How Big Is Cost of Goods Sold Expense For Activision Blizzard?

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Activision Blizzard (NASDAQ:ATVI) total expenses have largely trended higher from around $3.8 billion in 2015 to $5.7 billion in 2018. Among its expense items, cost of goods sold (COGS) is expected to be $2.1 billion in 2019, making up 39% of the company’s expected total costs. In fact, COGS is more than 2x the company’s research & development expenses, as well as sales & marketing costs. While COGS between 2015 and 2018 have increased $932 million (nearly 30%), as % of revenue, COGS has declined in the recent years, partly due to an increase in digital downloads. This has been helpful in improvement of earnings margin from 19.1% in 2015 to an expected 24.2% in 2018. The growth in margins has been important to an over 50% jump in the company’s stock price over the same period. We discuss Activision Blizzard’s valuation analysis with context on contribution from revenue growth and expansion of valuation multiple in this dashboard.  Below, we take a look at the key drivers of Activision Blizzard’s expenses and net margins. Look at our interactive dashboard analysis ~ ATVI Expenses: How Does Activision Blizzard Spend Money? ~ for more details.

Breaking Down Activision Blizzard’s Total Expenses In 2018:

  • COGS = $2.5 billion
  • Operating Expenses = $3.0 billion
  • Provision for income taxes = $0.1 billion
  • Non-operating expenses = $0.1 billion
  • Total = $5.7 billion

Activision Blizzard’s Net Income Margin Grew From 19% In 2015 To 24% In 2018, Although It Saw Significant Decline In 2017, Due To Tax Adjustments

Activision Blizzard’s Total Expenses Have Increased From $3.8 Billion In 2015 To $5.7 Billion In 2018

  • Activision Blizzard’s total expenses have grown from $3.8 billion in 2015 to about $5.7 billion in 2018.
  • For 2020, we expect total expenses to be around $5.8 billion, which comprises of
    • 1) COGS: $2.2 Billion
    • 2) Operating Expenses: $2.9 billion
    • 3) Non-Operating Expense: $0.1 billion
    • 4) Income Taxes: $0.6 billion
  • Below, we take a look at how the company’s key expense components have trended and the key reasons for the change.

1. COGS After Increasing Over The Last Few Years Is Expected To Decline Going Forward

  • Cost of Goods Sold (COGS) have increased from $1.6 billion in 2016 to $2.5 billion in 2018, led by the King Digital acquisition.
  • However, it could decline to $2.2 billion in 2020, led by timing of gaming titles released, and an increase in digital downloads.
  • As % of revenue, COGS has been on a decline over the past few years, and this trend could continue.

2. Operating Costs Are On A Rise

  • Operating Costs have increased from $1.8 billion in 2016 to $3.0 billion in 2018 driven by:
    • (A) $455 million increase in Research & Development (R&D),
    • (B) $328 million increase in Sales & Marketing (S&M), and
    • (C) $452 million increase in General & Administrative (G&A).
    • The overall operating expenses are expected to see slight decline in the near term, due to expected lower revenues.

A) R&D Costs Grew From $0.6 Billion In 2015 To $1.1 Billion In 2018

  • This can be attributed to the King Acquisition, and the company’s investments in new games.
  • As a % of revenues, R&D grew from 14% to 15% over the same period.
  • The figure is expected to hover around the 15% mark going forward.

B) S&M Expenses Grew From $0.7 Billion In 2015 To $1.1 Billion In 2018

  • This was also driven by the King Digital acquisition.
  • As a % of revenues, S&M grew from 16% to 20% between 2015 and 2017, but declined sharply in 2018, due to decrease in amortization expenses.
  • The figure is expected to see slight growth going forward.

C) G&A Expenses Are On A Rise

  • General & Administrative expenses grew from $380 million in 2015 to $832 million in 2018.
  • As a % of revenues, G&A grew from 8% to 11% over the same period.
  • This can be attributed to the addition of King Digital’s gaming portfolio.

3. Activision Blizzard’s Non-Operating Expenses Primarily Includes Interest & Other Expenses

  • It grew from $198 million in 2015 to $306 million in 2016, due to a $92 million loss on extinguishment of debt.
  • The figure declined in 2017 amid absence of one time loss in 2016.
  • As a % of average debt, Interest & Other Expenses declined from 4.2% to 1.5% over the same period.

4. Activision Blizzard’s Income Tax Expense Has Fluctuated In Recent Years

  • This was driven by the tax cut and jobs act.
  • Effective Tax Rate has seen sharp swings in the recent years.
  • The jump in 2017 was due to the impact of Tax Cuts & Jobs Act. The company recorded a provisional charge of $636 million for the year.
  • The dip in 2018 can be attributed to one-time tax benefits.

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