Hello everyone,
I am at the moment making a valuation model of the company Activision Blizzard (a video game company).
I am following the methodology of the book Valuation: Measuring and managing the value of companies by McKinsey.
I am at a stage where I need to calculate NOPLAT. Basically to compute NOPLAT, one needs to separate operating and nonoperating items in the income statement of the company. Also, generally, when we do this we separate the amortization expenses into amortization of capitalized software (which we include in NOPLAT) from the amortization of acquired intangibles.
My problem is that some components of COGS and SG&A include portions of the amortizations of capitalized software and acquired intangibles but they do not specify the amount. The only values available in the 10-K are the amortization expense of capitalized software and amortization expense of acquired intangibles.
For an easier understanding, the company’s COGS is divided into the following items:
1 - Cost of revenues – product sales:
a) Product costs
b)Software royalties, amortization and intellectual property licenses
2 - Cost of revenues – subscription, licensing and other revenues:
a) Game operations and distribution costs
b) Software royalties, amortization and intellectual property licenses
For instance, one component of COGS is Software royalties, amortization and intellectual property licenses (2. b)), and its description is the following: " includes the amortization of capitalized software costs and royalties attributable to subscription, licensing and other revenues. These costs are capitalized on the balance sheet until the respective games are released, at which time the capitalized costs are amortized. Also included is amortization of intangible assets recognized in purchase accounting attributable to subscription, licensing and other revenues.
Also, there is a note in the latest 10-K that reports the following :“The internally-developed franchises, customer base, developed software. and Trade name intangible assets will be amortized to “Cost of revenues – subscription, licensing and other revenues - Software royalties, amortization and intellectual property licenses”, “Sales and marketing”, “Cost of revenues – subscription, licensing and other revenues - Software royalties, amortization and intellectual property licenses” and “General and administrative”, respectively”
Does this information mean that all the types of amortization are embedded into this items? Ideally, to compute NOPLAT, I would only need to use the amortization expense of capitalized software, but since this value is spread between several items, I cannot find a solution for this.
Thanks for your time and sorry to be a bother