Financial Statement Analysis - Blizzard Vs. Ea

Yefan Zhou

Activation Blizzard, Inc.

Electronic Arts Inc.

https://www.sec.gov/Archives/edgar/data/718877/000104746916010584/a2227483z10-k.htm#du75301_item_8._financial_statements_and_supplementary_data

https://www.sec.gov/Archives/edgar/data/712515/000071251516000111/ea3312016-q410kdoc.htm#s91D621AC8ABF1F167D40199AA9FF37F3     

Section A:

         Activation Blizzard, Inc. is an entertainment software company which develops and publishes interactive games on personal computer, video game console, mobile phone, and tablet. The company’s franchises include Call of Duty, World of Warcraft, Skylanders, Destiny and others. The economic environment of the video game industry is extremely competitive because game developers are regularly bringing jaw-dropping innovations to consumers. Blizzard faces direct competition not only from large corporations like Electronic Arts, but also from small companies such as Rovio Entertainment Ltd (the producer of the Angry Birds series).

Section B:

        The ROE ratio of Blizzard was nearly constant from 2013 to 2015. The constant ratios suggested that about 11 cents was generated by 1 dollar of common stockholders’ equity.

The profit margin ratio was highest in 2013, and then it decreased by about 14 percent in 2014, indicating a lower profit margin generated from each dollar of sales revenue. In 2015, there was a slight increase in profit margin. The asset turnover ratio had a similar trend as the profit margin ratio – it decreased from 2013 to 2014 by around 5 percent, suggesting a less efficient use of assets to generate sales. And it increased slightly from 2014 to 2015, showing a bit more sales revenue was generated by each dollar of assets. The similar trends of profit margin and asset turnover ratios from 2013 to 2015 could be explained by the lower revenues from Call of Duty and Skylanders franchises in 2014 and higher revenues from the Call of Duty: Black Ops III in 2015.

 In addition, the financial leverage ratio grew by over 30 percent from 2013 to 2014, and then it remained relatively constant during 2014 and 2015. The huge increase in financial leverage ratio from 1.573 in 2013 to 2.068 in 2014 indicated Blizzard probably borrowed more money from creditors and shareholders owned a smaller portion of assets from 2013 to 2014.

Compared with the financial leverage ratio, the ROA ratio had an opposite trend from 2013 to 2015. In 2013, the ROA ratio was 0.072 and it declined to 0.058 in 2014 and remained constant in 2015. The increasing financial leverage from 2013 to 2014 offset the decreasing ROA during that time. Therefore, the ROE did not have great fluctuations from 2013 to 2015. The ROFL from 2013 and 2015 were all positive and it indicated financial leverage did not hurt Blizzard.

Section C:

        The gross profit margin increased from 2013 to 2015. During those 3 years, over 60 percent of every sales dollar was gross profit while the rest was the cost of goods sold.

        To Blizzard, product development is a key factor of its successful growth. In the intensely competitive video game industry, new products are brought to consumers every day. To keep and attract customers, Blizzard relies on its ability to develop and sell new games. In the meantime, developing new products requires substantial R&D expenses. Therefore, it is important for Blizzard to analyze its R&D expense to see if it can generate satisfactory revenue. The R&D expense ratio for Blizzard is calculated through dividing product development expense by net revenue. For 2015, R&D expense ratio was higher than that of 2014, primarily due to support future title releases and higher payroll costs to product development teams. In 2014, the ratio decreased, as compared to 2013, because employees in the product development team received fewer studio-related bonuses.

        In addition, in 2013 and 2014, Blizzard collected its accounts receivable every 48 days. In 2015, it took Blizzard 52 days to collect accounts receivable. For 2015, Blizzard might have faced increased competition, such as Electronic Arts’ FIFA 15, and therefore Blizzard extended its credit terms in order to attract more customers.

        Furthermore, Blizzard held its inventories before selling for 45 days in 2013, 35 days in 2014, and 29 days in 2015, indicating Blizzard’s products became more salable. The higher DIO might be due to Blizzard’s release of more popular games such as Call of Duty: Black Ops III and Guitar Hero Live.

Section D:

        From 2014 to 2015, the working capital of Blizzard dropped by nearly 80 percent, the current ratio decreased by about 45 percent, and the quick ratio declined by over 50 percent. The primary reason of those decreases was that Blizzard had much less cash and cash equivalents in 2015, as compared to 2014. This was mainly due to the negative cash flows from investment activities – on November 2, 2015, Blizzard had an agreement with King Digital Entertainment plc (the producer of Candy Crush Saga) in order to acquire this company. As part of the King acquisition, Blizzard was required to hold $3.56 billion in an escrow account in 2015.