Activision Blizzard - Net effect from deferral of net revenues and sales forecast
Hello everyone,
I am an Equity Valuation masters student and I am at the moment valuing Activision Blizzard. I noticed in some analyst reports that they do not include the net effect from deferral of net revenues in their revenues forecast.
I wanted to ask if anyone know why they not include that value in their projections. In other words, the value that the analysts use for past revenue (e.g Revenue from 2015) does not match the value in the income statement of the company.
This is a bit confusing as I am not sure how should I start my top line DCF model. Also, I read in one of the analyst reports that the results of the analysts focus on non-GAAP figures and the inclusion of the net effect from deferral of net revenues is a GAAP measure. Is it usual to use non-GAAP figures in the DCF model?
Thanks in advance,
Nate
For a video game company like ATVI, you definitely want to adjust revenue and EPS for the deferred revenues. non-gaap revenue and non-gaap EPS are definitely what you should be focusing on.
Basically, GAAP accounting treats a video games as unfinished software, and as such companies like ATVI have to defer revenue into subsequent quarters.
Here's how it works...if you buy Call of Duty for $60, non-GAAP revenue is $60 (makes sense, right?), but GAAP revenue will be something like $20-30 (makes no sense) because GAAP rules say "this game is not finished because many users are purchasing map packs and additional in-game content over a period of time". So in order to calculate GAAP revenue, you need a team of accountants and lawyers to determine the correct assumed service period of the game, the expected amount of spending for each user, and a bunch of other nonsense that is impossible to model.
GAAP revenue and EPS are BACKWARD LOOKING metrics, and non-GAAP revenue and non-gaap EPS adjusts for this fact, providing a more up-to-date view on revenue trends.
The summer of 2016 the SEC said companies can no longer adjust for deferrals in non-GAAP results. So ATVI is not allowed to print the actual non-GAAP results on their earnings presentations. It's bullshit. So the street still adjusts. You want to take the revenue outlook, and add / subtract the change in deferred revenue....which gives you the actual revenue / actual eps. its kinda complicated at first but you will get the hang of it.
there are zero investors focusing on gaap results for atvi. everyone focuses on non-gaap.
Thank you so much for your insight! It makes sense. My thesis advisor said that I should always use the GAAP measures but I guess it really depends on the company.
Just to be clear because I think I did not understand very well from your comment. Should I just ignore the net effect from deferral of net revenues in my DCF projections or should I project that effect too?
By the way, do you know if there is any book/website where I can check the accouting principles about this specific case so I can justify that in my project?
Again, thanks for your help.
Regards, Nate
I'm confused...if I buy Call of Duty for $60, that does not entitle me to future map packs. I still need to pay up for future downloadable content it is just the base game. So why isn't $60 fully earned under GAAP? I can understand how the treatment would work if I purchased some premium edition for $80-$100 which entitled me to the future content, but it hasn't been delivered yet the difference between the base $60 would be deferred. Is it because of future general game patches/software updates?
It is definitely confusing. However, every analyst report that I have see uses non-GAAP Revenues as well as the projections provided by Thomson Reuters
Nearr, the use of non-GAAP numbers is because non-GAAP numbers move the market. They are (intended) to provide a clear view of the economic reality, not the accounting view, of the firm's performance.
Non-GAAP Activision Blizzard Deferrals (Originally Posted: 10/14/2017)
I am strugling to understand how the deferrals work in ATVI Income Statements. However I don't understand whta they refer to when day say for example that:
"The decrease in net deferred revenues recognized for 2016, as compared to 2015, was primarily due to: • Deferrals of revenues associated with the release of World of Warcraft: Legion in August 2016, as compared to the recognition of deferred revenues in 2015 from the release of World of Warcraft: Warlords of Draenor® in November 2014."
What I understant is that they have less deferrals with the release of legion than with the end of Warlords of Draenor expansion, I mean, They have recognised less revenue from Legion than from Warlords of Draenor? But that would not make sense, the sales of Legion have been more than Warlords of Draenor.
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