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.