Activision Blizzard Inc. (NASDAQ:ATVI)

The period under review demonstrates a fluctuating pattern in economic profit. Initially negative, economic profit transitioned to positive values before stabilizing. Net operating profit after taxes (NOPAT) and invested capital both exhibited increases over the period, though with some variation. The cost of capital remained relatively stable.

Economic Profit

Economic profit began at a negative US$15 million in 2018. This was followed by a substantial decline to negative US$519 million in 2019. A significant recovery occurred in 2020, with economic profit reaching US$685 million. This positive trend continued, albeit at a reduced rate, with economic profit at US$200 million in 2021 and US$445 million in 2022. The shift from negative to positive economic profit suggests improved capital allocation efficiency and value creation.

Net Operating Profit After Taxes (NOPAT)

NOPAT decreased from US$1,379 million in 2018 to US$980 million in 2019. A considerable increase was then observed, reaching US$2,485 million in 2020. NOPAT experienced a slight decrease to US$2,162 million in 2021, followed by a modest increase to US$2,208 million in 2022. The overall trend indicates a generally increasing profitability, despite some year-over-year fluctuations.

Cost of Capital

The cost of capital showed minimal variation throughout the period. It began at 8.67% in 2018, increased to 8.79% in 2019 and 8.86% in 2020, then decreased slightly to 8.82% in 2021, and finally rose to 8.89% in 2022. This relative stability suggests consistent market conditions and risk assessment regarding the company’s financing.

Invested Capital

Invested capital increased steadily from US$16,084 million in 2018 to US$17,047 million in 2019. Further growth was seen in 2020, reaching US$20,332 million, and continued to US$22,243 million in 2021. A decrease was observed in 2022, with invested capital falling to US$19,837 million. This suggests a period of expansion followed by a potential recalibration of capital deployment.

The positive correlation between NOPAT and economic profit is evident. While invested capital increased overall, the substantial improvement in NOPAT, particularly in 2020, drove the significant increase in economic profit. The slight decrease in invested capital in the final year did not negatively impact economic profit, indicating improved efficiency in capital utilization.

Net Income

The net income exhibited volatility over the five-year period. Starting at 1,813 million US dollars in 2018, it declined to 1,503 million in 2019. This was followed by a substantial increase in 2020, reaching 2,197 million. The upward trend continued in 2021, culminating in a peak of 2,699 million. However, in 2022, net income dropped sharply to 1,513 million, almost reverting to the 2019 level.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated an inconsistent trend throughout the timeline. It started at 1,379 million US dollars in 2018, decreased substantially to 980 million in 2019, then sharply increased to 2,485 million in 2020. Unlike net income, NOPAT decreased in 2021, reaching 2,162 million, but showed a slight rebound in 2022 to 2,208 million. Despite fluctuations, the overall level of NOPAT in the latter years remained higher than the initial years.

Comparative Insights

While both net income and NOPAT fluctuated, their trends did not move entirely in tandem, especially notable in 2021 and 2022. Net income reached its highest point in 2021, but saw a steep decline the following year, whereas NOPAT remained relatively stable in those two years. The divergence suggests variations in operational efficiency and the impact of other financial factors such as non-operating income or expenses.

Overall Interpretation

The data reflects a period of considerable financial fluctuation with some years of strong profitability followed by significant declines. The volatility might imply external market impacts, changing operational conditions, or other elements influencing profitability both at the operational and net levels. Further investigation into the underlying causes of these trends would be necessary for comprehensive understanding and strategic decision-making.

The financial data reveals notable fluctuations in both income tax expenses and cash operating taxes over the five-year period from 2018 to 2022.

Income Tax Expense

The income tax expense demonstrates a significant upward trend from 2018 to 2021, increasing from $64 million in 2018 to a peak of $465 million in 2021. This represents a more than sevenfold increase over the four-year span. However, in 2022, income tax expense dropped sharply to $231 million, approximately half of the 2021 level, indicating a substantial reduction.

Cash Operating Taxes

The cash operating taxes present a different pattern, with a steep increase observed between 2018 and 2019, from $54 million to $478 million. This level remained relatively stable in 2020 and 2021, with values of $535 million and $473 million respectively. In 2022, there was a noticeable decrease to $384 million, indicating a downward adjustment following the previous high-pressure tax years.

Overall, the data suggests a period of escalating tax-related expenses through 2019 to 2021, with both income tax expense and cash operating taxes reaching their highest points during this time. The subsequent decline in 2022 could imply changes in profitability, tax planning strategies, or external tax regulations impacting the company's tax liabilities. The divergence in the scale and timing of changes between income tax expenses and cash operating taxes highlights different components that contribute to the company’s overall tax burden.

Total reported debt & leases

The reported debt and leases remained relatively stable from 2018 to 2019, with a slight decrease from 2,984 million USD to 2,948 million USD. However, there was a notable increase in 2020, rising to 3,895 million USD. The debt level then plateaued in 2021 at 3,897 million USD and marginally decreased to 3,856 million USD in 2022. Overall, debt showed moderate growth peaking in 2020 and 2021 before slightly declining.

