Activision Blizzard Annual Report 2017

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FY2017 Annual Report · Activision Blizzard

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2017 Annual Report

A record year in

2017

record net bookings1

$7.2 billion

up 8%
year-over-year

record digital net bookings1

$5.4 billion

76% of total net bookings1,
up 4% year-over-year

record in-game net bookings1

$4+ billion

record non-GAAP EPS2

$2.21

record operating cash flow

$2.2 billion

Cover: Activision Blizzard has the
most talented, passionate and
dedicated team in entertainment.

1 Net bookings is an operating metric that is defined as the net amount of products and services sold digitally or sold-in physically
in the period, and includes license fees, merchandise, and publisher incentives, among others.
2 Non-GAAP reconciliations are in the earnings release dated February 8, 2018, which is available on www.activisionblizzard.com

a virtuous cycle
the media company of the future

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n t D rives
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building blocks for growth

Core Interactive

Esports

Digital Advertising

n Bigger audiences

n Increasing engagement

n Growing monetization

n Driven by franchise

innovation, always-on
gameplay, and mobile
expansion

n Franchises become
even more enduring,
like professional sports

n Largest untapped digital

ad opportunity

n Fuels growth across
mobile and esports

The first global city-based esports league

40 million registered players globally

7th expansion, Battle for Azeroth, launches in 2018

Record levels of MAUs1 and time spent in 2017

1 MAUs defined as number of individuals who accessed a particular game in a given month averaged across the number of months
in a respective period. Refer to the definition included in the fourth quarter 2017 earnings release for additional details.

Top grossing console game worldwide in 2017 1

Top franchise globally for 8 of the last 9 years1

n n n

1 Based on data from the NPD Group, GfK, GSD and internal estimates.

Second highest grossing console game
in North America in 2017 1

1 Based on data from the NPD Group, GfK, GSD and internal estimates.

Number-one-selling remastered
collection in PS4 history1

Skylanders Academy animated show
with two seasons on Netflix

1 Based on blog.us.playstation.com

2 of top-10 grossing mobile games for the 17th quarter in a row1

n n n

Candy Crush Saga and Candy Crush Soda Saga
at #1 and #2, respectively in Q4 2017 1

1 Publisher ranking for U.S. Apple App Store and Google Play Store per App Annie Intelligence for Q4 2017.

MAJOR LEAGUE GAMING

A leader in creating and streaming premium
live gaming events and serves as the foundation
for Activision Blizzard’s esports broadcasts

Devoted to creating original content based
on the company’s extensive library of
iconic and globally-recognized intellectual properties

C O N S U M E R P R O D U C T S

Dedicated to providing our passionate communities
with new ways to experience our
franchises and characters in their everyday lives

to our shareholders

Since 1991, when Brian Kelly and I purchased our stake in the company

and were given the privilege of managing it, our book value per share has

grown at a rate of over 31% compounded annually. $100 invested in our

company 20 years ago would have been worth $4,650 at the end of 2017,

over 11 times more than the S&P 500’s $401 over the same period. In 2017,

our share price increased 75 percent, 56 percentage points above the S&P

500. Our future prospects probably had more to do with this rise than our

2017 operating results.

In 2017, we had net bookings of $7.2 billion dollars, non-GAAP EPS of $2.21

and annual operating cash flow of $2.2 billion dollars (to truly understand all of

these measures requires a careful reading of our Form 10-K, this is especially

true for net bookings which is a new term for us).

While some of these results were records for the company they also highlight

areas of opportunity. If we had owned King (creator of Candy Crush and

one of the world’s most successful mobile game companies) for a full year

in 2016, our segment operating income would have been roughly flat year-

over-year. Our non-GAAP EPS only grew 1% in 2017, while the S&P 500’s

EPS grew 12%. This includes benefits we received from foreign currency

adjustments and lower interest expense which make the comparisons even

less favorable.

The markets we serve grew faster than we did last year, but we are determined

to change that over the next few years.

We have the most talented teams in entertainment, and they are hard at work

creating exciting and innovative new content and experiences. We know there

is more we can do to serve our players and spectators, and in turn, more we

can do to drive growth for our stakeholders. 385 million people in 196 countries

are deeply engaged with our franchises. Our players are spending almost an

hour a day playing our games, and that doesn’t include time spent watching

our games.

All figures included in this letter are non-GAAP unless
otherwise stated. For full GAAP to non-GAAP reconciliation,
please see tables at the end of this annual report.

Achieved record in-game net bookings1 of $4+ billion, driven by live services, features, and content updatesRecord Net Bookings1
($ billions of dollars)

Up 8%
Year-Over-Year

$7.2

$6.6

Record Non-GAAP
Earnings Per Share3

Through the strength of our deep library of intellectual property (perhaps

the biggest in our industry and one of the oldest – dating back to 1979),

we have unique opportunities to further engage and expand our player and

$2.18

$2.21

spectator communities. We have just begun offering more traditional linear

content, including professional esports programming, and we have much more

interactive content to create and share with our players and our audiences.

Harnessed as a global network, we have far more monthly active users2 than

ESPN and Netflix have subscribers. There are very few networks larger than

ours and even fewer with the diversity of investment options for our audience

members. Today we support subscription billing, pay-per-digital download,

microtransactions like virtual item sales, virtual item sales in broadcast streams

2016 2017

and unique digital advertising. We do this in almost every country in the world.

2016 2017

Record Digital Net Bookings1
($ billions of dollars)

76% of Net Bookings

An increasingly

Up 4%
Year-Over-Year

diversified business,

with over $2 billion

$5.4

$5.2

Our core games business is our engine for innovation and growth. Historically,

our consumers – numbering in the tens of millions – have been in developed

2018 Dividend
($ per share)

countries and largely reliant on expensive personal computers and video game

consoles. Mobile gaming meaningfully expands our reach, potentially unlocking

Up 13%
Year-Over-Year

billions of players around the world and new opportunities for our consumers

in annual revenues

on each of three

interactive platforms –

console, PC, and mobile

2016 2017

2Monthly Active Users is defined as number of individuals
who accessed a particular game in a given month averaged
across the number of months in a respective period. Refer
to the definition included in the financial review herein for
additional details.

to play games outside of the home. Mobile devices are the main reason time

$0.34

$0.30

spent gaming is expected to grow faster than time spent watching videos,

listening to music, and even on social networks.

As the size and engagement of our communities grow, so does our opportunity

to better serve them. More frequent content releases provide opportunities

for our players to engage with our content more regularly and for longer. This

creates new high-margin recurring revenue streams, which in turn enable us to

invest in more compelling content. In 2017, we generated ~$4 billion of our

2017 2018

~$7 billion of net bookings from digital in-game content, and we believe this

number will continue to increase. There is substantial room for growth given

the passion and ongoing engagement of our players and given our focus on

delivering unique value and continually exceeding player expectations.

In addition to the growth profile of our core business, we also have meaningful

Users now spend

50+ minutes per day

across Activision, Blizzard,

and King, in-line with

some of the most

engaging online connected

platforms in the world

new opportunities to expand our franchises in areas like esports, in-game

advertising, consumer products and linear media.

Our esports efforts have received a lot of attention. More than 335 million

people around the world already watch esports, reflecting the unique appeal

of organized, global competition. To date, for the Overwatch League, we have

sold the first 12 teams for almost a quarter of a billion dollars, sold more than

$100 million dollars of over the top broadcast rights and sponsorship sales and

had more than 10 million spectators in the League’s first week of operation. We

have 40 million Overwatch players today and expect our league to eventually

grow to 28 teams. The average age of our players is 223, and they play

Overwatch all over the world.

By contrast, the NFL has around 40 million regular season spectators with

an average age of 50. The NFL generates ~$12 billion in annual revenues

through broadcast rights, ticketing, sponsorships and licensing. Compare this

to esports audiences which are younger, growing, and especially attractive

to advertisers, and it is easy to see why we are so enthusiastic about the

opportunity. Importantly, because we own our IP and our own direct network

for distribution, we have the unique ability to create value for spectators,

professional players, team owners, brand partners, and shareholders.

Our expertise launching and growing the Overwatch League will allow us to

launch additional professional esports initiatives. Later this year we intend to

expand the number of Overwatch teams and launch team sales for the Call of

Duty professional league. Over time we believe our esports initiatives could rival

traditional sports for audience interest, advertisers, sponsors, ticket sales and

merchandise sales (both virtual and physical).

We are pursuing several additional emerging categories of potential growth, in-

cluding digital advertising. Gaming is one of the largest untapped opportunities

for advertisers in the world. While companies like Google and Facebook have

3 Based on the average age of Overwatch PC players.

had success driving value with their large and engaged global platforms,

Record Non-GAAPEarnings Per Share3Up 4% Year-Over-YearUp 13% Year-Over-Year2018 Dividend($ per share) 2016 2017 2016 2017 2016 2017 2017 2018$6.6Record Net Bookings1($ billions of dollars) Record Digital Net Bookings1($ billions of dollars)76% of Net BookingsUp 8% Year-Over-Year$7.2$2.18$2.21$5.2$5.4$0.30$0.34Generated record

operating cash flow

of $2.2 billion

advertising in games is in the first inning of opportunity. Our over 50 minutes

of average daily time spent is on par with what many view as the engagement

leader, Facebook. And our 385 million global users offer greater scale and reach

than Twitter, Snapchat or Spotify.

We are developing our advertising experiences carefully, and our efforts will

begin with King’s hundreds of millions of players. In the future, we can unlock

new advertising experiences across our portfolio, including advertising on our

esports network which features live professional competitive content, the most

valuable linear content in the world today.

As we pursue these efforts, we will remain guided by the principles that have

allowed our company to carefully grow over the long-term:

n Delivering innovative and compelling entertainment experiences with

continuous investment in our franchises and community;

n Focusing on the largest and most promising opportunities;

n Recruiting, rewarding and retaining diverse world-class talent, emphasizing

our shared common values; and

n Remaining disciplined in our commitment to deliver shareholder value.

From all of us at Activision Blizzard, thank you for your continued support.

We are grateful for the capital you provide and respectful of our responsibility

to invest it carefully. We hope to continue providing returns commensurate with

the risks we take. We recognize that you have many places you can invest your

capital and as we have for 27 years, we hope to continue to provide superior

returns for all our stakeholders.

With appreciation,

Bobby Kotick

Brian Kelly

President and Chief Executive Officer

Chairman of the Board

Activision Blizzard

SELECTED FINANCIAL DATA

The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision
Blizzard, Inc. and its subsidiaries.

The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision
The following table summarizes certain selected consolidated financial data, which should be read in conjunction with our
Blizzard, Inc. and its subsidiaries.
Consolidated Financial Statements and Notes thereto and with Management’s Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this Annual Report. The selected consolidated financial data
The following table summarizes certain selected consolidated financial data, which should be read in conjunction with our
presented below at and for each of the years in the five-year period ended December 31, 2017 is derived from our
Consolidated Financial Statements and Notes thereto and with Management’s Discussion and Analysis of Financial
Consolidated Financial Statements and include the operations of King Digital Entertainment (“King”) commencing on
Condition and Results of Operations included elsewhere in this Annual Report. The selected consolidated financial data
February 23, 2016 (the “King Closing Date”). All amounts set forth in the following tables are in millions, except per share
presented below at and for each of the years in the five-year period ended December 31, 2017 is derived from our
data.
Consolidated Financial Statements and include the operations of King Digital Entertainment (“King”) commencing on
February 23, 2016 (the “King Closing Date”). All amounts set forth in the following tables are in millions, except per share
data.

For the Years Ended December 31,
2015

2017

2016

2014

2013

Statement of Operations Data:
Net revenues...................................................................................
Net income(1).................................................................................
Statement of Operations Data:
Basic net income per share .............................................................
Net revenues...................................................................................
Diluted net income per share..........................................................
Net income(1).................................................................................
Cash dividends declared per share .................................................
Basic net income per share .............................................................
Diluted net income per share..........................................................
Operating cash flows ......................................................................
Cash dividends declared per share .................................................

$7,017
2017
273
0.36
$7,017
0.36
273
0.30
0.36
0.36
$2,213
0.30

For the Years Ended December 31,
$4,664
2015
892
1.21
$4,664
1.19
892
0.23
1.21
1.19
$1,259
0.23

$6,608
2016
966
1.30
$6,608
1.28
966
0.26
1.30
1.28
$2,155
0.26

$4,408
2014
835
1.14
$4,408
1.13
835
0.20
1.14
1.13
$1,331
0.20

$4,583
2013
1,010
0.96
$4,583
0.95
1,010
0.19
0.96
0.95
$1,293
0.19

$2,213
$4,775
18,668
4,390
$4,775
4,440
18,668
—
4,390
4,440
—

$1,259
$1,840
15,246
4,074
$1,840
4,119
15,246
2,279
4,074
4,119
2,279

$2,155
$3,271
17,452
4,887
$3,271
4,940
17,452
1,669
4,887
4,940
1,669

Balance Sheet Data:
Operating cash flows ......................................................................
Cash and investments(2) ................................................................
Total assets .....................................................................................
Balance Sheet Data:
Long-term debt, net(3) ...................................................................
Cash and investments(2) ................................................................
Long-term debt, gross.....................................................................
Total assets .....................................................................................
Net debt(4) .....................................................................................
Long-term debt, net(3) ...................................................................
Long-term debt, gross.....................................................................
(1)
Net debt(4) .....................................................................................

$1,293
$4,452
13,947
4,687
$4,452
4,744
13,947
292
4,687
4,744
Net income includes the impact of significant discrete tax-related impacts, including incremental income tax
292
expense due to the application of tax reform legislation known as the Tax Cuts and Jobs Act (the "U.S. Tax Reform
Act") that was enacted in the United States. See further discussion in Note 15 of the notes to consolidated financial
Net income includes the impact of significant discrete tax-related impacts, including incremental income tax
statements included in this Annual Report.
expense due to the application of tax reform legislation known as the Tax Cuts and Jobs Act (the "U.S. Tax Reform
Act") that was enacted in the United States. See further discussion in Note 15 of the notes to consolidated financial
Cash and investments consists of cash and cash equivalents along with short-term and long-term investments. We
statements included in this Annual Report.
had short-term investments of $62 million and did not have any long-term investments as of December 31, 2017.
We had short-term and long-term investments of $13 million and $13 million, respectively, as of December 31,
Cash and investments consists of cash and cash equivalents along with short-term and long-term investments. We
2016, $8 million and $9 million, respectively, as of December 31, 2015, $10 million and $9 million, respectively, as
had short-term investments of $62 million and did not have any long-term investments as of December 31, 2017.
of December 31, 2014, and $33 million and $9 million, respectively, as of December 31, 2013. Cash and
We had short-term and long-term investments of $13 million and $13 million, respectively, as of December 31,
investments as of December 31, 2015 excludes $3,561 million of cash placed in escrow for the acquisition of King.
2016, $8 million and $9 million, respectively, as of December 31, 2015, $10 million and $9 million, respectively, as
of December 31, 2014, and $33 million and $9 million, respectively, as of December 31, 2013. Cash and
For discussion on our debt obligations, see Note 11 of the notes to consolidated financial statements included in this
investments as of December 31, 2015 excludes $3,561 million of cash placed in escrow for the acquisition of King.
Annual Report.

$1,331
$4,867
14,637
4,319
$4,867
4,369
14,637
—
4,319
4,369
—

For discussion on our debt obligations, see Note 11 of the notes to consolidated financial statements included in this
Net debt is defined as long-term debt, gross less cash and investments.
Annual Report.

Net debt is defined as long-term debt, gross less cash and investments.

(1)

(2)

(3)

(3)
(4)

(4)

Activision_AR2017_MASTER_LAYOUT_COPYv2.indd 17

Activision 2017 Annual Report LETTER

1
1

Monday, April 9, 2018 8:00pm PST

Andra Design LLC

4/9/18 11:59 PM

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Business Overview

The King Acquisition

On February 23, 2016, we completed the acquisition of King for an aggregate purchase price of approximately $5.8 billion
(the “King Acquisition”), as further described in Note 20 of the notes to the consolidated financial statements. Our
consolidated financial statements include the operations of King commencing on the King Closing Date.

