Marginal Performance at Activision Blizzard

Margins matter. The more Activision Blizzard (Nasdaq: ATVI  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Activision Blizzard's competitive position could be.

Here's the current margin snapshot for Activision Blizzard and peers:

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Activision Blizzard

48.8%

15.4%

6.6%

 Microsoft (Nasdaq: MSFT  )

80.2%

39.5%

30.0%

 Shanda Interactive Entertainment (Nasdaq: SNDA  )

70.0%

35.5%

26.8%

 Take-Two Interactive Software (Nasdaq: TTWO  )

29.7%

-3.6%

-8.8%

 Electronic Arts (Nasdaq: ERTS  )

53.8%

-5.5%

-9.1%

Source: Capital IQ, a division of Standard & Poor's.

Unfortunately, that chart doesn't tell us much about where Activision Blizzard has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Activision Blizzard over the past few years.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 67.7% and averaged 55.6%. Operating margin peaked at 13.2% and averaged 7.8%. Net margin peaked at 16.8% and averaged 7.1%.
  • Fiscal year 2009 gross margin was 46.1%, 950 basis points worse than the five-year average. Fiscal year 2009 operating margin was 9.5%, 170 basis points better than the five-year average. Fiscal year 2009 net margin was 2.6%, 450 basis points worse than the five-year average.
  • TTM gross margin is 48.8%, 680 basis points worse than the five-year average. TTM operating margin is 15.4%, 760 basis points better than the five-year average. TTM net margin is 6.6%, 50 basis points worse than the five-year average.
  • LFQ gross margin is 59.3%, 860 basis points better than the prior-year quarter. LFQ operating margin is 39.1%, 1,790 basis points better than the prior-year quarter. LFQ net margin is 29.1%, 980 basis points better than the prior-year quarter.

With recent 12-month-period operating margins exceeding historical averages, Activision Blizzard looks like it's doing fine.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. By keeping an eye on the health of your companies' margins, you can spot potential trouble early, or figure out whether the numbers merit Mr. Market's enthusiasm or pessimism. Let us know what you think of the health of the margins at Activision Blizzard in the comments box below. Or, if you're itching to learn more, head on over to our quotes page to view the filings directly.

Microsoft is a Motley Fool Inside Value selection. Shanda Interactive Entertainment and Take-Two Interactive Software are Motley Fool Rule Breakers recommendations. Activision Blizzard and Electronic Arts are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard. Try any of our Foolish newsletters today, free for 30 days.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 06, 2010, at 7:51 PM, srun wrote:

    I've owned shares of ATVI for over two years with little to show for it. Even when it's doing great, the share price refuses to reflect it. Recently sold and wouldnt recommend this in your holdings. I'm quite bearish on this stock.

  • Report this Comment On August 06, 2010, at 8:44 PM, Bristinwolfsong wrote:

    The CEO of the company BobbY Kotick (sp?) has quickly risen to the top of gamers most hated persons list. expect steep dropoffs in future sales as more and more people want nothing to do with him. If it were not for WoW masking all the companies problems this would be more obvious

  • Report this Comment On August 06, 2010, at 10:54 PM, TMFBent wrote:

    When do you all think WoW will finally roll over and croak? I was an avid player for years, but it has gotten really long in the tooth.

  • Report this Comment On August 07, 2010, at 7:35 AM, xuincherguixe wrote:

    It won't.

    It'll be a slow steady decline.

    People won't decide to stop playing all at once in a nice predictable fashion.

    I don't think there will be any one product that kills it. Seems every couple months we hear about some new game that's going to kill WoW. And it never does.

    But there's always going to be a few people playing. There's a couple people still playing Ultima Online!

  • Report this Comment On August 09, 2010, at 11:47 AM, Feurbach wrote:

    I suspect WoW's dominance will begin to decline gradually next year, with the release of Star Wars: the Old Republic. While a good deal of the success of SWTOR will likely be attributed to new players entering the MMORPG space, it will also steal (or, if it fails to impress, borrow) subscribers from WoW and other online gaming communities.

    In the short term, there don't sppear to be any new entrants that threaten to erode WoW's market share, so the real question is whether WoW Cataclysm will succeed in bringing departed subscribers back into the fold and enticing new players to join.

  • Report this Comment On August 09, 2010, at 11:52 AM, sid2286 wrote:

    I think that eventual decline of WoW is why Blizzard is rumored to be developing another game that is just like it... Personally I'm hoping for Universe of Starcraft. Just tossing that out there.

    Also, the expansion that is coming out this year is supposed to revitalize the game, as well.

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