Shareholders’ equity

Shareholders’ equity demonstrated a consistent upward trend throughout the period analyzed. It increased steadily from 11,357 million USD in 2018 to 12,805 million USD in 2019, then to 15,037 million USD in 2020. This growth continued into 2021 with equity reaching 17,599 million USD and further expanded to 19,243 million USD in 2022. The rising equity suggests strengthening of the company's net asset base over time.

Invested capital

Invested capital showed an overall increasing trend from 16,084 million USD in 2018 to a peak of 22,243 million USD in 2021. Notably, invested capital grew each year from 2018 through 2021. However, in 2022, there was a decline to 19,837 million USD, indicating a reduction in total capital invested in the business after several years of growth.

Summary Insights

Between 2018 and 2021, the company exhibited growth in both shareholders’ equity and invested capital, reflecting expansion and possibly reinvestment into the business. The relatively stable but elevated debt levels from 2020 onwards may indicate increased borrowing or lease obligations supporting this expansion. The decline in invested capital in 2022 despite continued growth in equity could signal asset disposals, capital restructuring, or efficiency improvements. Meanwhile, the slight reduction in debt in 2022 suggests cautious management of financial leverage following the prior increase.

The economic spread ratio exhibited significant fluctuations between 2018 and 2022. Initially negative, the ratio demonstrated substantial improvement before stabilizing in later periods. A review of the underlying components, economic profit and invested capital, provides further context to these movements.

Economic Spread Ratio

In 2018, the economic spread ratio was -0.09%, indicating that the company’s return on invested capital was less than its cost of capital. This situation worsened considerably in 2019, with the ratio declining to -3.04%. A dramatic positive shift occurred in 2020, as the ratio rose to 3.37%, signifying a return exceeding the cost of capital. The ratio moderated to 0.90% in 2021, before increasing again to 2.24% in 2022. This suggests improving profitability relative to capital employed, though with some volatility.

Economic Profit

Economic profit followed a similar trajectory to the economic spread ratio. Beginning with a loss of US$15 million in 2018, it experienced a substantial loss of US$519 million in 2019. A significant turnaround was observed in 2020, with economic profit reaching US$685 million. While remaining positive, economic profit decreased to US$200 million in 2021 and then increased to US$445 million in 2022. The positive economic profit in the latter three years indicates value creation for investors.

Invested Capital

Invested capital generally increased throughout the period. From US$16,084 million in 2018, it rose to US$17,047 million in 2019 and continued to climb to US$20,332 million in 2020 and US$22,243 million in 2021. A slight decrease was noted in 2022, with invested capital falling to US$19,837 million. This suggests a period of growth in capital deployment, followed by a modest reduction in the most recent year.

The combined effect of increasing invested capital and fluctuating economic profit resulted in the observed changes in the economic spread ratio. The substantial improvement in the ratio from 2019 to 2020 is attributable to the significant increase in economic profit, despite the concurrent rise in invested capital. The subsequent moderation and then further increase in the ratio reflect ongoing profitability improvements relative to the capital base.

The economic profit margin exhibited significant fluctuations between 2018 and 2022. Initially negative, it demonstrated substantial improvement before stabilizing in later periods. A review of the economic profit reveals a corresponding pattern of initial losses followed by gains.

Economic Profit Margin

In 2018, the economic profit margin was -0.21%, indicating the company did not generate returns exceeding its cost of capital. This margin deteriorated considerably in 2019, reaching -8.15%, signifying a substantial shortfall in economic profit. A dramatic reversal occurred in 2020, with the economic profit margin rising to 8.15%, demonstrating a significant improvement in profitability relative to the cost of capital. The margin decreased to 2.42% in 2021, suggesting some erosion of the gains achieved in the prior year, but remained positive. Further improvement was observed in 2022, with the economic profit margin reaching 5.24%, representing the highest level within the observed period.

Economic Profit

Economic profit mirrored the trend in the economic profit margin. A loss of US$15 million was recorded in 2018. This loss expanded substantially to US$519 million in 2019. A significant positive economic profit of US$685 million was achieved in 2020. While decreasing to US$200 million in 2021, economic profit remained positive. The value increased again in 2022, reaching US$445 million.

Adjusted Net Revenues

Adjusted net revenues experienced a decrease from US$7,064 million in 2018 to US$6,371 million in 2019. Revenues then increased significantly to US$8,400 million in 2020, and remained relatively stable at US$8,232 million in 2021. A slight increase to US$8,498 million was observed in 2022. The improvement in economic profit margin from 2019 to 2020 occurred alongside a substantial increase in adjusted net revenues, suggesting revenue growth played a key role in the improved financial performance.

The period between 2019 and 2022 demonstrates a clear positive trend in economic profit margin, despite fluctuations in economic profit itself. The company’s ability to generate economic profit improved considerably, and the trend suggests a strengthening of its competitive position and efficient capital allocation.