Reportable Segments

As part of the continued implementation of our esports strategy, we instituted changes to our internal organization and
reporting structure such that the Major League Gaming (“MLG”) business now operates as a division of Blizzard
Entertainment, Inc. (“Blizzard”). As such, commencing with the second quarter of 2017, MLG, which was previously a
separate operating segment, is now a component of the Blizzard operating segment. MLG is responsible for the operations of
the Overwatch League™, along with other esports events, and will also continue to serve as a multi-platform network for
other Activision Blizzard esports content. Based upon our organizational structure, we conduct our business through three
reportable segments as follows:

(i)

Activision

Activision Publishing, Inc. (“Activision”), is a leading global developer and publisher of interactive software products and
entertainment content, particularly for the console platform. Activision primarily delivers content through retail and digital
channels, including full-game and in-game sales, as well as by licensing software to third-party or related-party companies
that distribute Activision products. Activision develops, markets, and sells products based on our internally developed
intellectual properties, as well as some licensed properties. We have also established a long-term alliance with Bungie to
publish its game universe, Destiny.

Activision’s key product franchises include: Call of Duty®, a first-person shooter for the console and PC platforms, and
Destiny, an online universe of first-person action gameplay (which we call a “shared-world shooter”) for the console and PC
platforms. Call of Duty, Activision’s leading franchise, has been the number one console franchise globally for eight of the
last nine years, based on data from The NPD Group, GfK Chart-Track, and GSD, and our internal estimates.

(ii)

Blizzard

Blizzard is a leading global developer and publisher of interactive software products and entertainment content, particularly
for the PC platform. Blizzard primarily delivers content through retail and digital channels, including subscriptions,
full-game, and in-game sales, as well as by licensing software to third-party or related-party companies that distribute
Blizzard products. Blizzard also maintains a proprietary online gaming service, Blizzard Battle.net®, which facilitates digital
distribution of Blizzard content, along with Activision’s Destiny 2 PC content, online social connectivity, and the creation of
user-generated content. As noted above, Blizzard also includes the activities of our MLG business, which is responsible for
the operations of the Overwatch League, along with other esports events, and will also continue to serve as a multi-platform
network for other Activision Blizzard esports content.

Blizzard’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing
game (“MMORPG”) for PC; StarCraft®, a real-time strategy PC franchise; Diablo®, an action role-playing franchise for the
PC and console platforms; Hearthstone®, an online collectible card franchise for the PC and mobile platforms; Heroes of the
Storm®, a free-to-play team brawler for PC; and Overwatch®, a team-based first-person shooter for the PC and console
platforms. World of Warcraft, which was initially launched in November 2004, is the leading subscription-based MMORPG
in the world.

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(iii)

King

King is a leading global developer and publisher of interactive entertainment content and services, particularly on mobile
platforms, such as Google Inc.’s (“Google”) Android and Apple Inc.’s (“Apple”) iOS. King also distributes its content and
services on the PC platform, primarily via Facebook, Inc. (“Facebook”). King’s games are free to play, however, players can
acquire in-game items, either with virtual currency the players purchase or directly using real currency.

King’s key product franchises, all of which are for the mobile and PC platforms, include: Candy Crush™, which features
“match three” games; Farm Heroes™, which also features “match three” games; and Bubble Witch™, which features
“bubble shooter” games. King had two of the top 10 highest-grossing titles in the U.S. mobile app stores for the last 17
quarters in a row, according to App Annie Intelligence and internal estimates for the Apple App Store and the Google Play
Store combined.

Other

We also engage in other businesses that do not represent reportable segments, including:

•

the Studios business, which is devoted to creating original film and television content based on our extensive
library of globally recognized intellectual properties; and

the Distribution business, which consists of operations in Europe that provide warehousing, logistics, and sales
distribution services to third-party publishers of interactive entertainment software, our own publishing
operations, and manufacturers of interactive entertainment hardware.

Business Results and Highlights

Financial Results

The Company’s 2017 financial highlights include:

•

consolidated net revenues increased 6% to $7.0 billion and consolidated operating income decreased 7% to
$1.3 billion, as compared to consolidated net revenues of $6.6 billion and consolidated operating income of
$1.4 billion in 2016;

revenues from digital online channels increased 13% to $5.5 billion, or 78% of consolidated net revenues, as
compared to $4.9 billion, or 74% of consolidated net revenues, in 2016;

operating margin was 18.7%, as compared to 21.4% in 2016;

cash flows from operating activities of approximately $2.21 billion, an increase of 3%, as compared to
$2.16 billion in 2016;

consolidated net income decreased 72% to $273 million, as compared to $966 million in 2016, primarily driven
by the impact of significant discrete tax-related impacts, including incremental income tax expense due to the
impacts from the U.S. Tax Reform Act, as discussed in “Consolidated Results” below;

consolidated net income included $113 million of excess tax benefits from share-based payments, as compared
to $81 million in 2016; and

diluted earnings per common share decreased 72% to $0.36, as compared to $1.28 in 2016, primarily driven by
incremental income tax expense due to the impacts from the U.S. Tax Reform Act.

Since certain of our games are hosted online or include online functionality that represents an essential component of
gameplay and, as a result, a more-than-inconsequential separate deliverable, we initially defer the software-related revenues
from the sale of these games and recognize the attributable revenues over the relevant estimated service periods, which are
generally less than a year. Net revenues and operating income for the year ended December 31, 2017, include a net effect of
$139 million and $71 million, respectively, from the deferrals of net revenues and related cost of revenues.

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Release Highlights

Games and downloadable content that were released during 2017, include:

• Activision’s four downloadable content packs for Call of Duty: Infinite Warfare™; and one downloadable

content pack for Call of Duty: Modern Warfare® Remastered;

• Activision’s Call of Duty: Black Ops III Zombies Chronicles, a downloadable content pack of remastered
zombies maps from Call of Duty: World at War, Call of Duty: Black Ops, and Call of Duty: Black Ops II;

• Activision’s Crash Bandicoot™ N. Sane Trilogy, a remastered version of the first three Crash Bandicoot games

for Playstation 4;

• Activision’s Destiny 2, the sequel to Destiny, and Curse of Osiris, the first expansion to Destiny 2;

• Activision’s Call of Duty: WWII;

• Blizzard’s latest expansions to Hearthstone—Journey to Un’Goro™, Knights of the Frozen Throne™, and

Kobolds and Catacombs™;

• Blizzard’s Rise of the Necromancer™, a downloadable content pack for Diablo III; and

• King’s Bubble Witch 3 Saga™.

We also completed the sale of 12 teams for the Overwatch League, the first major global professional esports league with
city-based teams. The first preseason matches occurred in December 2017 and the inaugural regular season started in January
2018.

International Sales

International sales are a fundamental part of our business. An important element of our international strategy is to develop
content that is specifically directed toward local cultures and customs. Net revenues from international sales accounted for
approximately 55%, 55%, and 52% of our total consolidated net revenues for the years ended December 31, 2017, 2016, and
2015, respectively. The majority of our net revenues from foreign countries are generated by consumers in Australia, Canada,
China, France, Germany, Italy, Japan, South Korea, Spain, Sweden, and the United Kingdom. Our international business is
subject to risks typical of an international business, including, but not limited to, foreign currency exchange rate volatility and
changes in local economies. Accordingly, our future results could be materially and adversely affected by changes in foreign
currency exchange rates and changes in local economies.

Operating Metrics

The following operating metrics are key performance indicators that we use to evaluate our business.

Monthly Active Users

We monitor monthly active users (“MAUs”) as a key measure of the overall size of our user base. MAUs are the number of
individuals who accessed a particular game in a given month. We calculate average MAUs in a period by adding the total
number of MAUs in each of the months in a given period and dividing that total by the number of months in the period. An
individual who accesses two of our games would be counted as two users. In addition, due to technical limitations, for
Activision and King, an individual who accesses the same game on two platforms or devices in the relevant period would be
counted as two users. For Blizzard, an individual who accesses the same game on two platforms or devices in the relevant
period would generally be counted as a single user.

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The number of MAUs for a given period can be significantly impacted by the timing of new content releases, since new
releases may cause a temporary surge in MAUs. Accordingly, although we believe that overall trending in the number of
MAUs can be a meaningful performance metric, period-to-period fluctuations may not be indicative of longer-term trends.
The following table details our average MAUs on a sequential quarterly basis for each of our reportable segments (amounts
in millions):

December 31,
2017

September 30,
2017

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

Activision ...............................................
Blizzard ..................................................
King ........................................................
Total .......................................................

55
40
290
385

49
42
293
384

47
46
314
407

48
41
342
431

51
41
355
447

46
42
394
482

Average MAUs for the quarter ended December 31, 2017 were comparable to the quarter ended September 30, 2017. The
decrease in King’s and Blizzard’s average MAUs is partially offset by an increase in Activision’s average MAUs driven by
the Call of Duty franchise due to the launch of Call of Duty: WWII in November 2017.

Average MAUs decreased by 62 million, or 14%, for the quarter ended December 31, 2017, as compared to the quarter ended
December 31, 2016. The decrease in King’s average MAUs is due to decreases across King’s franchises that are largely
attributable to less engaged users leaving the network and maturity of titles.

Net Bookings

We monitor net bookings as a key operating metric in evaluating the performance of our business. Net bookings is defined as
the net amount of products and services sold digitally or sold-in physically in the period, and includes license fees,
merchandise, and publisher incentives, among others. Net bookings were as follows (amounts in millions):

Net bookings .......................................................................

2017 vs. 2016

For the years ended
December 31,
2016
$6,599

2017
$7,156

2015
$4,621

Increase
(Decrease)
2017 v 2016

Increase
(Decrease)
2016 v 2015

$557

$1,978

The increase in net bookings for 2017, as compared to 2016, was primarily due to:

•

higher net bookings from King titles, as 2017 includes King net bookings for the full year, while 2016 only
included King net bookings for the partial period following the King Closing Date, as well as higher net
bookings from the Candy Crush franchise, due to in-game events and features;

higher net bookings from the Destiny franchise, driven by the release of Destiny 2 in September 2017;

higher net bookings from Call of Duty: WWII, which was released in November 2017, as compared to Call of
Duty: Infinite Warfare (which, when referred to herein, is inclusive of Call of Duty: Modern Warfare
Remastered), the comparable 2016 title;

higher net bookings from the continued strength of Call of Duty: Black Ops III, as compared to prior catalog
releases, driven by the downloadable content pack, Zombies Chronicles, which was released in May 2017, and
the continued strength of microtransactions; and

•

net bookings from Crash Bandicoot N. Sane Trilogy, which was released in June 2017.

The increase was partially offset by:

•

lower net bookings from Call of Duty: Infinite Warfare, as compared to the performance of Call of Duty: Black
Ops III, the comparable 2015 title;

•

lower net bookings from Overwatch, which was released in May 2016;

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•

lower net bookings from World of Warcraft, driven by the release of World of Warcraft: Legion™ in August
2016, with no comparable release in 2017; and

lower net bookings from the Skylanders® franchise, due to the release of Skylanders Imaginators in October
2016, with no comparable release in 2017.

2016 vs. 2015

The increase in net bookings for 2016, as compared to 2015, was primarily due to:

•

new net bookings from King titles following the King Closing Date, primarily driven by the Candy Crush
franchise;

net bookings from Overwatch, which was released in May 2016;

higher net bookings from digital content associated with Call of Duty: Black Ops III, which was released in
November 2015, as compared to Call of Duty: Advanced Warfare, the comparable 2014 title; and

higher net bookings from World of Warcraft, driven by the release of World of Warcraft: Legion in August
2016, with no comparable release in 2015.

The increase was partially offset by:

•

lower net bookings from Call of Duty: Infinite Warfare, which was released in November 2016, as compared to
Call of Duty: Black Ops III, the comparable 2015 title;

lower net bookings from the Destiny franchise, as there were two expansion packs in 2015—House of Wolves
and The Taken King—but only one in 2016—Rise of Iron;

lower net bookings from Skylanders Imaginators, which was released in October 2016, as compared to
Skylanders Superchargers, the comparable 2015 title, as well as lower net bookings from standalone toys and
accessories from the Skylanders franchise in 2016; and

•

lower net bookings from Guitar Hero® Live, which was released in 2015, with no comparable release in 2016.

Management’s Overview of Business Trends

Interactive Entertainment and Mobile Gaming Growth

Our business participates in the global interactive entertainment industry. Games have become an increasingly popular form
of entertainment, and we estimate the total industry has grown, on average, 18% over the last three years. The industry
continues to benefit from additional players entering the market as interactive entertainment becomes more common place
across age groups and as more developing regions gain access to this form of entertainment.

Further, the wide adoption of smart phones globally and the free-to-play business model on those platforms has increased the
total addressable market for gaming significantly by introducing gaming to new age groups and new regions and allowing
gaming to occur more widely outside the home. Mobile gaming is now estimated to be larger than console and PC gaming
and continues to grow at a significant rate. King is a leading developer of mobile and free-to-play games and our other
business units have mobile efforts underway that present the opportunity for us to expand the reach of, and drive additional
player investment from, our franchises.

Opportunities to Expand Franchises Outside of Games

Our fans spend significant time investing in our franchises through purchases of our game content, whether through
purchases of full games or downloadable content or via microtransactions. Given the passion our players have for our
franchises, we believe there are emerging opportunities to drive additional engagement and investment in our franchises
outside of games. These opportunities include esports, film and television, and consumer products. Our efforts to build these
adjacent opportunities are still relatively nascent, but we view them as potentially significant sources of future revenues.

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As part of our efforts to take advantage of the esports opportunity, during 2017 we completed the sale of 12 teams for the
Overwatch League. The Overwatch League is the first major global professional esports league with city-based teams. The
first preseason matches occurred in December 2017 and the inaugural regular season started in January 2018.

Concentration of Sales Among the Most Popular Franchises

The concentration of retail revenues among key titles has continued as a trend in the overall interactive entertainment
industry. According to The NPD Group, the top 10 titles accounted for 36% of the retail sales in the U.S. interactive
entertainment industry in 2017. Similarly, a significant portion of our revenues has historically been derived from video
games based on a few popular franchises and these video games were responsible for a disproportionately high percentage of
our profits. For example, the Call of Duty, Candy Crush, World of Warcraft, and Overwatch franchises, collectively,
accounted for 66% of our consolidated net revenues—and a significantly higher percentage of our operating income—for
2017.

The top titles in the industry are also becoming more consistent as players and revenues concentrate more heavily in
established franchises. Of the top 10 console franchises in 2017, all 10 are from established franchises. Similarly, according
to U.S rankings for the Apple App Store and Google Play store per App Annie Intelligence as of December 2017, the top 10
mobile games have an average tenure of 22 months.

In addition to investing in and developing sequels and content for our top titles, we are continually exploring additional ways
to expand those franchises. Further, while there is no guarantee of success, we invest in new properties in an effort to develop
future top franchises. In 2014, we released Hearthstone and Destiny, in 2015, we released Heroes of the Storm, and in 2016,
we released Overwatch. Additionally, to diversify our portfolio of key franchises and increase our presence in the mobile
market, on February 23, 2016, we completed the King Acquisition.

Overall, we do expect that a limited number of popular franchises will continue to produce a disproportionately high
percentage of our, and the industry’s, revenues and profits in the near future. Accordingly, our ability to maintain our top
franchises and our ability to successfully compete against our competitors’ top franchises can significantly impact our
performance.

Recurring Revenue Business Models and Seasonality

Increased consumer online connectivity has allowed us to offer players new investment opportunities and to shift our
business further towards a more consistently recurring and year-round model. Offering downloadable content and
microtransactions, in addition to full games, allows our players to access and invest in new content throughout the year. This
incremental content not only provides additional high-margin revenues, it can also increase player engagement. Also, mobile
games, and free-to-play games more broadly, are generally less seasonal.

