November 18, 2009

November 18, 2009

Company Report Company Update

Activision Blizzard, Inc.

ATVI: $11.69 Gaming

Buy ATVI: Strong Modern Warfare 2 Performance Strengthens Our Optimism THINK ACTION: We are encouraged by the strong performance of MW2 and are more comfortable with our view that 4Q MW2 sell-in could beat the Street estimate of 8-10 million (our estimate of 11 million) by a few million units. While we remain concerned about the slow uptake of the music category and hardware bundled titles, we believe that the bottom-line impact from the underperformance in this category could be more than offset by the outperformance of MW2. We are also encouraged with the stickiness of MW2, which we believe opens up potential opportunity for further monetization. KEY POINTS: • ATVI announced today that Call of Duty: Modern Warfare 2 had sell-through of $550 million worldwide during the first five days of launch. We estimate that this represents a sell-through of about 8.0-8.5 titles worldwide. • We are comfortable with our view that MW2 could top our estimate of 11 million units (versus the Street estimate of 8-10 million units) by a couple of million units. • On the other hand, we remain concerned about the slow uptake of the music category and especially higher-priced hardware bundled titles (Band Hero, DJ Hero, and Tony Hawk), which we believe creates some risk for top-line performance in 4Q (our estimate is $2.3 billion versus the Street estimate of $2.25 billion). However, we don't see risk to the EPS estimate (our and Street estimate at $0.44) as the outperformance of MW2 could more than offset the underperformance of the music category, in our view. • We are also encouraged with the high stickiness of MW2 (5.2 million hours by 2.2 million users on day one, according to the company) which we believe opens up opportunity for further monetization of the franchise. • Next year, we expect to see full year contribution of WOW China (estimated at about $100 million, up from about $50 million in 2009), release of a couple of highly anticipated and high margin games (Cataclysm and Starcraft 2), and next release of COD as growth drivers. In addition, we believe that the new Battle.net platform has the potential to emerge as a credible online gaming platform, which we believe is still not in the stock. • Trading at 13x 2010E EPS (net of cash), ATVI shares are not too expensive and bake in a lot of negativity (concerns about WOW and the retail environment for gaming shares), in our view. Historically, ATVI shares have traded at an average of 28x (range 15-75x) on forward earnings. Assuming 18-20x on 2010 earnings, plus $2.12 in cash per share, we believe that shares could be valued at $17-18, which is our fair value estimate. We believe that a PE multiple of 18-20 is reasonable given what we view as the superior earning profile (WOW contributes approximately 25% of revenue—higher predictability, lower risks); strong franchises (COD, WOW, and GH); and a solid pipeline for 2010 (Starcraft 2, Cataclysm, and strong platform for online gaming—battle.net).

Atul Bagga 415-249-6362, [email protected]

Changes

Current

Rating

FY09E EPS FY10E EPS FY09E REV (M) FY10E REV (M)

--

$0.63E $0.75E $4,589.9E $5,157.7E

-----

52-Week High: 52-Week Low: Shares O/S-Diluted (M): Market Cap (M): Average Daily Volume: Short Interest: Debt/Total Cap: Net Cash Per Share: P/E (12-month forward): Est. Long-Term EPS Growth: P/E/G: Fiscal Year-End: REV (M) $

Mar Jun Sep Dec FY CY FY P/S CY P/S

Previous

Buy

$13.14 $8.14 1,332.0 $15,571.1 16,584,457 1.9% 0.0% $2.12 18.3x 20.0% 92% Dec

2008A 2009E 2010E 602.0A 724.0A NA 654.2A 801.0A NA 770.0A 755.0A NA 2343.0A 2309.9E NA 5032.0A 4589.9E 5157.7E NA NA NA 3.1x 3.1x

3.4x 3.4x

3.0x 3.0x

On July 9, 2008, Activision and Vivendi Games completed a merger to become Activision Blizzard. Financials for 1Q08 and 2Q08 represent the results of Activision as a standalone entity and are not comparable. EPS $

Mar Jun Sep Dec FY CY FY P/E CY P/E

2008A 0.17A 0.23A 0.07A 0.32A 0.59A NA

2009E 0.08A 0.08A 0.04A 0.44E 0.63E NA

2010E NA NA NA NA 0.75E NA

19.8x 19.8x

18.6x 18.6x

15.6x 15.6x

On July 9, 2008, Activision and Vivendi Games completed a merger to become Activision Blizzard. Financials for 1Q08 and 2Q08 represent the results of Activision as a standalone entity and are not comparable.

Please see analyst certification (Reg. AC) and other important disclosures on pages 4-6 of this report.

