Activision Blizzard Inc. (NASDAQ:ATVI)

The period under review demonstrates fluctuating economic profit performance. Net operating profit after taxes exhibited volatility, beginning at US$1,379 million in 2018, decreasing to US$980 million in 2019, then increasing substantially to US$2,485 million in 2020, followed by a decline to US$2,162 million in 2021, and a slight increase to US$2,208 million in 2022.

Economic Profit Trend

Economic profit initially registered a negative value of US$-160 million in 2018. This deficit widened considerably to US$-676 million in 2019. A significant turnaround occurred in 2020, with economic profit becoming positive at US$495 million. However, this positive trend was short-lived, as economic profit decreased to near breakeven at US$-7 million in 2021, before recovering to US$260 million in 2022.

The cost of capital remained relatively stable throughout the period, ranging from 9.57% to 9.82%. A slight upward trend is observable, though the fluctuations are minimal. Invested capital generally increased from US$16,084 million in 2018 to US$22,243 million in 2021, before decreasing to US$19,837 million in 2022. The increase in invested capital did not consistently translate into increased economic profit, as evidenced by the negative economic profit in 2018, 2019, and 2021.

Relationship between NOPAT and Economic Profit

The fluctuations in economic profit largely correlate with changes in net operating profit after taxes. The substantial increase in NOPAT in 2020 directly contributed to the positive economic profit observed in that year. Conversely, the decline in NOPAT in 2019 and 2021 corresponded with negative economic profit during those periods. Despite a relatively consistent cost of capital, the ability to generate sufficient NOPAT relative to invested capital was the primary driver of economic profit performance.

The most recent year, 2022, shows a positive economic profit, indicating improved value creation compared to 2021, but remains below the peak achieved in 2020. The decrease in invested capital in 2022, coupled with a slight increase in NOPAT, contributed to this improvement.

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 considerable fluctuation between 2018 and 2022. Initially negative, the ratio improved significantly before experiencing another period of decline, ultimately recovering to a positive value by the end of the analyzed period.

Economic Spread Ratio Trend

In 2018, the economic spread ratio was -1.00%, 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 falling to -3.97%, suggesting a widening gap between returns and costs. A substantial improvement occurred in 2020, as the ratio rose to 2.43%, signifying that the company generated returns exceeding its cost of capital. However, this positive trend was short-lived, with the ratio declining to -0.03% in 2021, nearly reaching a point of no economic profit. The ratio recovered to 1.31% in 2022, indicating a return to positive economic spread, though not as strong as observed in 2020.

The economic spread ratio’s movement appears correlated with the fluctuations in economic profit. The negative ratios in 2018, 2019, and 2021 align with negative economic profit values for those years. Conversely, the positive ratios in 2020 and 2022 correspond with positive economic profit.

Relationship to Invested Capital

Invested capital generally increased from 2018 to 2021, rising from US$16,084 million to US$22,243 million. A decrease in invested capital was observed in 2022, falling to US$19,837 million. Despite the increasing invested capital between 2018 and 2021, the economic spread ratio did not consistently improve, suggesting that increases in capital deployment did not always translate into proportionally higher returns.

The volatility in the economic spread ratio suggests potential challenges in consistently generating returns that exceed the cost of capital. While improvements were made in certain years, the fluctuations highlight the importance of ongoing monitoring and strategic adjustments to enhance profitability and capital allocation efficiency.

The economic profit margin exhibited significant fluctuations between 2018 and 2022. Initially negative, it demonstrated improvement before reverting to near-zero and then positive territory. A detailed examination of the trends reveals key insights into the company’s financial performance.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at -2.27%. This indicates that the company’s economic profit was 2.27% lower than its cost of capital. The margin deteriorated substantially in 2019, reaching -10.61%, signifying a considerably larger shortfall between returns and the cost of capital. A substantial turnaround occurred in 2020, with the economic profit margin rising to 5.89%, indicating the company generated economic profit exceeding its cost of capital. However, this positive momentum was short-lived, as the margin declined sharply to -0.08% in 2021, representing a near-breakeven scenario. Finally, in 2022, the economic profit margin recovered to 3.05%, suggesting a renewed ability to generate economic profit, albeit at a moderate level.

Relationship to Adjusted Net Revenues

Adjusted net revenues generally increased over the period, moving from US$7,064 million in 2018 to US$8,498 million in 2022. Despite this revenue growth, the economic profit margin did not consistently improve. The significant negative margins in 2018 and 2019, and the near-zero margin in 2021, suggest that increases in costs or capital charges outpaced revenue gains during those years. The positive margin in 2020, coinciding with a substantial increase in adjusted net revenues, indicates improved efficiency or cost management. The moderate margin in 2022, despite further revenue growth, suggests continued cost pressures or capital allocation considerations.

The volatility in the economic profit margin highlights the sensitivity of the company’s profitability to factors beyond revenue generation. Further investigation into the underlying drivers of cost of capital and operational expenses would be necessary to fully understand these fluctuations and inform strategic decision-making.