While our business is transitioning to a year-round engagement model, the interactive entertainment industry remains
somewhat seasonal. We have historically experienced our highest sales volume, particularly for Activision, in the year-end
holiday buying season, which occurs in the fourth quarter. Following the acquisition of King, which focuses on free-to-play
games which are generally less seasonal, and as we otherwise make the shift to a year-round model, less of our revenues are
generated during the fourth quarter. For our reportable segments—Activision, Blizzard, and King—the percentage of our
revenue represented by the fourth quarter in each of 2017 and 2016 was 36%, as compared to 46% in 2015.

Expected Upcoming Releases

We expect to release World of Warcraft: Battle for Azeroth and our latest Call of Duty game in the second half of 2018. In
addition, we expect to deliver ongoing content for our various franchises, including expansion packs for Hearthstone and
Destiny 2, in-game events for Overwatch, and map packs for Call of Duty: WWII, as well as releases of remastered versions
of titles from our library of IP. We also expect to release at least two new mobile titles during 2018, including a social casino
game from King.

We will also continue to invest in new opportunities, including new titles across our platforms, and continue to build on our
advertising and esports initiatives.

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Consolidated Statements of Operations Data

The following table sets forth consolidated statements of operations data for the periods indicated in dollars and as a
percentage of total net revenues, except for cost of revenues, which are presented as a percentage of associated revenues
(amounts in millions):

For the Years Ended December 31,
2016

2015

2017

Net revenues

Product sales ...........................................................................................
Subscription, licensing, and other revenues ...........................................
Total net revenues ......................................................................................
Costs and expenses

Cost of revenues—product sales:

Product costs ......................................................................................
Software royalties, amortization, and intellectual property

$2,110 30%
4,907
70
7,017 100

$2,196 33%
4,412
67
6,608 100

$2,447 52%
2,217
48
4,664 100

733

741

872

licenses ...........................................................................................

300

331

370

Cost of revenues—subscription, licensing, and other:

Game operations and distribution costs ..............................................
Software royalties, amortization, and intellectual property

licenses ...........................................................................................
Product development ..............................................................................
Sales and marketing................................................................................
General and administrative .....................................................................
Total costs and expenses ............................................................................
Operating income .......................................................................................
Interest and other expense (income), net ....................................................
Loss on extinguishment of debt(1) .............................................................
Income before income tax expense ............................................................
Income tax expense ....................................................................................
Net income .................................................................................................

984

851

274

484
1,069
1,378
760
5,708
1,309
146

10
15
20
11
81
19
2
12 —
16
13
4%

1,151
878
$273

471
958
1,210
634
5,196
1,412
214
92
1,106
140

11
14
18
10
79
21
3
1
17
2
$966 15%

69
646
734
380
3,345
1,319
198

3
14
16
8
72
28
4
— —
24
5
$892 19%

1,121
229

(1)

Represents the loss on extinguishment of debt we recognized associated with our refinancing activities. The 2017
loss on extinguishment is comprised of a $12 million write-off of unamortized discount and deferred financing costs
associated with refinancing activities on our tranche of term loans “A” and the 2016 loss on extinguishment was
comprised of a premium payment of $63 million and a write-off of unamortized discount and financing costs of
$29 million associated with the extinguishment of certain term loan and senior note facilities through our
refinancing activities.

Consolidated Net Revenues

The following table summarizes our consolidated net revenues and the increase/(decrease) in deferred revenues recognized
(amounts in millions):

Consolidated net revenues .............................. $7,017 $6,608 $4,664
Net effect from recognition (deferral) of

2017

2016

2015

Increase/
(decrease)
2017 v 2016
$409

Increase/
(decrease)
2016 v 2015
$1,944

% Change
2017 v 2016
6%

% Change
2016 v 2015
42%

deferred net revenues ..................................

(139)

(148)

(34)

For the Years Ended December 31,

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Consolidated net revenues

2017 vs. 2016

The increase in consolidated net revenues for 2017, as compared to 2016, was primarily due to:

•

higher revenues from King titles, as 2017 includes King revenues for the full year, while 2016 only included
King revenues for the partial period following the King Closing Date, as well as higher revenues from the
Candy Crush franchise, due to in-game events and features;

higher revenues recognized from the continued strength of Call of Duty: Black Ops III, as compared to prior
catalog releases, driven by the downloadable content pack, Zombies Chronicles, which was released in May
2017, and the continued strength of microtransactions;

revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017; and

higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to
Call of Duty: Infinite Warfare, the comparable 2016 title.

The increase was partially offset by:

•

lower revenues recognized from Call of Duty: Infinite Warfare, as compared to the performance of Call of
Duty: Black Ops III, the comparable 2015 title; and

lower revenues from the Skylanders franchise, due to the release of Skylanders Imaginators in October 2016,
with no comparable release in 2017.

2016 vs. 2015

The increase in consolidated net revenues for 2016, as compared to 2015, was primarily due to:

•

new revenues from King titles following the King Closing Date, primarily driven by the Candy Crush franchise;

revenues recognized from Overwatch, which was released in May 2016; and

higher revenues recognized in 2016 from Call of Duty: Black Ops III, which was released in the fourth quarter
of 2015 and was the third game in our successful Black Ops series, as compared to revenues recognized in 2015
from Call of Duty: Advanced Warfare, which was released in the fourth quarter of 2014, including, in each case,
the associated digital content.

The increase was partially offset by:

•

lower revenues recognized from the Destiny franchise, as Destiny debuted in September 2014 but had no
comparable full-game release in 2015;

lower revenues from Skylanders Imaginators, which was released in October 2016, as compared to Skylanders
Superchargers, the comparable 2015 title, as well as lower revenues from standalone toys and accessories from
the Skylanders franchise in 2016; and

•

lower revenues recognized from the Diablo franchise due to the timing of releases.

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Change in Deferred Revenues Recognized

2017 vs. 2016

The decrease in net deferred revenues recognized for 2017, as compared to 2016, was primarily due to:

•

a net deferral of revenues for the Destiny franchise, primarily due to Destiny 2, which was released in
September 2017, as compared to net deferred revenues recognized in the comparable prior period; and

a higher net deferral of revenues from the Call of Duty franchise, primarily due to the stronger performance of
Call of Duty: WWII in the fourth quarter of 2017, as compared to Call of Duty: Infinite Warfare in the fourth
quarter of 2016.

The decrease was partially offset by:

•

net deferred revenues recognized from Overwatch in 2017, as compared to a net deferral of revenues in 2016
due to the release of Overwatch in May 2016; and

net deferred revenues recognized from World of Warcraft in 2017, as compared to a net deferral of revenues in
2016 due to the release of World of Warcraft: Legion in August 2016.

2016 vs. 2015

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; and

•

deferrals of revenues associated with Overwatch.

The decrease was partially offset by lower deferrals of revenues associated with the Call of Duty franchise, driven by lower
revenue deferrals from Call of Duty: Infinite Warfare, which was released in the fourth quarter of 2016, as compared to Call
of Duty: Black Ops III, the comparable 2015 title.

Foreign Exchange Impact

Changes in foreign exchange rates had a positive impact of $42 million, a negative impact of $81 million, and a negative
impact of $373 million on Activision Blizzard’s consolidated net revenues in 2017, 2016, and 2015, respectively, as
compared to the same periods in the previous year. The changes are primarily due to changes in the value of the U.S. dollar
relative to the euro and the British pound.

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Operating Segment Results

Currently, we have three reportable segments. Our operating segments are consistent with the manner in which our
operations are reviewed and managed by our Chief Executive Officer, who is our chief operating decision maker (“CODM”).
The CODM reviews segment performance exclusive of: the impact of the change in deferred revenues and related cost of
revenues with respect to certain of our online-enabled games; share-based compensation expense; amortization of intangible
assets as a result of purchase price accounting; fees and other expenses (including legal fees, expenses, and accruals) related
to acquisitions, associated integration activities, and financings; certain restructuring costs; and certain other non-cash
charges. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly,
no disclosure is made with respect thereto.

Our operating segments are also consistent with our internal organization structure, the way we assess operating performance
and allocate resources, and the availability of separate financial information. We do not aggregate operating segments. As
discussed in the “Business Overview” above, commencing with the second quarter of 2017, we made changes to our
operating segments which reflect the changes in our organization and reporting structure. Our MLG business, which was
previously included in the non-reportable “Other segments,” is now presented within the Blizzard reportable segment. Prior
period amounts have been revised to reflect this change. This change had no impact on consolidated net revenues or
operating income.

Information on the reportable segments net revenues and segment operating income are presented below (amounts in
millions):

For the Year Ended December 31, 2017
Total

Blizzard

Activision

King

Segment Revenues
Net revenues from external customers ..........
Intersegment net revenues(1) ....................
Segment net revenues ................................
Segment operating income ..........................

$2,628
—
$2,628
$1,005

$2,120 $1,998 $6,746
19
$2,139 $1,998 $6,765
$700 $2,417

$712

—

For the Year Ended December 31, 2016
Total

Blizzard King

Activision

Segment Revenues

Net revenues from external customers ......
Intersegment net revenues(1) ....................
Segment net revenues ................................
Segment operating income ..........................

$2,220
—
$2,220
$788

—

$2,439 $1,586 $6,245
—
$2,439 $1,586 $6,245
$537 $2,320

$995

—

Increase / (decrease) 2017 v 2016

Activision

Blizzard King

Total

$408
—
$408
$217

$(319)
19
$(300)
$(283)

$412
—
$412
$163

$501
19
$520
$97

Increase / (decrease) 2016 v 2015

Activision

Blizzard King

Total

$(480)
—
$(480)
$(80)

—

$874 $1,586 $1,980
—
—
$874 $1,586 $1,980
$891
$537
$434

For the Year Ended December 31, 2015
Total
Activision

Blizzard King

Segment Revenues

Net revenues from external customers .......
Intersegment net revenues(1) .....................
Segment net revenues .................................
Segment operating income ...........................

$2,700
—
$2,700
$868

$1,565
—
$1,565
$561

—

$— $4,265
—
$— $4,265
$— $1,429

(1)

Intersegment revenues reflect licensing and service fees charged between segments.

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Reconciliations of total segment net revenues and total segment operating income to consolidated net revenues from external
customers and consolidated income before income tax expense are presented in the table below (amounts in millions):

For the Years Ended
December 31,
2016

2017

2015

Reconciliation to consolidated net revenues:
Segment net revenues ................................................................................................................
Revenues from other segments(1) .............................................................................................
Net effect from recognition (deferral) of deferred net revenues(2) ...........................................
Elimination of intersegment revenues(3) ..................................................................................
Consolidated net revenues .........................................................................................................

revenues(2) ............................................................................................................................
Share-based compensation expense ..........................................................................................
Amortization of intangible assets(4) .........................................................................................
Fees and other expenses related to the King Acquisition(5) .....................................................
Restructuring costs(6)................................................................................................................
Other non-cash charges(7) .........................................................................................................
Discrete tax-related items(8) .....................................................................................................
Consolidated operating income .................................................................................................
Interest and other expense (income), net ...................................................................................
Loss on extinguishment of debt .................................................................................................
Consolidated income before income tax expense ......................................................................

$6,765
410
(139)
(19)
$7,017

$6,245
354
9
—
$6,608

$4,265
356
43
—
$4,664

$2,417
(19)

$2,320
14

$1,429
37

(71)
(178)
(757)
(15)
(15)
(14)
(39)
1,309
146
12
$1,151

(10)
(159)
(706)
(47)
—
—
—
1,412
214
92
$1,106

(39)
(92)
(11)
(5)
—
—
—
1,319
198
—
$1,121

(1)

(2)

(3)

(4)

(5)

(6)

(7)

Includes other income and expenses from operating segments managed outside the reportable segments, including
our Studios and Distribution businesses. Also includes unallocated corporate income and expenses.

We have determined that some of our titles’ online functionality represents an essential component of gameplay and,
as a result, represents a more-than-inconsequential separate deliverable. As such, we are required to recognize
revenues from these titles over the estimated service periods, which are generally less than twelve months. The
related cost of revenues are deferred and recognized when the related revenues are recognized. In the operating
segment results table, we reflect the net effect from the deferrals of revenues and (recognition) of deferred revenues,
along with the related cost of revenues, on certain of our online enabled products.

Intersegment revenues reflect licensing and service fees charged between segments.

We amortize intangible assets over their estimated useful lives based on the pattern of consumption of the
underlying economic benefits. The amounts presented in the table represent the effect of the amortization of
intangible assets in our consolidated statements of operations.

Reflects fees and other expenses related to the King Acquisition, inclusive of related debt financings and integration
costs.

Reflects restructuring charges, primarily severance costs.

Reflects a non-cash accounting charge to reclassify certain cumulative translation gains (losses) into earnings due to
the substantial liquidation of certain of our foreign entities.

(8)

Reflects the impact of other unusual or unique tax-related items and activities.

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Segment Net Revenues

Activision

2017 vs. 2016

The increase in Activision’s net revenues for 2017, as compared to 2016, was primarily due to:

•

higher revenues from the Destiny franchise, driven by the release of Destiny 2 in September 2017, with no
comparable release in 2016;

higher revenues from Call of Duty: WWII, which was released in November 2017, as compared to Call of Duty:
Infinite Warfare, the comparable 2016 title;

higher revenues from from the continued strength of Call of Duty: Black Ops III, as compared to prior catalog
releases, driven by the downloadable content pack, Zombies Chronicles, which was released in May 2017, and
the continued strength of microtransactions; and

•

revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017.

The increase was partially offset by:

•

lower revenues from Call of Duty: Infinite Warfare including its associated digital content, as compared to the
performance of Call of Duty: Black Ops III, the comparable 2015 title; and

lower revenues from the Skylanders franchise, due to the release of Skylanders Imaginators in October 2016,
with no comparable release in 2017.

2016 vs. 2015

The decrease in Activision’s net revenues for 2016, as compared to 2015, was primarily due to:

•

lower revenues from Call of Duty: Infinite Warfare, which was released in the fourth quarter of 2016, as
compared to Call of Duty: Black Ops III, the comparable 2015 title, which was the third game in our successful
Black Ops series;

lower revenues from the Destiny franchise, as there were two expansion packs in 2015—House of Wolves and
The Taken King—but only one in 2016—Rise of Iron;

•

lower revenues from Guitar Hero Live, which was released in 2015 with no comparable release in 2016.

The decrease was partially offset by higher revenues from digital content associated with Call of Duty: Black Ops III, as
compared to Call of Duty: Advanced Warfare, the comparable 2014 title.

Blizzard

2017 vs. 2016

The decrease in Blizzard’s net revenues for 2017, as compared to 2016, was primarily due to:

•

lower revenues from Overwatch, which was released in May 2016; and

lower revenues from World of Warcraft, driven by the release of World of Warcraft: Legion in August 2016,
with no comparable release in 2017.

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The decrease was partially offset by:

•

revenues recognized from franchise sales of city-based teams for the Overwatch League; and

higher revenues from Diablo III, primarily due to the release of Rise of the Necromancer, a downloadable
content pack for Diablo III that was released in June 2017.

2016 vs. 2015

The increase in Blizzard’s net revenues for 2016, as compared to 2015, was primarily due to:

•

revenues from Overwatch, which was released in May 2016; and

higher revenues from World of Warcraft, driven by the release of World of Warcraft: Legion in August 2016,
with no comparable release in 2015.

King

2017 vs. 2016

The increase in King’s net revenues for 2017, as compared to 2016, was primarily due to:

•

2017 including King revenues for the full year, while 2016 only included King revenues for the partial period
following the King Closing Date; and

•

higher revenues from the Candy Crush franchise, due to in-game events and features.

2016 vs. 2015

King’s 2016 net revenues represent the net revenues from the King Closing Date through December 31, 2016. The revenues
were primarily driven by the Candy Crush franchise, which included the release of Candy Crush Jelly Saga™ in January
2016.

Segment Income from Operations

Activision

2017 vs. 2016

The increase in Activision’s operating income for 2017, as compared to 2016, was primarily due to higher revenues, as
discussed above, and lower costs associated with the Skylanders franchise, as there was not a new title released in 2017.

The increase was partially offset by higher sales and marketing spend on the Destiny franchise due to the release of Destiny
2.