November 18, 2009

Company Report Company Update

VALUATION: Given that ATVI shares are trading at approximately an 13x PE on 2010E earnings (net of cash), current multiples suggest a lot of negativity (concerns about WOW and the retail environment for gaming shares), in our view. Historically, ATVI shares have traded at an average of 28x (range 15-75x) on forward earnings. Assuming 18-20x on 2010 earnings, plus $2.12 in cash per share, we believe that shares could be valued at $17-18, which is our fair value estimate. We believe that a PE multiple of 18-20 is reasonable given what we view as the superior earning profile (WOW contributes approximately 25% of revenue—higher predictability, lower risks); strong franchises (COD, WOW, and GH); and solid pipeline for 2010 (Starcraft 2, Cataclysm, and strong platform for online gaming—battle.net). INVESTMENT RISKS: Gaming continues to be a hit-or-miss-driven business, and predicting successful titles versus unsuccessful titles is extremely difficult. The risk is especially high for the new and unproven IPs, and the company's reliance on the new IPs and the titles in the established franchises to reach the revenue target opens the company to risk of a revenue miss. Macro headwinds and popularity of the used games and free-to-play online games. Given the current macro headwinds, used games and free-to-play online games create higher substitute competition for video games. The industry is dependent on the console cycle. An unexpected start of the new console cycle would likely constrain the revenue growth and affect profitability of gaming vendors. Foreign currency exchange risk. The company generates almost one-half of its revenue from international operations, which exposes the company to foreign currency exchange risks. COMPANY DESCRIPTION: Activision Blizzard publishes online, PC, console, and hand-held games worldwide. The company develops and publishes video games, and offers an online-game-related service, Battle.net. The company offers games in various genres: first-person shooting, music, massively multiplayer online role-playing, strategy, action/adventure, sports, and racing. Its top franchises include Guitar Hero, Call of Duty, Worldwarcraft, Tony Hawk, Spider-Man, X-Men, James Bond, Transformers, Diablo, StarCraft, and Warcraft. The company is headquartered in Santa Monica, California, and is a subsidiary of Vivendi S.A.

Page 2

Activision Blizzard, Inc. Date of Report: 11/5/09

ATVI Income Statement

All Figures in Millions, US$ except for share and per share data

FY December Product Sales

Year 2007

Sep-08

Dec-08

Year 2008

461.0

1,319.0

3,165.0

690.0

747.0

NM NM

NM NM

4%

-48% 2%

8% 6%

297.0

320.0

1,154.0

291.0

NM NM

NM NM

29%

40.0

12.0

705.0

713.0

3,987.0

770.0

2,344.0

NM NM

204.4% 24.0%

387.0 50.3%

3,055.0

Q/Q Growth Y/Y Growth

Subscription, Licensing & Other revenues

892.0

Q/Q Growth Y/Y Growth

Change in Deferred Revenue Total Revenues Q/Q Growth Y/Y Growth

Cost of Goods Total Cost of Goods Sold Percent of Total Revenues

Gross Profit Percent of Total Revenues

Dec-09

Year 2009E

411.0

1,043.9

2,891.9

-45% -11%

154% -21%

-9%

27%

291.0

292.0

301.7

1,175.7

1,417.7

-9% 18%

0% 0%

0% -2%

3% -6%

2%

21%

(256.0)

(237.0)

52.0

964.3

523.3

65.9

5,032.0

724.0

801.0

755.0

2,309.9

4,589.9

5,157.8

26%

-69% -21%

11% -20%

-6% -2%

206% -1%

-9%

12%

1,226.0

346.0

352.0

359.0

1,065.5

2,122.5

2,209.3

52.3%

47.8%

43.9%

47.5%

46.1%

46.2%

42.8%

383.0

1,118.0

378.0

449.0

396.0

1,244.5

2,467.5

2,948.4

49.7%

47.7%

52.2%

56.1%

52.5%

53.9%

53.8%

57.2%

114.0

176.0

111.0

116.0

111.0

152.5

490.5

520.6

14.8%

7.5%

15.3%

14.5%

14.7%

6.6%

10.7%

10.1%

100.0

233.0

78.0

114.0

131.0

194.0

517.0

571.8

13.0%

9.9%

10.8%

14.2%

17.4%

8.4%

11.3%

11.1%

55.0

64.0

70.0

63.0

79.0

78.5

290.5

304.0

Mar-09

2009E Jun-09 Sep-09

Year 2010E 3,674.2

Operating Expenses Product Development Percent of Total Revenues

Sales & Marketing Percent of Total Revenues

General & Administrative Percent of Total Revenues

Total Operating Expenses Percent of Total Revenues

Operating Profit Percent of Total Revenues

2.7%

9.7%

7.9%

10.5%

3.4%

6.3%

5.9%

473.0

259.0

293.0

321.0

425.0

1,298.0

1,396.4

34.9%

20.2%

35.8%

36.6%

42.5%

18.4%

28.3%

27.1%

994.0

114.0

645.0

1,200.0

119.0

156.0

75.0

819.4

1,169.4

1,552.1

24.9%

14.8%

27.5%

23.8%

16.4%

19.5%

9.9%

35.5%

25.5%

30.1%

316.0

792.0

1,348.0

(60.0)

(62.0)

