B) Volitile. That is until you realize that over a five year period it’s gone from 6.87 to 14.85 to 8.64 to around 11.20 today. Their stock price has always been volatile, but during that same period there has definitely been a significant RISE in player subscriptions. So just looking at a stock price won’t tell us if Management is putting the pressure to release.
I like that show, but it’s moving to Sunday night on TNT so I don’t know if I’ll remember to watch. Oh, not that Leverage, financial leverage or debt. ATVI is actually in a good position. They actually do not incur any long-term debt, and their current ratio is a solid 2.91. Current Ratio measures the ability of a company to pay off short-term debt. Calculated by dividing Current Assets / Current Liabilities (Current = less than one year).
What this means that in the short term if ATVI ran into some small financial trouble, they would have sufficient assets to pay off what they owed and keep themselves afloat. ATVI also maintains a significant cash reserve, but even according to admitted risk factors, a significant drop in subscribers could easily completely use up their loss reserves, which is an undesirable event. But overall their leveraged positions are strong, there’s not much there to worry management.
Now we’re getting to the meat of the issue. Earnings and all the factors and measurements off earnings are a tool managers use to strategize and make decisions. Not to say earnings are the sole factor, any analyst knows that you actually use ALL financial data and relevant reports to reach any conclusions. But expected future earnings are a factor in stock prices, which is good for shareholders.
AVTI breaks down their revenue into two categories: 1) Product Sales, and 2) Subscription, Licensing and Other Revenue. #2 is a broad range of income and consists of income generated through their relationships with retailers and other outlets and developers. Product sales are pretty self-explanatory, I hope; they sell a box of WotLK and they call that “Revenue”.
The Net Revenue over the past five years looks like this (in Millions):
2009 - $4,279
2008 - 3,026
2007 - 1,349
2006 - 1,018
2005 - 780
Consequently their Net Income (Loss) for the same time period looks like this:
2009 - $113
2008 - 107
2007 - 227
2006 - 139
2005 - 45
Per AVTI’s financial reports:
Cash Flows from Operating Activities
The primary drivers of cash flows from operating activities have typically included the collection of customer receivables generated by the sale of our products and our subscription revenues, offset by payments for taxes and to vendors for the manufacture, distribution and marketing of our products, third-party developers and intellectual property holders, and to our workforce. A significant operating use of our cash relates to our continued investment in software development and intellectual property.
AVTI even exceeded Q1 2010 expectations by posting $1.3B in Revenue (1.1B expected), with total cash and investments totaling $3.4B (3.3 expected). They anticipate $700M for Q2 and $4.2B for the entire year 2010. Additionally, their EPS (or earnings per share) have also exceeded expectations. So financially speaking, they are reaching their goals for revenue and even recently exceeding their expectations. That’s got to have management in a good mood. As part of their expectations they still anticipate to release Cataclysm in 2010, so whatever revenues generated from those product sales are included into their $4.2B estimate.
Unfortunately, AVTI’s P/E Ratio is not one of the best in their industry. Yes, there are future expectations of revenue, but there are significant risks to AVTI’s products and operations. In their own words, let me share what they see are some, just some of those risks. These may seem obvious, but to see them written and admitted to makes them legitimate and worth consideration.
* A continuing deterioration of general economic conditions could result in a reduction in discretionary spending by consumers that could reduce demand for our product.
* We depend on a relatively small number of franchises for a significant portion of our revenues and profits. (i.e. Call of Duty, Guitar Hero, and World of Warcraft account for approximately 68% of all net revenues for the year ended Dec 31, 2009. Additionally, revenues associated with the World of Warcraft franchises accounted for 98%, 97%, and 97% of Blizzard’s consolidated net revenues for the years ended Dec 31 2009, 2008, and 2007 respectively)
* A substantial portion of our revenue and profitability will depend on the subscription –based MMORPG category. If we do not maintain our leadership position in this category, our financial results could suffer. To remain a leader in the MMORPG category, it is important that we continue to refresh World of Warcraft or develop new MMORPG products that are favorably received by both our existing customer base and new customers.
* The future success of our business depends on our ability to release popular products in a timely manner.
* If our products contain defects, our business could be harmed significantly.
I hope not, because simply by looking into their financial reports we see a few interesting things. First is that without WoW, Blizzard would fail…at least as we know them now. Unless they introduced something else to take it’s place, they still rely on product sales and continued subscriptions of WoW to keep their business a viable business. They are very interested in making a good product. VERY. They realize that if they send Cataclysm to the retail floors of Wal-Mart, Target, GameStop, whatever that it needs to be a product with as few defects as possible and a gaming experience worthy of the subscribership they need to remain financially viable.
I’ve thought a lot about this, and I think I realize that the truth definitely is in the middle on this one. Yes, top brass is whispering in the ears of the developers to get the product launched in the time they set forth who knows how long ago. In the meantime, the devs are working their brains off to get it done…THE RIGHT WAY. I don’t envy them in the slightest. It can’t be an easy job to satisfy enough people to earn over 4 billion a year in revenue. Yet each year they seem to meet or exceed their revenue goals. Now there are other financial factors that are incredibly boring to discuss at the moment, so I won’t ever go there.
But I think it’s clear that they are trying. I don’t think they scrapped PotT because they couldn’t meet a deadline, financially speaking it’s better for them to put out a good product than to put out a product by X date. So in a way I believe it when they say that it “will be released when it’s ready”…as long as it’s this year so that the shareholders get their money’s worth!