2016 vs. 2015

The decrease in Activision’s operating income for 2016, as compared to 2015, was primarily due to lower revenues, as
discussed above. This was partially offset by:

•

lower sales and marketing spend on Guitar Hero Live and the Destiny franchise given the timing of game
launches; and

the relative increase in revenues coming from the digital online channel, which typically has a higher profit
margin.

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Blizzard

2017 vs. 2016

The decrease in Blizzard’s operating income for 2017, as compared to 2016, was primarily due to lower revenues, as
discussed above, along with higher product development costs resulting from lower capitalization of software development
costs due to the timing of game development cycles.

The decrease was partially offset by lower sales and marketing costs and software amortization for Overwatch and World of
Warcraft: Legion, due to their respective launches in 2016, with no comparable releases in 2017.

2016 vs. 2015

The increase in Blizzard’s operating income for 2016, as compared to 2015, was primarily due to higher revenues. This was
partially offset by:

•

new sales and marketing spending to support Overwatch; and

higher personnel costs due to segment performance bonuses and increased headcount to support the business
growth.

King

2017 vs. 2016

The increase in King’s operating income for 2017, as compared to 2016, was primarily due to:

•

2017 including King’s results of operations for the full year, while 2016 only included King’s results of
operations for the partial period following the King Closing Date; and

•

higher revenues from the Candy Crush franchise, as discussed above.

2016 vs. 2015

King’s operating income for the year ended December 31, 2016 represents the operating income from the King Closing Date
through December 31, 2016.

Foreign Exchange Impact

Changes in foreign exchange rates had a positive impact of $85 million, a negative impact of $30 million, and a negative
impact of $338 million on reportable segment net revenues for 2017, 2016, and 2015, respectively, as compared to the same
periods in the previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the euro and
British pound.

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Consolidated Results

Net Revenues by Distribution Channel

The following table details our consolidated net revenues by distribution channel (amounts in millions):

Net revenues by distribution channel

For the Years Ended December 31,

Increase/
(decrease)
2017 v 2016

Increase/
(decrease)
2016 v 2015

% Change
2017 v 2016

% Change
2016 v 2015

2017

2016

2015

Digital online channels(1) ........................ $5,479 $4,865 $2,502
Retail channels ......................................... 1,033 1,386 1,806
356
Other(2) ....................................................
Total consolidated net revenues ............... $7,017 $6,608 $4,664

357

505

$614
(353)
148
$409

$2,363
(420)
1
$1,944

13%
(25)
41
6%

94%
(23)
—
42%

(1)

(2)

Net revenues from “Digital online channels” include revenues from digitally-distributed subscriptions, licensing
royalties, value-added services, downloadable content, microtransactions, and products.

Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as revenues from
MLG and the Overwatch League.

Digital Online Channel Net Revenues

2017 vs. 2016

The increase in net revenues from digital online channels for 2017, as compared to 2016, was primarily due to:

•

The increase was partially offset by lower revenues recognized from Call of Duty: Infinite Warfare, which was released in
November 2016, as compared to the performance of Call of Duty: Black Ops III, the comparable 2015 title.

2016 vs. 2015

The increase in net revenues from digital online channels for 2016, as compared to 2015, was primarily due to:

•

new revenues from King titles following the King Closing Date, primarily driven by the Candy Crush franchise;

revenues recognized from Overwatch, which was released in May 2016; and

higher revenues recognized in 2016 from digital content associated with Call of Duty: Black Ops III, as
compared to revenues recognized in 2015 from digital content associated with Call of Duty: Advanced Warfare,
the comparable 2015 title.

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Retail Channel Net Revenues

2017 vs. 2016

The decrease in net revenues from retail channels for 2017, as compared to 2016, was primarily due to:

•

lower revenues recognized from Call of Duty: Infinite Warfare, which was released in November 2016, as
compared to the performance of Call of Duty: Black Ops III, the comparable 2015 title; and

lower revenues from the Skylanders franchise, due to the release of Skylanders Imaginators in October 2016,
with no comparable release in 2017.

The decrease was partially offset by:

•

revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017; and

higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to
Call of Duty: Infinite Warfare, the comparable 2016 title.

2016 vs. 2015

The decrease in net revenues from retail channels for 2016, as compared to 2015, was primarily due to:

•

lower revenues recognized from the Destiny franchise, as Destiny debuted in September 2014 but had no
comparable full-game release in 2015;

lower revenues recognized from Call of Duty: Infinite Warfare, which was released in the fourth quarter of
2016, as compared to Call of Duty: Black Ops III, which was released in the fourth quarter of 2015.

The decrease was partially offset by:

•

revenues recognized from Overwatch, which was released in May 2016; and

higher revenues recognized in 2016 from Call of Duty: Black Ops III, which was released in the fourth quarter
of 2015, as compared to revenues recognized in 2015 from Call of Duty: Advanced Warfare, which was
released in the fourth quarter of 2014.

Net Revenues by Geographic Region

The following table details our consolidated net revenues by geographic region (amounts in millions):

Geographic region net revenues:

2017

2016

2015

For the Years Ended December 31,

Increase/
(decrease)
2017 v 2016

Increase/
(decrease)
2016 v 2015

% Change
2017 v 2016

% Change
2016 v 2015

Americas................................................ $3,607 $3,423 $2,409
EMEA(1) ............................................... 2,464 2,221 1,741
514
Asia Pacific ...........................................
Consolidated net revenues ......................... $7,017 $6,608 $4,664

964

946

$184
243
(18)
$409

$1,014
480
450
$1,944

5%
11
(2)
6

42%
28
88
42

(1)

Consists of the Europe, Middle East, and Africa geographic regions.

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Americas

2017 vs. 2016

The increase in net revenues in the Americas region for 2017, as compared to 2016, was primarily due to:

•

higher revenues from King titles, as 2017 includes King’s revenues for the full year, while 2016 only included
King’s revenues for the partial period following the King Closing Date, as well as higher revenues from the
Candy Crush franchise due to in-game events and features;

•

revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017.

2016 vs. 2015

The increase in net revenues in the Americas region for 2016, as compared to 2015, was primarily due to:

•

new revenues from King titles following the King Closing Date, primarily driven by the Candy Crush franchise;

revenues recognized from Overwatch, which was released in May 2016; and

The increase was partially offset by:

•

lower revenues recognized from the Destiny franchise, as Destiny debuted in September 2014 but had no
comparable full-game release in 2015; and

EMEA

2017 vs. 2016

The increase in net revenues in the EMEA region for 2017, as compared to 2016, was primarily due to the same drivers and
partially offsetting factors as those for the Americas region discussed above, as well as higher revenues from our Distribution
business, primarily due to higher sales during the holiday season.

2016 vs. 2015

The increase in net revenues in the EMEA region for 2016, as compared to 2015, was primarily due to the same drivers and
partially offsetting factors as the Americas region, as discussed above.

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Asia Pacific

2017 vs. 2016

The slight decrease in net revenues in the Asia Pacific region for 2017, as compared 2016, was primarily due to slightly
lower revenues recognized from Overwatch and Hearthstone, mostly offset by higher revenues from King titles and Crash
Bandicoot N. Sane Trilogy.

2016 vs. 2015

The increase in net revenues in the Asia Pacific region for 2016, as compared to 2015, was primarily due to:

•

new revenues from King titles following the King Closing Date, primarily driven by the Candy Crush franchise;

revenues recognized from Overwatch, which was released in May 2016; and

higher revenues recognized from Hearthstone.

The increase was partially offset by lower revenues recognized from the Diablo franchise due to the timing of releases.

Net Revenues by Platform

The following tables detail our net revenues by platform and as a percentage of total consolidated net revenues (amounts in
millions):

Year Ended
December 31,
2017

% of
total(3)
consolidated
net revenues

Year Ended
December 31,
2016

% of
total(3)
consolidated
net revenues

Year Ended
December 31,
2015

% of
total(3)
consolidated
net revenues

Increase/
(Decrease)
2017 v 2016

Increase/
(Decrease)
2016 v 2015

Platform net revenues:

Console........................................
PC ...............................................
Mobile and ancillary(1) ...............
Other(2) .......................................
Total consolidated net revenues........

$2,389
2,042
2,081
505
$7,017

34%
29
30
7
100%

$2,453
2,124
1,674
357
$6,608

37%
32
25
5
100%

$2,391
1,499
418
356
$4,664

51%
32
9
8
100%

$(64)
(82)
407
148
$409

$62
625
1,256
1
$1,944

(1)

(2)

(3)

Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform-specific
game-related revenues, such as standalone sales of toys and accessories from our Skylanders franchise and other
physical merchandise and accessories.

Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as revenues from
MLG and the Overwatch League.

The percentages of total are presented as calculated. Therefore, the sum of these percentages, as presented, may
differ due to the impact of rounding.

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Console Net Revenues

2017 vs. 2016

The decrease in net revenues from console for 2017, as compared to 2016, was primarily due to lower revenues recognized
from Call of Duty: Infinite Warfare, which was released November 2016, as compared to the performance of Call of Duty:
Black Ops III, the comparable 2015 title. The decrease is partially offset by:

•

revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017; and

higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to
Call of Duty: Infinite Warfare, the comparable 2016 title.

2016 vs. 2015

The increase in net revenues from console for 2016, as compared to 2015, was primarily due to:

•

revenues recognized from Overwatch, which was released in May 2016.

The increase was partially offset by lower revenues recognized from the Destiny franchise, as Destiny debuted in September
2014 but had no comparable full-game release in 2015.

PC Net Revenues

2017 vs. 2016

The decrease in net revenues from PC for 2017, as compared to 2016, was primarily due to:

•

lower revenues recognized from the World of Warcraft franchise; and

lower revenues recognized from Overwatch, which was released in May 2016.

2016 vs. 2015

The increase in net revenues from PC for 2016, as compared to 2015, was primarily due to:

•

revenues recognized from Overwatch, which was released in May 2016; and

revenues from King titles following the King Closing Date.

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Mobile and Ancillary Net Revenues

2017 vs. 2016

The increase in net revenues from mobile and ancillary for 2017, as compared to 2016, was primarily due to higher revenues
from King titles, as 2017 includes King’s revenues for the full year, while 2016 only included King’s revenues for the partial
period following the King Closing Date, as well as higher revenues from the Candy Crush franchise due to in-game events
and features.

The increase was partially offset by lower revenues from sales of standalone toys and accessories from the Skylanders
franchise.

2016 vs. 2015

The increase in net revenues from mobile and ancillary for 2016, as compared to 2015, was primarily due to:

•

new revenues from King titles following the King Closing Date, which were primarily driven by the Candy
Crush franchise; and

higher revenues recognized from Hearthstone, which was released on iPhone and Android smartphones in April
2015.

The increase was partially offset by lower revenues from sales of standalone toys and accessories from the Skylanders
franchise.

Costs and Expenses

Cost of Revenues

The following tables detail the components of cost of revenues in dollars and as a percentage of associated net revenues
(amounts in millions):

Year Ended
December 31,
2017

% of
associated
net revenues

Year Ended
December 31,
2016

% of
associated
net revenues

Year Ended
December 31,
2015

% of
associated
net revenues

Increase
(Decrease)
2017 v 2016

Increase
(Decrease)
2016 v 2015

$733

300

984

484
$2,501

35%

36%

$741

331

851

471
$2,394

34%

36%

$872

370

274

69
$1,585

36%

34%

$(8)

(31)

133

13
$107

$(131)

(39)

577

402
$809

Cost of revenues—product sales:

Product costs .............................................
Software royalties, amortization,

intellectual property licenses ................

Cost of revenues—subscription,

licensing, and other revenues:
Game operations and distribution costs .....
Software royalties, amortization,

intellectual property licenses ................
Total cost of revenues .....................................

Cost of Revenues—Product Sales:

2017 vs. 2016

Product costs for 2017, were comparable to 2016, primarily due to lower product costs from the Skylanders franchise as there
was no new release in 2017, offset by higher product costs resulting from the increased revenues of our relatively
lower-margin Distribution business.

The decrease in software royalties, amortization, and intellectual property licenses related to product sales for 2017, as
compared to 2016, was primarily due to:

•

lower software amortization associated with Guitar Hero Live, which was released in October 2015;

lower software amortization from Overwatch, which was released in May 2016; and

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•

lower software amortization from the Skylanders franchise as there was no new release in 2017.

The decrease was partially offset by higher software amortization associated with the Destiny franchise, primarily due to the
release of Destiny 2 in September 2017.

2016 vs. 2015

The decrease in product costs for 2016, as compared to 2015, was primarily due to:

•

lower product costs associated with the Skylanders franchise; and

the relative increase in revenues coming from the digital online channel, which typically have relatively lower
product costs.

The decrease in software royalties, amortization, and intellectual property licenses related to product sales for 2016, as
compared to 2015, was primarily due to lower software amortization from the Destiny franchise, as Destiny was released in
the third quarter of 2014, but had no comparable full-game release in 2015.

This decrease was partially offset by:

•

software amortization from Overwatch, which was released in May 2016 with no comparable 2015 title; and

higher software amortization associated with Call of Duty: Black Ops III, which was released in the fourth
quarter of 2015, as compared to Call of Duty: Advanced Warfare, which was released in the fourth quarter of
2014.

Cost of Revenues—Subscription, Licensing, and Other Revenues:

2017 vs. 2016

The increase in game operations and distribution costs for 2017, as compared to 2016, was primarily due to platform provider
fees associated with the increase in revenues from King.

Software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other revenues for
2017 were comparable to 2016.

2016 vs. 2015

The increase in game operations and distribution costs for 2016, as compared to 2015, was primarily due to:

•

increased online costs and platform provider fees associated with revenues from King titles included following
the King Closing Date; and

•

increased expenditures to support our growing online activity across our existing and new titles.

The increase in software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other
revenues for 2016, as compared to 2015, was primarily due to a full year-to-date period amortization of internally-developed
franchise intangible assets acquired in the King Acquisition, while the comparable prior period only included the partial
period of amortization of internally-developed franchise intangible assets following the King Closing Date.

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Product Development (amounts in millions)

Year Ended
December 31,
2017

Product development .........

$1,069

% of
consolidated
net revenues
15%

Year Ended
December 31,
2016

$958

% of
consolidated
net revenues
14%

Year Ended
December 31,
2015

$646

% of
consolidated
net revenues
14%

Increase
(Decrease)
2017 v 2016
$111

Increase
(Decrease)
2016 v 2015
$312

2017 vs 2016

The increase in product development costs for 2017, as compared to 2016, was primarily due to:

•

higher Blizzard product development costs resulting from lower capitalization of software development costs
due to the timing of game development cycles; and

increased product development costs for King, as 2017 includes King’s costs for a full year, while 2016 only
included King’s costs for the partial period following the King Closing Date.

2016 vs 2015

The increase in product development costs for 2016, as compared to 2015, was primarily due to:

•

product development costs associated with King’s titles for the period following the King Closing Date; and

increased product development costs for Activision and Blizzard’s current and upcoming releases.

Sales and Marketing (amounts in millions)

Year Ended
December 31,
2017

Sales and marketing ..........

$1,378

2017 vs. 2016

% of
consolidated
net revenues
20%

Year Ended
December 31,
2016

$1,210

% of
consolidated
net revenues
18%

Year Ended
December 31,
2015

$734

% of
consolidated
net revenues
16%

Increase
(Decrease)
2017 v 2016
$168

Increase
(Decrease)
2016 v 2015
$476

The increase in sales and marketing expenses for 2017, as compared to 2016, was primarily due to:

•

higher sales and marketing costs for the Destiny franchise, given the release of Destiny 2 in September 2017;
and

increased amortization of the customer base intangible assets acquired in the King Acquisition and increased
sales and marketing costs to support King’s titles, as 2017 includes a full year of costs, while 2016 only
included King’s costs for the partial period following the King Closing Date.

The increase was partially offset by lower sales and marketing costs for the Skylanders franchise as there was no new title
release in 2017.