66.0

745.8

689.8

448.0

994.0

(202.0)

(147.0)

(148.0)

179.0

218.0

9.0

73.6

479.6

1,104.1

-26.2%

-6.3%

-2.9%

24.7%

27.2%

1.2%

3.2%

10.4%

21.4%

-

44.0

Total Non-GAAP Adjustment GAAP Operating Profit

7.1%

269.0

Percent of Total Revenues

Total Other Inc/(Expense)

42.4

24.0

18.0

46.0

10.0

11.0

11.0

32.0

Percent of Total Revenues

1.1%

3.1%

0.8%

0.9%

1.4%

0.0%

1.5%

0.5%

0.7%

0.9%

1,036.4

138.0

663.0

1,246.0

129.0

156.0

86.0

830.4

1,201.4

1,401.1

26.0%

17.9%

28.3%

24.8%

17.8%

19.5%

11.4%

36.0%

26.2%

27.2%

129.9

54.0

233.0

442.3

18.0

44.0

31.0

257.4

350.4

434.3

14.0%

28.2%

36.0%

31.0%

29.2%

31.0%

21.2

49.2

25.0%

9.6%

Profit Before Taxes Percent of Total Revenues

Income Taxes Tax Rate

GAAP Income Taxes Tax Rate

Non-GAAP Net Income Percent of Total Revenues Change Vs Year Ago

GAAP Net Income Non-GAAP EPS (Diluted) Y/Y Growth

GAAP EPS Diluted Shares (in Millions)

12.5%

39.1%

35.1%

35.5%

129.9

(62.0)

(58.0)

(80.0)

23.0

5.0

12.5%

34.8%

45.0%

78.4%

35.0%

10.6%

25.0%

-

333.6 29.1%

906.4

84.0

430.0

803.7

111.0

112.0

55.0

573.0

851.0

966.8

22.7%

10.9%

18.3%

16.0%

15.3%

14.0%

7.3%

24.8%

18.5% 5.9%

18.7% 13.6%

906.4

(116.0)

(71.0)

(22.0)

189.0

195.0

15.0

63.5

462.5

814.5

0.96

0.06

0.32

0.59

0.08

0.08

0.04

0.44

0.64

0.75

NM

NM

-93%

-37%

NM

NM

NM

37%

9%

16%

0.96 946.0

(0.08) 1,390.0

(0.05) 1,326.0

(0.02) 1,358.0

0.14

0.15

0.01

0.05

0.35

0.63

1,359.0

1,332.0

1,297.0

1,293.0

1,320.3

1,294.5

Source: Company Reports and ThinkEquity Estimates Atul Bagga ThinkEquity LLC 415-249-6362

Page 3

November 18, 2009

Company Report Company Update COMPANIES MENTIONED IN THIS REPORT: Company NetEase.com, Inc.

Exchange

Symbol

Price

Rating

NASDAQ

NTES

$41.94

Buy

Important Disclosures Analyst Certification I, Atul Bagga, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total revenues, a portion of which is generated by investment banking activities. ThinkEquity LLC makes a market in NetEase.com, Inc. and Activision Blizzard, Inc. securities; and/or associated persons may sell to or buy from customers on a principal basis.

Rating History for: Activision Blizzard, Inc. (ATVI) as of 11-17-2009 07/12/07 D:NR

06/15/09 I:B

21

18

15

12

9

Q1 2007

Q2

Q3

Q1 2008

Q2

Q3

Q1

Q2

Q3

6

2009

Created by BlueMatrix

Page 4

November 18, 2009

Company Report Company Update

Rating History for: NetEase.com, Inc. (NTES) as of 11-17-2009 12/16/08 I:B

48

40

32

24 16

Q1 2007

Q2

Q3

Q1

Q2

Q3

2008

Q1

Q2

Q3

8

2009

Created by BlueMatrix

Rating Definitions Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier Buy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including previously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquity recommends initiating or increasing exposure to the stock. Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stock is fairly valued. Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquity recommends decreasing exposure to the stock. Distribution of Ratings, Firmwide ThinkEquity LLC IB Serv./Past 12 Mos. Rating

BUY [B] HOLD [H] SELL [S]

Count

Percent

Count

Percent

115 59 6

63.90 32.80 3.30

9 2 0

7.83 3.39 0.00

This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clients

Page 5

November 18, 2009

Company Report Company Update of ThinkEquity LLC. Recipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of their personal financial advisors before making any investment decisions based on this report. Stocks mentioned in this report are not covered by ThinkEquity LLC unless otherwise mentioned. Additional information on the securities mentioned is available on request. In the event that this is a compendium report (covers more than six ThinkEquity LLC-covered subject companies), ThinkEquity LLC may choose to provide specific disclosures for the subject companies by reference. To request more information regarding these disclosures, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Stocks mentioned in this report are not covered by ThinkEquity LLC unless otherwise mentioned. Member of FINRA and SIPC. Copyright 2009 ThinkEquity LLC, A Panmure Gordon Company

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