2016 vs. 2015

The increase in sales and marketing expenses for 2016, as compared to 2015, was primarily due to:

•

amortization of the customer base intangible assets acquired in the King Acquisition;

sales and marketing spending to support King’s titles and new launches, including Candy Crush Jelly Saga and
Farm Heroes Super Saga™; and

•

sales and marketing spending to support Blizzard’s new title, Overwatch.

The increase was partially offset by lower sales and marketing expenditures on Guitar Hero Live and the Destiny franchise
given the timing of game launches.

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General and Administrative (amounts in millions)

Year Ended
December 31,
2017

% of
consolidated
net revenues

Year Ended
December 31,
2016

% of
consolidated
net revenues

Year Ended
December 31,
2015

% of
consolidated
net revenues

Increase
(Decrease)
2017 v 2016

Increase
(Decrease)
2016 v 2015

General and

administrative ...........

$760

11%

$634

10%

$380

$126

$254

2017 vs. 2016

The increase in general and administrative expenses for 2017, as compared to 2016, was primarily due to:

•

increased personnel costs, including stock compensation expenses, to support the growth in our business and
adjacent areas of opportunity;

the inclusion of a non-cash accounting charge to reclassify certain losses included in our cumulative translation
adjustments into earnings due to the substantial liquidation of certain of our foreign entities, with no comparable
activity in 2016;

restructuring charges, primarily severance costs, incurred in 2017 with no comparable activity in 2016; and

higher foreign currency transaction losses.

The increase is partially offset by lower transaction costs as 2016 included the King Acquisition.

2016 vs. 2015

The increase in general and administrative expenses for 2016, as compared to 2015, was primarily due to:

• King’s general and administrative costs, which are included from the King Closing Date;

•

higher Blizzard personnel costs due to segment performance bonuses and increased headcount to support the
growth of the Blizzard business;

higher professional and transaction-related fees due to the King Acquisition, which closed on February 23,
2016; and

•

lower foreign currency transaction and derivative contract gains.

Interest and Other Expense (Income), Net (amounts in millions)

Year Ended
December 31,
2017

% of
consolidated
net revenues

Year Ended
December 31,
2016

% of
consolidated
net revenues

Year Ended
December 31,
2015

% of
consolidated
net revenues

Increase
(Decrease)
2017 v 2016

Increase
(Decrease)
2016 v 2015

$146

$214

$198

$(68)

$16

Interest and other

expense (income),
net ...................................

2017 vs. 2016

The decrease in interest and other expense, net, for 2017, as compared to 2016, was primarily due to our lower total
outstanding debt and lower interest rates on our current debt instruments as a result of our refinancing activities in 2016 and
2017. See further discussion below under “Liquidity and Capital Resources.”

2016 vs. 2015

The increase in interest and other expense, net, for 2016, as compared to 2015, was primarily due to interest expense
associated with the new $2.3 billion tranche of term loans “A” that were incurred in connection with the King Acquisition.
This increase was partially offset by lower interest expense related to our prior term loan because of voluntary prepayments

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on the principal we made throughout 2016, with the prior term loan being fully extinguished in September 2016. See further
discussion below under “Liquidity and Capital Resources.”

Income Tax Expense (Benefit) (amounts in millions)

Year Ended
December 31,
2017

Income tax expense ........

$878

% of
Pretax
income
76%

Year Ended
December 31,
2016

$140

% of
Pretax
income
13%

Year Ended
December 31,
2015

$229

% of
Pretax
income
20%

Increase
(Decrease)
2017 v 2016
$738

Increase
(Decrease)
2016 v 2015
$(89)

For the years ended December 31, 2017, 2016, and 2015, the Company’s income before income tax expense was
$1.15 billion, $1.11 billion, and $1.12 billion, respectively, and our income tax expense was $878 million (or a 76% effective
tax rate), $140 million (or a 13% effective tax rate), and $229 million (or a 20% effective tax rate), respectively. Our full year
2017 effective tax rate of 76% is higher than the U.S. statutory rate of 35% primarily due to the one-time tax expense related
to the U.S. Tax Reform Act (discussed further below) and changes in the Company’s liability for uncertain tax positions,
partially offset by earnings taxed at relatively lower rates in foreign jurisdictions, recognition of excess tax benefits from
shared-based payments, and research and development (“R&D”) credits.

On December 22, 2017, the U.S. Tax Reform Act was enacted. The U.S. Tax Reform Act, among other things, reduced the
U.S. corporate income tax rate from 35% to 21% beginning in 2018 and implemented a modified territorial tax system that
imposes a one-time tax on deemed repatriated earnings of foreign subsidiaries (“Transition Tax”).

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on
how to account for the effects of the U.S. Tax Reform Act under ASC 740. SAB 118 enables companies to record a
provisional amount for the effects of the U.S. Tax Reform Act based on a reasonable estimate, subject to adjustment during a
measurement period of up to one year, until accounting is complete.

We recorded a provisional amount for the effects of the U.S. Tax Reform Act based on a reasonable estimate in the fourth
quarter of 2017 resulting in a charge of $636 million. This includes current tax expense of $555 million related to the
Transition Tax, which is payable over eight years, and deferred tax expense of $81 million related to the remeasurement of
deferred taxes resulting from the U.S. corporate income tax rate reduction. Accounting for the income tax effects of the U.S.
Tax Reform Act requires complex new calculations to be performed and significant judgments in interpreting the legislation.
Additional guidance may be issued on how the provisions of the U.S. Tax Reform Act will be applied or otherwise
administered that is different from our interpretation. We may make adjustments to the provisional amounts as we collect and
prepare the data necessary to finalize our calculations, interpret the U.S. Tax Reform Act and any additional guidance issued,
and consider the effects of any additional actions we may take as a result of the U.S. Tax Reform Act.

We continue to analyze the prospective effects of the U.S. Tax Reform Act, including new provisions impacting certain
foreign income, such as global intangible low-taxed income (“GILTI”) of foreign subsidiaries, base erosion anti-abuse tax
(“BEAT”), and foreign-derived intangible income (“FDII”), potential limitations on interest expense deductions, and changes
to the provisions of Section 162(m) of the Internal Revenue Code, among other provisions of the U.S. Tax Reform Act.

In 2017 and 2016, our U.S. income before income tax expense was $185 million and $228 million, respectively, and
comprised 16% and 21%, respectively, of our consolidated income before income tax expense. In 2017 and 2016, our foreign
income before income tax expense was $966 million and $878 million, respectively, and comprised 84% and 79%,
respectively, of our consolidated income before income tax expense.

In 2017, 2016 and 2015, earnings taxed at lower rates in foreign jurisdictions, as compared to domestic earnings taxed at the
U.S. federal statutory tax rate, lowered our effective tax rate by 24 percentage points, 22 percentage points, and 20 percentage
points, respectively. The increase in the foreign rate differential is due to the overall increase in foreign income, which is
taxed at relatively lower rates in proportion to U.S. income.

The overall effective income tax rate in future periods will depend on a variety of factors, such as changes in the mix of
income by tax jurisdiction, applicable accounting rules, applicable tax laws and regulations, and rulings and interpretations
thereof, developments in tax audits and other matters, and variations in the estimated and actual level of annual pre-tax
income or loss. Further, the effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected
by the extent that income (loss) before income tax expenses (benefit) is lower than anticipated in foreign regions, where taxes
are levied at relatively lower statutory rates, and/or higher than anticipated in the United States, where taxes are levied at
relatively higher statutory rates.

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On December 28, 2017, we received a Notice of Reassessment from the French Tax Authority (“FTA”) related to transfer
pricing concerning intercompany transactions involving one of our French subsidiaries for the 2011 through 2013 tax years.
The total assessment, including penalties and interest, was approximately €571 million ($680 million). We disagree with the
proposed assessment and intend to vigorously contest it. We plan to pursue all remedies available to us to successfully
resolve this matter, including administrative remedies with the FTA, and judicial remedies, if necessary. While we believe
our tax provisions at December 31, 2017 are appropriate, until such time as this matter is ultimately resolved we could be
subject to significant additional tax liabilities. In addition to the risk of additional tax for years 2011 through 2013, if
litigation regarding this matter were adversely determined and/or if the FTA were to seek adjustments of a similar nature for
subsequent years, we could be subject to significant additional tax liabilities.

Further analysis of the differences between the U.S. federal statutory rate and the consolidated effective tax rate, as well as
other information about our income taxes, is provided in Note 15 of the notes to consolidated financial statements included in
this Annual Report.

Foreign Exchange Impact

Changes in foreign exchange rates had a positive impact of $27 million, a positive impact of $10 million, and a negative
impact of $242 million on Activision Blizzard’s consolidated operating income in 2017, 2016 and 2015, respectively. The
changes are primarily due to changes in the value of the U.S. dollar relative to the euro and British pound and its impact on
our foreign operating income.

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Liquidity and Capital Resources

We believe our ability to generate cash flows from operating activities is one of our fundamental financial strengths. In the
near term, we expect our business and financial condition to remain strong and to continue to generate significant operating
cash flows, which, in combination with our existing balance of cash and cash equivalents and short-term investments of
$4.8 billion, our access to capital, and the availability of our $250 million revolving credit facility, we believe will be
sufficient to finance our operational and financing requirements for the next 12 months. Our primary sources of liquidity,
which are available to us to fund cash outflows such as our anticipated dividend payments, share repurchases, and scheduled
debt maturities, include our cash and cash equivalents, short-term investments, and cash flows provided by operating
activities.

As of December 31, 2017, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was
$3.0 billion, as compared to $1.9 billion as of December 31, 2016. Following the enactment of the U.S. Tax Reform Act and
the current period expense on unrepatriated earnings, we no longer consider these available cash balances, which primarily
relate to undistributed earnings of our most significant foreign subsidiaries, to be indefinitely reinvested.

Our cash provided from operating activities is somewhat impacted by seasonality. Working capital needs are impacted by
weekly sales, which are generally highest in the fourth quarter due to seasonal and holiday-related sales patterns. On a
continuing basis, we consider various transactions to increase shareholder value and enhance our business results, including
acquisitions, divestitures, joint ventures, share repurchases, and other structural changes. These transactions may result in
future cash proceeds or payments.

Sources of Liquidity (amounts in millions)

Cash and cash equivalents ...............................................................................................
Short-term investments....................................................................................................

For the Years Ended
December 31,

2017
$4,713
62
$4,775

2016
$3,245
13
$3,258

Increase
(Decrease)
2017 v 2016

$1,468
49
$1,517

Percentage of total assets .................................................................................................

26%

19%

Net cash provided by operating activities ............................ $2,213
(197)
Net cash used in investing activities ....................................
(624)
Net cash (used in) provided by financing activities.............
Effect of foreign exchange rate changes..............................
76
Net increase (decrease) in cash and cash equivalents .......... $1,468

2017

For the Years Ended December 31,

2016
$2,155
(1,177)
500
(56)
$1,422

2015
$1,259
(3,716)
(202)
(366)
$(3,025)

Increase
(Decrease)
2017 v 2016

Increase
(Decrease)
2016 v 2015

$58
980
(1,124)
132
$46

$896
2,539
702
310
$4,447

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Net Cash Provided by Operating Activities

The primary driver of net cash flows associated with our operating activities is the collection of customer receivables
generated from the sale of our products and services. These collections are typically partially offset by: payments to vendors
for the manufacturing, distribution, and marketing of our products; payments for customer service support for our consumers;
payments to third-party developers and intellectual property holders; payments for interest on our debt; payments for
software development; payments for tax liabilities; and payments to our workforce.

2017 vs 2016

Net cash provided by operating activities for 2017 was $2.21 billion, as compared to $2.16 billion for 2016. The increase was
primarily due to:

•

increased earnings after excluding the effects of charges due to impacts from the U.S. Tax Reform Act, which
did not result in current year cash outflows, and other non-cash charges for depreciation and amortization and
share-based compensation expenses;

a full year of King operating cash flows; and

changes in our working capital due to the timing of collections and payments.

Net cash provided by operating activities for 2017 included $145 million of interest paid on our outstanding debt, as
compared to $209 million paid in 2016.

2016 vs 2015

Net cash provided by operating activities for 2016 was $2.2 billion, as compared to $1.3 billion for 2015. The increase was
primarily due to:

•

new operating cash flows contributed by King following the King Closing Date; and

higher net income in 2016, as compared to 2015, along with larger adjustments to net income for non-cash
charges, primarily associated with the amortization of the acquired intangibles in the King Acquisition, higher
stock compensation expense due to converted equity awards for King personnel in the King Acquisition, and
other non-cash or non-operating costs associated with our debt-related activities during the year.

Net cash provided by operating activities for 2016 included $209 million of interest paid on our outstanding debt, as
compared to $193 million paid in 2015.

Net Cash Used in Investing Activities

The primary drivers of net cash flows associated with investing activities typically include capital expenditures, purchases
and sales of investments, changes in restricted cash balances, and cash used for acquisitions.

2017 vs 2016

Net cash used in investing activities for 2017 was $197 million, as compared to $1.2 billion for 2016. The decrease in the
cash used was primarily due to cash used for the King Acquisition in 2016, with no comparable transaction in 2017. The
decrease was partially offset by purchases of available-for-sale investments, net of proceeds from maturities, of $55 million
in 2017, with no comparable transaction in 2016.

2016 vs 2015

Net cash used in investing activities for 2016 was $1.2 billion, as compared to $3.7 billion for 2015. The lower amount of
cash used in investing activities in 2016 was primarily due to a 2015 cash outflow of $3.6 billion for cash placed into escrow
to facilitate the King Acquisition. In 2016, when we acquired King, the cash in escrow became a cash inflow. As a result, in
2016 we had a $2.2 billion cash outflow for the King Acquisition in excess of the cash already in escrow, net of $1.15 billion
of cash acquired from King.

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Net Cash Provided by (Used in) Financing Activities

The primary drivers of net cash flows associated with financing activities typically include the proceeds from, and
repayments of, our long-term debt and transactions involving our common stock, including the issuance of shares of common
stock to employees upon the exercise of stock options, as well as the payment of dividends.

2017 vs 2016

Net cash used in financing activities for 2017 was $624 million, as compared to net cash provided by financing activities of
$500 million for 2016. The changes were primarily attributed to our debt financing activities. For 2017, we had net debt
repayments of $500 million, as compared to approximately $700 million of net debt proceeds, inclusive of a premium
payment, for 2016. The cash flows used in financing activities for 2017, were partially offset by:

•

higher proceeds from stock option exercises in 2017 of $178 million, as compared to $106 million for 2016; and

lower tax payments made for net share settlements on restricted stock units in 2017 of $56 million, as compared
to $115 million in 2016.

2016 vs 2015

Net cash provided by financing activities for 2016 was $500 million, as compared to cash flows used in financing activities
of $202 million for 2015. The difference was primarily due to $6.9 billion of proceeds received from the following debt
issuances in 2016:

•

issuance of a $2.3 billion tranche of term loans “A” on February 23, 2016 to fund the King Acquisition;

issuance of an additional $250 million tranche of term loans “A” on March 31, 2016;

issuance of a new unsecured $2.9 billion tranche of term loans “A” in connection with the fifth amendment to
our credit agreement on August 23, 2016;

issuance of $650 million of 2.3% unsecured senior notes due September 2021 on September 19, 2016; and

issuance of $850 million of 3.4% unsecured senior notes due September 2026 on September 19, 2016.

These issuances were partially offset by:

•

repayments of $1.9 billion to extinguish our term loan outstanding at December 31, 2015 (the “Original Term
Loan”);

repayments of $2.5 billion in connection with the refinancing of our tranche of term loans “A” that were
provided in the first quarter of 2016;

repayments of $185 million on our new tranche of term loans “A” that were provided on August 23, 2016,
which included $167 million of voluntary prepayments, as compared to the $250 million partial repayment of
our Original Term Loan in 2015;

a cash payment to redeem all $1.5 billion of our outstanding 5.625% unsecured senior notes due September
2021, as well as the associated $63 million premium; and

•

higher cash dividend payments made during 2016, as compared to 2015.

Net cash used in financing activities for 2015 also included proceeds of $202 million received in the settlement of the
litigation related to the October 11, 2013 repurchase of approximately 429 million shares of our common stock (the
“Purchase Transaction”). There were no such proceeds received in 2016.

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Effect of Foreign Exchange Rate Changes

Changes in foreign exchange rates had a positive impact of $76 million, a negative impact of $56 million, and a negative
impact of $366 million on our cash and cash equivalents for the years ended December 31, 2017, 2016, and 2015,
respectively. The change is primarily due to changes in the value of the U.S. dollar relative to the Euro and British pound.

Debt

As of December 31, 2016, our total outstanding debt was $4.9 billion, bearing interest at a weighted average rate of 2.92%.
As a result of the activities described below, our total outstanding debt as of December 31, 2017, was $4.4 billion, bearing
interest at a weighted average rate of 3.58%.

On February 3, 2017, we entered into a sixth amendment (the “Sixth Amendment”) to our credit agreement, which was
originally executed on October 11, 2013 (as amended thereafter and from time to time, the “Credit Agreement”). The Sixth
Amendment: (1) provided for a new tranche of term loans “A” in an aggregate principal amount of $2.55 billion (the “2017
TLA”) and (2) released each of our subsidiary guarantors from their respective guarantees provided under the Credit
Agreement. All proceeds of the 2017 TLA, together with additional cash on hand of $139 million, were used to fully retire
the term loans then outstanding (the “2016 TLA”) under the Credit Agreement, including all accrued and unpaid interest
thereon. The terms of the 2017 TLA, other than the absence of the subsidiary guarantees, are generally the same as the terms
of the 2016 TLA. The fees incurred as a result of the Sixth Amendment were not material. The 2017 TLA will mature on
August 23, 2021.

On May 26, 2017, in a public underwritten offering, we issued three series of unsecured senior notes—$400 million of 2.6%
unsecured senior notes due June 2022, $400 million of 3.4% unsecured senior notes due June 2027, and $400 million of 4.5%
unsecured senior notes due June 2047. The proceeds from these unsecured senior notes, together with cash on hand, were
used to make a prepayment of $1.2 billion on our 2017 TLA.

During the year ended December 31, 2017, we reduced our total outstanding long-term debt by $500 million. This included
$139 million of cash used to retire the 2016 TLA, as discussed above, along with a prepayment on the 2017 TLA of
$361 million. The prepayment made on our 2017 TLA satisfied the remaining required quarterly principal repayments for the
entire term of the Credit Agreement.

A summary of our outstanding debt as of December 31, 2017, is as follows (amounts in millions):

2017 TLA .........................................................................................................
2021 Notes .......................................................................................................
2022 Notes .......................................................................................................
2023 Notes .......................................................................................................
2026 Notes .......................................................................................................
2027 Notes .......................................................................................................
2047 Notes .......................................................................................................
Total debt .........................................................................................................

Gross
Carrying
Amount
$990
650
400
750
850
400
400
$4,440

December 31, 2017
Unamortized
Discount and Deferred
Financing Costs

$(8)
(4)
(4)
(9)
(9)
(6)
(10)
$(50)

Net
Carrying
Amount
$982
646
396
741
841
394
390
$4,390

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A summary of our outstanding debt as of December 31, 2016, is as follows (amounts in millions):

2016 TLA ........................................................................................................
2021 Notes ......................................................................................................
2023 Notes ......................................................................................................
2026 Notes ......................................................................................................
Total long-term debt ........................................................................................

Gross
Carrying
Amount
$2,690
650
750
850
$4,940

December 31, 2016
Unamortized
Discount and Deferred
Financing Costs

$(27)
(5)
(11)
(10)
$(53)

Net
Carrying
Amount
$2,663
645
739
840
$4,887

On February 1, 2018, our Board of Directors authorized repayments of up to $1.8 billion of the company’s outstanding debt
during 2018. As of the date hereof, we have not made any additional repayments on our outstanding debt and the
determination as to if and when we make any such repayment will be dependent on market conditions and other factors.

Refer to Note 11 of the notes to consolidated financial statements included in this Annual Report for disclosures regarding
terms and activities associated with our debt obligations.

Dividends

On February 1, 2018, our Board of Directors approved a cash dividend of $0.34 per common share, payable on May 9, 2018,
to shareholders of record at the close of business on March 30, 2018.

On February 2, 2017, our Board of Directors approved a cash dividend of $0.30 per common share and we made an
aggregate cash dividend payment on May 10, 2017 of $226 million to shareholders.

Capital Expenditures

We made capital expenditures of $155 million in 2017, as compared to $136 million in 2016. In 2018, we anticipate total
capital expenditures of approximately $155 million, primarily for leasehold improvements, computer hardware, and software
purchases.

Commitments

Refer to Note 19 of the notes to consolidated financial statements included in this Annual Report for disclosures regarding
our commitments.

Off-balance Sheet Arrangements

At December 31, 2017 and 2016, Activision Blizzard had no significant relationships with unconsolidated entities or
financial parties, often referred to as “structured finance” or “special purpose” entities, established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, that have or are reasonably
likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures, or capital resources.

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and
assumptions. The impact and any associated risks related to these policies on our business operations are discussed
throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies
affect our reported and expected financial results. The policies, estimates, and assumptions discussed below are considered by
management to be critical because they are both important to the portrayal of our financial condition and results of operations
and because their application places the most significant demands on management’s judgment, with financial reporting
results relying on estimates and assumptions about the effect of matters that are inherently uncertain. Specific risks for these
critical accounting policies, estimates, and assumptions are described in the following paragraphs.

Revenue Recognition

Revenue Arrangements with Multiple Deliverables

Certain of our revenue arrangements have multiple deliverables, which we account for in accordance with Accounting
Standards Codification (“ASC”) Topic 605. These revenue arrangements include product sales consisting of both software,
service (such as ongoing hosting arrangements), and hardware deliverables (such as peripherals or other ancillary collectors’
items sold together with physical “boxed” software).

When a revenue arrangement contains multiple elements, such as hardware and software products, licenses and/or services,
we allocate revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its
vendor-specific objective evidence (“VSOE”) if it is available, third-party evidence (“TPE”) if VSOE is not available, or best
estimated selling price (“BESP”) if neither VSOE nor TPE is available. In multiple element arrangements where
more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of
the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the
deliverables in the arrangement based on the aforementioned selling price hierarchy. Further, if the arrangement contains
more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then
allocated to each software deliverable using the guidance for recognizing software revenue.

As noted above, when neither VSOE nor TPE is available for a deliverable, we use BESP. We did not have significant
revenue arrangements that required using BESP for the years ended December 31, 2017, 2016, and 2015. The inputs we use
to determine the selling price of our significant deliverables include the actual price charged by the Company for deliverables
that the Company sells separately (which represents VSOE) and the wholesale prices of the same or similar products for
deliverables not sold separately (which represents TPE).

Product Sales

Product sales consists of sales of our games, including physical products and digital full-game downloads. We recognize
revenues from the sale of our products after both (1) title and risk of loss have been transferred to our customers and (2) all
performance obligations have been completed. With respect to digital full-game downloads, this is when the product is
available for download or is activated for gameplay. Revenues from product sales are recognized after deducting the
estimated allowance for returns and price protection.

Product with Online Functionality or Online Hosted Arrangements

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more-than-inconsequential separate service deliverable in addition to the product, which is principally because of the online
functionality’s importance to gameplay, we consider our performance obligation for this title to extend beyond the sale of the
game. In addition, VSOE of fair value does not exist for the online functionality of some products, as we do not separately
charge for this component. As a result, we initially defer all of the software-related revenues from the sale of any such title
(including downloadable content) and recognize the revenues ratably over the estimated service period. In addition, we
initially defer the cost of revenues for the title and recognize the cost of revenues as the related revenues are recognized. The
cost of revenues that are initially deferred include product and distribution costs, software royalties and amortization, and
intellectual property licenses and exclude intangible asset amortization.

For our software products with online functionality that are considered to be incidental to the overall product offering and are
inconsequential deliverables, we recognize the related revenues when the revenue recognition criteria described above have
been met.

For our World of Warcraft boxed products, expansion packs and value-added services, we recognize revenues in each case
with the related subscription service revenues ratably over the estimated service period, beginning upon the activation of the
software and delivery of the related services. For revenues associated with the sales of subscriptions, the revenues are
deferred until the subscription service is activated by the consumer and are then recognized ratably over the subscription
period. Revenues attributed to the sale of World of Warcraft boxed software and related expansion packs are classified as
“Product sales,” whereas revenues attributable to subscriptions and other value-added services are classified as “Subscription,
licensing, and other revenues.”

Microtransaction Revenues

Microtransaction revenues are derived from the sale of virtual goods and currencies to our players to enhance their gameplay
experience. Proceeds from the sales of virtual goods and currencies are initially recorded in deferred revenues. Proceeds from
the sales of virtual currencies are recognized as revenues when a player uses the virtual goods purchased with the virtual
currency. Proceeds from the sales of virtual goods directly are also recognized as revenues when a player uses the virtual
goods. We categorize our virtual goods as either consumable or durable. Consumable virtual goods represent goods that can
be consumed by a specific player action; accordingly, we recognize revenues from the sale of consumable virtual goods as
the goods are consumed. Durable virtual goods represent goods that are accessible to the player over an extended period of
time; accordingly, we recognize revenues from the sale of durable virtual goods ratably over the period of time the goods are
available to the player, which is generally the estimated service period.

Estimated Service Period

We determine the estimated service period for players of our games with consideration of various data points, including the
weighted-average number of days between players’ first and last date played online, the average total hours played, the
average number of days in which player activity stabilizes, and the weighted-average number of days between players’ first
purchase date and last date played online. We also consider known online trends, the service periods of our previously
released games, and the service periods of our competitors’ games that are similar in nature to ours, to the extent they are
publicly available. Determining the estimated service period is subjective and requires management’s judgment. Future usage
patterns may differ from historical usage patterns and therefore the estimated service period may change in the future. The
estimated service periods for players of our current games are generally less than twelve months.

Principal Agent Considerations

We evaluate sales of our products and content via third party digital storefronts, such as Microsoft’s Xbox Games Store,
Sony’s PSN, the Apple App Store, and the Google Play Store, to determine whether revenues should be reported gross or net
of fees retained by the storefront. Key indicators that we evaluate in determining gross versus net treatment include, but are
not limited to, the following:

•

the party responsible for delivery/fulfillment of the product or service to the consumer;

the party responsible for consumer billing, fee collection, and refunds;

the storefront and terms of sale that govern the consumer’s purchase of the product or service; and

the party that sets the pricing with the consumer and has credit risk.

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Based on evaluation of the above indicators, we report revenues on a gross basis for sales arrangements via Apple App Store
and Google Play Store, and we report revenues on a net basis (i.e., net of fees retained by the storefront) for sales
arrangements via Microsoft’s Xbox Games Store and Sony PSN.

Allowances for Returns and Price Protection

We closely monitor and analyze the historical performance of our various titles, the performance of products released by
other publishers, market conditions, and the anticipated timing of other releases to assess future demand of current and
upcoming titles. Initial volumes shipped upon title launch and subsequent reorders are evaluated with the goal of ensuring
that quantities are sufficient to meet the demand from the retail markets, but at the same time are controlled to prevent excess
inventory in the channel. We benchmark units to be shipped to our customers using historical and industry data.

We may permit product returns from, or grant price protection to, our customers under certain conditions. In general, price
protection refers to the circumstances in which we elect to decrease, on a short- or longer-term basis, the wholesale price of a
product by a certain amount and, when granted and applicable, allow customers a credit against amounts owed by such
customers to us with respect to open and/or future invoices. The conditions our customers must meet to be granted the right
to return products or receive price protection credits include, among other things, compliance with applicable trading and
payment terms and consistent return of inventory and delivery of sell-through reports to us. We may also consider other
factors, including achievement of sell-through performance targets in certain instances, the facilitation of slow-moving
inventory, and other market factors.

Significant management judgments and estimates with respect to potential future product returns and price protection related
to current period product revenues must be made and used when establishing the allowance for returns and price protection in
any accounting period. We estimate the amount of future returns and price protection for current period product revenues
utilizing historical experience and information regarding inventory levels and the demand and acceptance of our products by
the end consumer. The following factors are used to estimate the amount of future returns and price protection for a particular
title: historical performance of titles in similar genres; historical performance of the hardware platform; historical
performance of the franchise; console hardware life cycle; sales force and retail customer feedback; industry pricing; future
pricing assumptions; weeks of on-hand retail channel inventory; absolute quantity of on-hand retail channel inventory; our
warehouse on-hand inventory levels; the title’s recent sell-through history (if available); marketing trade programs; and the
performance of competing titles. The relative importance of these factors varies among titles depending upon, among other
things, genre, platform, seasonality, and sales strategy.

Based upon historical experience, we believe that our estimates are reasonable. However, actual returns and price protection
could vary materially from our allowance estimates due to a number of reasons, including, among others: a lack of consumer
acceptance of a title, the release in the same period of a similarly themed title by a competitor, or technological obsolescence
due to the emergence of new hardware platforms. There may be material differences in the amount and timing of our
revenues for any period if factors or market conditions change or if matters resolve in a manner that is inconsistent with
management’s assumptions utilized in determining the allowances for returns and price protection. For example, a 1% change
in our December 31, 2017 allowance for sales returns, price protection, and other allowances would have impacted net
revenues by approximately $3 million.

Software Development Costs

Software development costs include payments made to independent software developers under development agreements, as
well as direct costs incurred for internally developed products. Software development costs are capitalized once the
technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility
of a product requires both technical design documentation and game design documentation, or the completed and tested
product design and a working model. Significant management judgments and estimates are utilized in the assessment of when
technological feasibility is established and the evaluation is performed on a product-by-product basis. For products where
proven technology exists, this may occur early in the development cycle. Software development costs related to online hosted
revenue arrangements are capitalized after the preliminary project phase is complete and it is probable that the project will be
completed and the software will be used to perform the function intended. Prior to a product’s release, if and when we believe
capitalized costs are not recoverable, we expense the amounts as part of “Cost of revenues—software royalties, amortization,
and intellectual property licenses.” Capitalized costs for products that are cancelled or are expected to be abandoned are
charged to “Product development” in the period of cancellation. Amounts related to software development which are not
capitalized are charged immediately to “Product development.”

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Commencing upon a product’s release, capitalized software development costs are amortized to “Cost of revenues—software
royalties, amortization, and intellectual property licenses” based on the ratio of current revenues to total projected revenues
for the specific product, generally resulting in an amortization period of six months to approximately two years.

We evaluate the future recoverability of capitalized software development costs on a quarterly basis. For products that have
been released in prior periods, the primary evaluation criterion is the actual performance of the title to which the costs relate.
For products that are scheduled to be released in future periods, recoverability is evaluated based on the expected
performance of the specific products to which the costs relate. Criteria used to evaluate expected product performance
include: historical performance of comparable products developed with comparable technology; market performance of
comparable titles; orders for the product prior to its release; general market conditions; and, for any sequel product, estimated
performance based on the performance of the product on which the sequel is based.

Significant management judgments and estimates are utilized in assessing the recoverability of capitalized costs. In
evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales
amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are less than the
originally forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than
originally estimated in any given quarter, which could result in an impairment charge. Material differences may result in the
amount and timing of expenses for any period if matters resolve in a manner that is inconsistent with management’s
expectations.

Income Taxes

We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with ASC
Topic 740, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets
and liabilities are recognized for the expected future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate
deferred tax assets each period for recoverability. For those assets that do not meet the threshold of “more likely than not”
that they will be realized in the future, a valuation allowance is recorded.

Management believes it is more likely than not that forecasted income, including income that may be generated as a result of
certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the
remaining deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in
the future, an adjustment to the valuation allowance would be charged to tax expenses in the period such determination is
made. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the
application of ASC Topic 740 and complex tax laws. Resolution of these uncertainties in a manner inconsistent with
management’s expectations could have a material impact on our business and results of operations in an interim period in
which the uncertainties are ultimately resolved.

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes.
Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will
not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in
light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent
that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision
for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of
reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties.

Our provision for income taxes is subject to volatility and could be adversely impacted by: (1) earnings being lower than
anticipated in foreign regions where taxes are levied at relatively lower statutory rates and/or higher than anticipated in the
United States where taxes are levied at relatively higher statutory rates; (2) changes in the valuation of our deferred tax assets
and liabilities; (3) tax effects of nondeductible compensation; (4) tax costs related to intercompany realignments;
(5) differences between amounts included in our tax filings and the estimate of such amounts included in our tax expenses;
(6) changes in accounting principles; or (7) changes in tax laws, regulations, administrative practices, principles or
interpretations, including fundamental changes to the tax laws applicable to multinational corporations. Significant judgment
is required to determine the recognition and measurement attributes prescribed in the accounting guidance for uncertainty in
income taxes. The accounting guidance for uncertainty in income taxes applies to all income tax positions, including the
potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income

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taxes. In addition, we are subject to the continuous examination of our income tax returns by the IRS and are regularly
subject to audit by other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from
these continuous examinations will not have an adverse impact on our operating results and financial condition.

As further described in “Consolidated Results” above, on December 22, 2017, the U.S. Tax Reform Act was enacted. The
U.S. Tax Reform Act, among other things, reduced the U.S. corporate income tax rate from 35% to 21% beginning in 2018
and implemented a modified territorial tax system that imposes a one-time tax on deemed repatriated earnings of foreign
subsidiaries.

On December 22, 2017, the SEC staff issued SAB 118, which provides guidance on how to account for the effects of the U.S.
Tax Reform Act under ASC 740. SAB 118 enables companies to record a provisional amount for the effects of the U.S. Tax
Reform Act based on a reasonable estimate, subject to adjustment during a measurement period of up to one year, until
accounting is complete.

We continue to analyze the prospective effects of the U.S. Tax Reform Act, including new provisions impacting certain
foreign income, such as GILTI, BEAT, and FDII, potential limitations on interest expense deductions, and changes to the
provisions of Section 162(m) of the Internal Revenue Code, among other provisions of the U.S. Tax Reform Act. The
Company has elected to account for the U.S. Tax Reform Act provisions related to GILTI as period costs if and when
incurred pursuant to the FASB Staff Q&A guidance issued in January 2018.

Fair Value Estimates

The preparation of financial statements often requires us to determine the fair value of a particular item to fairly present in
our consolidated financial statements. Without an independent market or another representative transaction, determining the
fair value of a particular item requires us to make several assumptions that are inherently difficult to predict and can have a
material impact on the conclusion of the appropriate accounting.

There are various valuation techniques used to estimate fair value. These include: (1) the market approach, where market
transactions for identical or comparable assets or liabilities are used to determine the fair value; (2) the income approach,
which uses valuation techniques to convert future amounts (for example, future cash flows or future earnings) to a single
present amount; and (3) the cost approach, which is based on the amount that would be required to replace an asset. For many
of our fair value estimates, including our estimates of the fair value of acquired intangible assets, we use the income
approach. Using the income approach requires the use of financial models, which require us to make various estimates
including, but not limited to: (1) the potential future cash flows for the asset, liability or equity instrument being measured;
(2) the timing of receipt or payment of those future cash flows; (3) the time value of money associated with the delayed
receipt or payment of such cash flows; and (4) the inherent risk associated with the cash flows (that is, the risk premium).
Determining these cash flow estimates is inherently difficult and subjective, and, if any of the estimates used to determine the
fair value using the income approach turns out to be inaccurate, our financial results may be negatively impacted.
Furthermore, relatively small changes in many of these estimates can have a significant impact on the estimated fair value
resulting from the financial models or the related accounting conclusion reached. For example, a relatively small change in
the estimated fair value of an asset may change a conclusion as to whether an asset is impaired. While we are required to
make certain fair value assessments associated with the accounting for several types of transactions, the following areas are
the most sensitive to the assessments:

Business Combinations. Assets acquired and liabilities assumed in a business combination are recorded based on their
estimated fair value. Our assessment of the estimated fair value of each of these can have a material effect on our reported
results as intangible assets are amortized over various estimated useful lives. Furthermore, a change in the estimated fair
value of an asset or liability often has a direct impact on the amount we recognize as goodwill, which is an asset that is not
amortized. Often determining the fair value of these assets and liabilities assumed requires an assessment of the expected use
of the asset, the expected cost to extinguish the liability or our expectations related to the timing and the successful
completion of development of an acquired in-process technology. Such estimates are inherently difficult and subjective and
can have a material impact on our financial statements.

Assessment of Impairment of Definite-lived Intangible and Other Long-lived Assets. We evaluate the recoverability of our
identifiable amortizable intangible assets and other long-lived assets in accordance with ASC Subtopic 360-10, which
generally requires the assessment of these assets for recoverability when events or circumstances (referred to as a “triggering
event”) indicate a potential impairment exists. We consider certain events and circumstances in determining whether a
triggering event has occurred that could indicate the carrying value of identifiable definite-lived intangible assets and other

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long-lived assets, may not be recoverable, including, but not limited to: (1) significant changes in performance relative to
expected operating results; (2) significant changes in the use of the assets; (3) significant negative industry or economic
trends; (4) a significant decline in our stock price for a sustained period of time; and (5) changes in our business strategy. If it
is determined that a triggering event has occurred, we determine if an impairment exists based on an estimate of the
undiscounted cash flows to be generated from the use and ultimate disposition of the asset group. If the undiscounted cash
flows are lower than the carrying values of the related asset group, an impairment exists and the impairment loss is measured
as the amount by which the carrying amount of the group’s assets exceeds the fair value of the asset group. We did not record
an impairment charge to any of our definite-lived intangible assets as of December 31, 2017, 2016, and 2015.

Assessment of Impairment of Goodwill and Indefinite-lived Intangible Assets. We are required to test goodwill and other
indefinite-lived intangible assets for impairment on an annual basis and, if current events or circumstances require, on an
interim basis. ASC Topic 350 provides companies an option to first perform a qualitative assessment to determine whether it
is more likely than not that the fair value of a reporting unit is less than its carrying value before performing a quantitative
two-step approach to testing goodwill for impairment. We perform our impairment test for each reporting unit as part of our
annual impairment test performed as of December 31. Our reporting units are determined based on the guidance within ASC
Subtopic 350-20. The first step of the quantitative test measures for impairment by applying fair value-based tests at the
reporting unit level. The second step (if necessary) measures the amount of impairment by applying fair value-based tests to
the individual assets and liabilities within each reporting unit.

To determine the fair values of the reporting units used in the first step, we use a discounted cash flow approach. Each step
requires us to make judgments and involves the use of significant estimates and assumptions. These estimates and
assumptions include long-term growth rates and operating margins used to calculate projected future cash flows,
risk-adjusted discount rates based on our weighted average cost of capital, and future economic and market conditions. These
estimates and assumptions must be made for each reporting unit evaluated for impairment. Our estimates for market growth,
our market share and costs are based on historical data, various internal estimates and certain external sources, and are based
on assumptions that are consistent with the plans and estimates we are using to manage the underlying business. If future
forecasts are revised, they may indicate or require future impairment charges. We base our fair value estimates on
assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ
from those estimates.

In determining the fair value of our significant reporting units—namely Activision, Blizzard, and King—we assumed
discount rates ranging from 8.5% to 11.5% and terminal growth rates of 0.0% to 4.0%, depending on the reporting unit and
its specific characteristics and risk profiles. Based on our quantitative evaluation, we determined the estimated fair value of
all of the reporting units exceeded their carrying values as of December 31, 2017. Changes in our assumptions underlying our
estimates of fair value, which will be a function of our future financial performance and changes in economic conditions,
could result in future impairment charges

We test our acquired trade names for possible impairment by using a discounted cash flow model to estimate fair value. At
December 31, 2017 and 2016, we concluded that no impairment had occurred and that no impairment was reasonably likely
to occur. In determining the fair value of these trade names, we assumed a discount rate of 8.5%, and royalty saving rates of
approximately 1.5%. Changes in our assumptions underlying our estimates of fair value, which will be a function of our
future financial performance and changes in economic conditions, could result in future impairment charges.

Share-Based Payments

We account for share-based payments in accordance with ASC Subtopic 718-10 and ASC Subtopic 505-50. Share-based
compensation expense for a given grant is recognized over the requisite service period (that is, the period for which the
employee is being compensated) and is based on the value of share-based payment awards after a reduction for estimated
forfeitures. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.

We generally estimate the value of stock options using a binomial-lattice model. This estimate is affected by our stock price,
as well as assumptions regarding a number of highly complex and subjective variables, including our expected stock price
volatility over the term of the awards and actual and projected employee stock option exercise behaviors.

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We generally determine the fair value of restricted stock units based on the closing market price of the Company’s common
stock on the date of grant, reduced by the present value of the estimated future dividends during the vesting period in which
the restricted stock units holder will not participate. Certain restricted stock units granted to our employees and senior
management vest based on the achievement of pre-established performance or market conditions. For performance-based
restricted stock units, each quarter we update our assessment of the probability that the specified performance criteria will be
achieved. We amortize the fair values of performance-based restricted stock units over the requisite service period, adjusting
for estimated forfeitures for each separately vesting tranche of the award. For market-based restricted stock units, we estimate
the fair value at the date of grant using a Monte Carlo valuation methodology and amortize those fair values over the
requisite service period, adjusting for estimated forfeitures for each separately vesting tranche of the award. The Monte Carlo
methodology that we use to estimate the fair value of market-based restricted stock units at the date of grant incorporates into
the valuation the possibility that the market condition may not be satisfied. Provided that the requisite service is rendered, the
total fair value of the market-based restricted stock units at the date of grant must be recognized as compensation expense
even if the market condition is not achieved. However, the number of shares that ultimately vest can vary significantly with
the performance of the specified market criteria.

For a detailed discussion of the application of these and other accounting policies, see Note 2 of the notes to consolidated
financial statements included in this Annual Report.

Recently Issued Accounting Pronouncements

Below are the recently issued accounting pronouncements that were most significant to our accounting policy activities for
fiscal 2017. For a detailed discussion of recently issued accounting pronouncements, see Note 21 of the notes to consolidated
financial statements included in this Annual Report.

Recently adopted accounting pronouncements

Inventory

In July 2015, the Financial Accounting Standards Board (“FASB”) issued new guidance related to the measurement of
inventory which requires inventory within the scope of the guidance to be measured at the lower of cost and net realizable
value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. We adopted this new standard as of January 1, 2017, and
applied it prospectively. The adoption of this guidance did not have a material impact on our financial statements.

Recent accounting pronouncements not yet adopted

Revenue recognition

In May 2014, the FASB issued new accounting guidance related to revenue recognition. The new standard will replace all
current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance, providing a unified model to
determine when and how revenue is recognized. The core principle is that a company should recognize revenue upon the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. This guidance is effective for us beginning with the first
quarter of 2018. We are adopting the accounting standard using the modified retrospective method, which recognizes the
cumulative effect upon adoption as an adjustment to retained earnings at the adoption date. We will report our adoption in
our Form 10-Q for the first quarter of 2018.

The most significant impacts of the new revenue recognition standard are expected to be:

•

The accounting for our sales of our games with significant online functionality for which we do not have VSOE
for unspecified future updates and ongoing online services provided. Under the current accounting standards,
VSOE for undelivered elements is required. This requirement will be eliminated under the new standard.
Accordingly, we will be required to recognize as revenue a portion of the sales price upon delivery of the
software, as compared to the current requirement of recognizing the entire sales price ratably over an estimated
service period. We expect this difference to primarily impact revenues from our Call of Duty franchise, where
we expect that approximately 20% of the sales price will be recognized as revenue upon delivery of the games
to our customers. Many of our other franchises, such as Destiny, Overwatch, World of Warcraft, and Candy
Crush, are online hosted arrangements, and we do not expect any significant impact on the accounting for our
sales of these games; and

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•

The accounting for certain of our software licensing arrangements. While the impacts of the new standard
may differ on a contract-by-contract basis (the actual revenue recognition treatment required under the standard
will depend on contract-specific terms), we generally expect earlier revenue recognition for these arrangements
under the new revenue standard.

We estimate that the cumulative effect of adopting this standard will result in an adjustment to retained earnings at the
adoption date of approximately $60 million to $100 million, inclusive of the associated tax impacts. Additionally, we expect
that the new disclosure requirements will require us to design and implement additional internal controls over financial
reporting, and we are in process of adjusting our processes and internal controls in preparation for adopting the new standard.

Leases

In February 2016, the FASB issued new guidance related to the accounting for leases. The new standard will replace all
current U.S. GAAP guidance on this topic. The new standard, among other things, requires a lessee to classify a lease as
either an operating or financing lease, and lessees will need to recognize a lease liability and a right-of-use asset for their
leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to
adjustment for initial direct costs, lease incentives received, and any prepaid lease payments. Operating leases will result in a
straight-line expense pattern, while finance leases will result in a front-loaded expense pattern. Classification will be based on
criteria that are largely similar to those applied in current lease accounting. The standard is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard
must be adopted using a modified retrospective transition and will require application of the new guidance at the beginning of
the earliest comparative period presented, with certain transition practical expedients available to provide relief in adopting
the new standard. We are evaluating the impact of this new accounting guidance on our financial statements. Currently, we
do not plan to early adopt this new standard but we do expect to elect and apply the available transition practical expedients
upon adoption.

Statement of Cash Flows-Restricted Cash

In November 2016, the FASB issued new guidance related to the classification of restricted cash in the statement of cash
flows. The new standard requires that a statement of cash flows explain any change during the period in total cash, cash
equivalents, and restricted cash. Therefore, restricted cash will be included with “Cash and cash equivalents” when
reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard
is effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is
permitted.

We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements. We expect there
will be a significant impact to the consolidated statements of cash flows for 2016, as this period includes, as an investing
activity, the $3.6 billion movement in restricted cash resulting from the transfer of cash into escrow at December 31, 2015, to
facilitate the King Acquisition and the subsequent release of that cash in 2016 in connection with the King Acquisition.
Under this new standard, the restricted cash balance will be included in the beginning and ending total cash, cash equivalents,
and restricted cash balances and, hence, would not be included as an investing activity in the statement of cash flows.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily
include fluctuations in foreign currency exchange rates and interest rates.

Foreign Currency Exchange Rate Risk

We transact business in many different foreign currencies and may be exposed to financial market risk resulting from
fluctuations in foreign currency exchange rates. Revenues and related expenses generated from our international operations
are generally denominated in their respective local currencies. Primary currencies include Euros, British pounds, Australian
dollars, South Korean won, Chinese yuan, and Swedish krona. To the extent the U.S. dollar strengthens against foreign
currencies, the translation of these foreign currency-denominated transactions will result in reduced revenues, operating
expenses, net income, and cash flows from our international operations. Similarly, our revenues, operating expenses, net
income, and cash flows will increase for our international operations if the U.S. dollar weakens against foreign currencies.
Since we have significant international sales, but incur the majority of our costs in the United States, the impact of foreign
currency fluctuations, particularly the strengthening of the U.S. dollar, may have an asymmetric and disproportional impact
on our business. We monitor currency volatility throughout the year.

To mitigate our foreign currency risk resulting from our foreign currency-denominated monetary assets, liabilities, and
earnings and our foreign currency risk related to functional currency-equivalent cash flows resulting from our intercompany
transactions, we periodically enter into currency derivative contracts, principally forward contracts. These forward contracts
generally have a maturity of less than one year. The counterparties for our currency derivative contracts are large and
reputable commercial or investment banks.

The fair value of foreign currency contracts are estimated based on the prevailing exchange rates of the various hedged
currencies as of the end of the period.

We do not hold or purchase any foreign currency forward contracts for trading or speculative purposes.

For a detailed discussion of our accounting policies for our foreign currency forward contracts, see Note 2 of the notes to
consolidated financial statements included in this Annual Report.

Foreign Currency Forward Contracts Designated as Hedges (“Cash Flow Hedges”)

At December 31, 2017, the gross notional amount of outstanding Cash Flow Hedges was approximately $521 million. The
fair value of these contracts, all of which have remaining maturities of 12 months or less, was $5 million of net unrealized
losses. Additionally, at December 31, 2017, we had approximately $10 million of net realized but unrecognized losses
recorded within “Accumulated other comprehensive income (loss)” associated with contracts that had settled but were
deferred and will be amortized into earnings, along with the associated hedged revenues. Such amounts will be reclassified
into earnings within the next 12 months.

At December 31, 2016, the gross notional amount of outstanding Cash Flow Hedges was approximately $346 million. The
fair value of these contracts was $22 million of net unrealized gains.

During the years ended December 31, 2017 and 2016, there was no ineffectiveness relating to our Cash Flow Hedges. During
the years ended December 31, 2017 and 2016, the amount of pre-tax net realized gains associated with these contracts that
were reclassified out of “Accumulated other comprehensive loss” and into earnings was not material.

In the absence of hedging activities for the year ended December 31, 2017, a hypothetical adverse foreign currency exchange
rate movement of 10% would have resulted in potential declines of our net income of approximately $134 million. This
sensitivity analysis assumes a parallel adverse shift of all foreign currency exchange rates against the U.S. dollar; however,
all foreign currency exchange rates do not always move in such manner and actual results may differ materially.

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Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio and variable rate
debt under our credit agreement. We do not currently use derivative financial instruments to manage interest rate risk. As of
December 31, 2017 and 2016, a hypothetical interest rate change on our variable rate debt of one percent (100 basis points)
would have changed interest expense on an annual basis by approximately $10 million and $27 million, respectively. This
estimate does not include a change in interest income from our investment portfolio that may result from such a hypothetical
interest rate change nor does it include the effects of other actions that we may take in the future to mitigate this risk or any
changes in our financial structure. Refer to Note 11 of the notes to consolidated financial statements included in this Annual
Report for disclosures regarding terms and interest rates associated with our debt obligations.

Our investment portfolio consists primarily of money market funds and government securities with high credit quality and
short average maturities. Because short-term securities mature relatively quickly and must be reinvested at the then-current
market rates, interest income on a portfolio consisting of cash, cash equivalents, or short-term securities is more subject to
market fluctuations than a portfolio of longer-term securities. Conversely, the fair value of such a portfolio is less sensitive to
market fluctuations than a portfolio of longer-term securities. At December 31, 2017, our $4.7 billion of cash and cash
equivalents was comprised primarily of money market funds.

The Company has determined that, based on the composition of our investment portfolio as of December 31, 2017, there was
no material interest rate risk exposure to the Company’s consolidated financial condition, results of operations, or liquidity as
of that date.

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CONTROLS AND PROCEDURES

Definition and Limitations of Disclosure Controls and Procedures.

Our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is:
(1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and
(2) accumulated and communicated to our management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well
designed and operated, can provide only reasonable assurance that it will detect or uncover failures within the Company to
disclose material information otherwise required to be set forth in our periodic reports. Inherent limitations to any system of
disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or
overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain
assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may
therefore not achieve its desired objectives under all possible future events.

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the
effectiveness of our disclosure controls and procedures at December 31, 2017, the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal financial officer concluded that, at December 31, 2017,
our disclosure controls and procedures were effective to provide reasonable assurance that information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act is (1) recorded, processed,
summarized, and reported on a timely basis, and (2) accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required
disclosures.

Management’s Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, with the participation of our
principal executive officer and principal financial officer, conducted an evaluation of the effectiveness, as of December 31,
2017, of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on this evaluation, our
management concluded that our internal control over financial reporting was effective as of December 31, 2017.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in this
Annual Report.

Changes in Internal Control Over Financial Reporting.

There have not been any changes in our internal control over financial reporting during the most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Activision Blizzard, Inc.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Activision Blizzard, Inc. and its subsidiaries as of December 31,
2017 and 2016, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders’ equity
and of cash flows for each of the three years in the period ended December 31, 2017, including the related notes. We also have audited
the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for income
taxes related to share-based payments in 2016.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s
Report on Internal Control over Financial Reporting appearing on page 42 of this Annual Report to Shareholders. Our responsibility is
to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in

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accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
on the financial statements.
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP

/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 27, 2018
Los Angeles, California
February 27, 2018
We have served as the Company’s auditor since 2008.

We have served as the Company’s auditor since 2008.

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4444
44

Activision 2017 10-K Thursday, March 15, 2018 9:00am PST Andra Design LLC ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share data)

Assets

Current assets:

Cash and cash equivalents ......................................................................................
Accounts receivable, net of allowances of $279 and $261, at December 31, 2017
and December 31, 2016, respectively .................................................................
Inventories, net .......................................................................................................
Software development ............................................................................................
Other current assets ................................................................................................
Total current assets .............................................................................................
Software development ............................................................................................
Property and equipment, net ...................................................................................
Deferred income taxes, net .....................................................................................
Other assets .............................................................................................................
Intangible assets, net ...............................................................................................
Goodwill .................................................................................................................
Total assets .........................................................................................................

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable....................................................................................................
Deferred revenues ...................................................................................................
Accrued expenses and other liabilities ...................................................................
Total current liabilities........................................................................................
Long-term debt, net ................................................................................................
Deferred income taxes, net .....................................................................................
Other liabilities .......................................................................................................
Total liabilities ....................................................................................................

Commitments and contingencies (Note 19)
Shareholders’ equity:

Common stock, $0.000001 par value, 2,400,000,000 shares authorized,

1,186,181,666 and 1,174,163,069 shares issued at December 31, 2017 and
December 31, 2016, respectively ........................................................................
Additional paid-in capital .......................................................................................
Less: Treasury stock, at cost, 428,676,471 shares at December 31, 2017 and

December 31, 2016 .............................................................................................
Retained earnings ...................................................................................................
Accumulated other comprehensive loss .................................................................
Total shareholders’ equity ..................................................................................
Total liabilities and shareholders’ equity ............................................................

At December 31,
2017

At December 31,
2016

$4,713

$3,245

918
46
367
476
6,520
86
294
459
440
1,106
9,763
$18,668

$323
1,929
1,411
3,663
4,390
21
1,132
9,206

—
10,747

(5,563)
4,916
(638)
9,462
$18,668

732
49
412
392
4,830
54
258
283
401
1,858
9,768
$17,452

$222
1,628
806
2,656
4,887
44
746
8,333

—
10,442

(5,563)
4,869
(629)
9,119
$17,452

The accompanying notes are an integral part of these Consolidated Financial Statements.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in millions, except per share data)

For the Years Ended
December 31,
2016

2017

2015

Net revenues

Product sales .............................................................................................................................
Subscription, licensing, and other revenues..............................................................................
Total net revenues ........................................................................................................................
Costs and expenses

Cost of revenues—product sales:

Product costs .........................................................................................................................
Software royalties, amortization, and intellectual property licenses ....................................

Cost of revenues—subscription, licensing, and other revenues:

Game operations and distribution costs ................................................................................
Software royalties, amortization, and intellectual property licenses ....................................
Product development ................................................................................................................
Sales and marketing ..................................................................................................................
General and administrative .......................................................................................................
Total costs and expenses ..............................................................................................................
Operating income .........................................................................................................................
Interest and other expense (income), net ......................................................................................
Loss on extinguishment of debt ....................................................................................................
Income before income tax expense ..............................................................................................
Income tax expense ......................................................................................................................
Net income ...................................................................................................................................

Earnings per common share

$2,110
4,907
7,017

$2,196
4,412
6,608

$2,447
2,217
4,664

733
300

984
484
1,069
1,378
760
5,708
1,309
146
12
1,151
878
$273

741
331

872
370

851
471
958
1,210
634
5,196
1,412
214
92
1,106
140
$966

274
69
646
734
380
3,345
1,319
198
—
1,121
229
$892

Basic .........................................................................................................................................

Diluted ......................................................................................................................................

$0.36

$1.30

$1.28

$1.21

$1.19

Weighted-average number of shares outstanding

Basic .........................................................................................................................................
Diluted ......................................................................................................................................
Dividends per common share .......................................................................................................

754
766
$0.30

740
754
$0.26

728
739
$0.23

The accompanying notes are an integral part of these Consolidated Financial Statements.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

Net income ........................................................................................................................................
Other comprehensive income (loss):

Foreign currency translation adjustments ......................................................................................
Unrealized gains (losses) on forward contracts designated as hedges, net of tax ..........................
Unrealized gains (losses) on investments, net of tax .....................................................................
Total other comprehensive income (loss) ..........................................................................................
Comprehensive income .....................................................................................................................

For the Years Ended
December 31,

2017
$273

2016
$966

2015

$892

36
(44)
(1)
$(9)
$264

(29)
33
—
$4
$970

(326)
(4)
—
$(330)
$562

The accompanying notes are an integral part of these Consolidated Financial Statements.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2017, 2016, and 2015
(Amounts and shares in millions, except per share data)

Common Stock

Treasury Stock

Shares
1,151

Amount

$—

Shares
(429)

Amount
$(5,762)

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders’
Equity

$9,924

$3,374

$(303)

$7,233

—
—

(3)

—

—
—

—

—
—

—

—
—

—

—
—

—

—
—

—

—
—

106

—

(83)

95
—

—

892
—

—

—
(170)

—

—
(330)

—

—
—

—

892
(330)

106

—

(83)

95
(170)

—
1,163

—
$—

—
(429)

67
$(5,637)

135
$10,242

—
$4,096

—
$(633)

202
$8,068

—
—

(3)

—

—
—

—

—
—

—

—
—

—

—
—

105

—

(116)

135

76
—

966
—

—

(193)

—
4

—

966
4

105

—

(116)

135

76
(193)

—
1,174

—
$—

—
(429)

74
$(5,563)

—
$10,442

—
$4,869

—
$(629)

74
$9,119

—
—

(1)

—
—

—

—
—

—

—
—

—

—
—

178

—

(54)

273
—

—

—
(9)

—

273
(9)

178

—

(54)

—
—
1,186

—
—
$—

—
—
(429)

—
—
$(5,563)

181
—
$10,747

—
(226)
$4,916

—
—
$(638)

181
(226)
$9,462

Balance at December 31, 2014 ..............

Components of comprehensive income:

Net income ..............................................
Other comprehensive income (loss) ........

Issuance of common stock pursuant to

employee stock options ...........................

Issuance of common stock pursuant to

restricted stock units ................................

Restricted stock surrendered for

employees’ tax liability ...........................

Tax benefit associated with employee

stock awards ............................................

Share-based compensation expense

related to employee stock options
and restricted stock units .........................
Dividends ($0.23 per common share) ...........
Indemnity on tax attributes assumed in

connection with the Purchase Transaction
(see Note 15) ...........................................

Shareholder settlement in connection
with the Purchase Transaction (see
Note 19) ..................................................
Balance at December 31, 2015 ..............

Components of comprehensive income:

Net income ..............................................
Other comprehensive income (loss) ........

Issuance of common stock pursuant to

employee stock options ...........................

Issuance of common stock pursuant to

restricted stock units ................................

Restricted stock surrendered for

employees’ tax liability ...........................

Share-based compensation expense

related to employee stock options
and restricted stock units .........................

Share-based compensation assumed in

acquisition (see Note 20) .........................
Dividends ($0.26 per common share) ...........
Indemnity on tax attributes assumed in

connection with the Purchase Transaction
(see Note 15) ...........................................
Balance at December 31, 2016 ..............

Components of comprehensive income:
Net income ...................................................
Other comprehensive income (loss) .............
Issuance of common stock pursuant to

employee stock options ...........................

Issuance of common stock pursuant to

restricted stock units ................................

Restricted stock surrendered for

employees’ tax liability ...........................

Share-based compensation expense

related to employee stock options
and restricted stock units .........................
Dividends ($0.30 per common share) ...........
Balance at December 31, 2017 ..............

The accompanying notes are an integral part of these Consolidated Financial Statements.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

Cash flows from operating activities:

Net income ...........................................................................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:

Deferred income taxes .....................................................................................................................................
Provision for inventories .................................................................................................................................
Depreciation and amortization .........................................................................................................................
Amortization of capitalized software development costs and intellectual property licenses(1) .......................
Premium payment for early redemption of note ..............................................................................................
Amortization of debt discount, financing costs, and non-cash write-off due to extinguishment of debts.........
Share-based compensation expense(2) ............................................................................................................
Other ...............................................................................................................................................................

Changes in operating assets and liabilities, net of effect from business acquisitions:

Accounts receivable, net ..................................................................................................................................
Inventories .......................................................................................................................................................
Software development and intellectual property licenses ................................................................................
Other assets .....................................................................................................................................................
Deferred revenues ...........................................................................................................................................
Accounts payable ............................................................................................................................................
Accrued expenses and other liabilities .............................................................................................................
Net cash provided by operating activities .............................................................................................................

Cash flows from investing activities:

Proceeds from maturities of available-for-sale investments .................................................................................
Purchases of available-for-sale investments .........................................................................................................
Acquisition of business, net of cash acquired (see Note 20) .................................................................................
Release (deposit) of cash in escrow ......................................................................................................................
Capital expenditures .............................................................................................................................................
Other investing activities ......................................................................................................................................
Net cash used in investing activities .....................................................................................................................

Cash flows from financing activities:

Proceeds from issuance of common stock to employees ......................................................................................
Tax payment related to net share settlements on restricted stock units .................................................................
Dividends paid .....................................................................................................................................................
Proceeds from debt issuances, net of discounts ....................................................................................................
Repayment of long-term debt ...............................................................................................................................
Premium payment for early redemption of note ...................................................................................................
Proceeds received from shareholder settlement (see Note 19) ..............................................................................
Other financing activities .....................................................................................................................................
Net cash (used in) provided by financing activities ..............................................................................................
Effect of foreign exchange rate changes on cash and cash equivalents .....................................................................
Net increase (decrease) in cash and cash equivalents ................................................................................................
Cash and cash equivalents at beginning of period .....................................................................................................
Cash and cash equivalents at end of period ...............................................................................................................

For the Years Ended
December 31,
2016

2017

2015

$273

$966

$892

(181)
33
888
311
—
24
176
28

(165)
(26)
(301)
(97)
220
85
945
2,213

80
(135)
—
—
(155)
13
(197)

178
(56)
(226)
3,741
(4,251)
—
—
(10)
(624)
76
1,468
3,245
$4,713

(9)
42
829
321
63
50
147
4

84
32
(362)
(10)
(35)
(50)
83
2,155

—
—
(4,588)
3,561
(136)
(14)
(1,177)

106
(115)
(195)
6,878
(6,104)
(63)
—
(7)
500
(56)
1,422
1,823
$3,245

(27)
43
95
399
—
7
92
—

(40)
(54)
(350)
21
(27)
(25)
233
1,259

145
(145)
(46)
(3,561)
(111)
2
(3,716)

106
(83)
(170)
—
(250)
—
202
(7)
(202)
(366)
(3,025)
4,848
$1,823

(1)

(2)

Excludes deferral and amortization of share-based compensation expense.

Includes the net effects of capitalization, deferral, and amortization of share-based compensation expense.

The accompanying notes are an integral part of these Consolidated Financial Statements.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Description of Business

Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and services. We develop and
distribute content and services on video game consoles, personal computers (“PC”), and mobile devices. We also operate esports
events and leagues and create film and television content based on our games. The terms “Activision Blizzard,” the “Company,” “we,”
“us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.

The Company was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992. In connection
with the 2008 business combination by and among the Company (then known as Activision, Inc.), Vivendi S.A. (“Vivendi”), and
Vivendi Games, Inc., an indirect wholly-owned subsidiary of Vivendi, we were renamed Activision Blizzard, Inc.

The common stock of Activision Blizzard is traded on The Nasdaq Stock Market under the ticker symbol “ATVI.”

The King Acquisition

On February 23, 2016 (the “King Closing Date”), we acquired King Digital Entertainment, a leading interactive mobile entertainment
company (“King”), by purchasing all of its outstanding shares (the “King Acquisition”), as further described in Note 20. Our
consolidated financial statements include the operations of King commencing on the King Closing Date.

Our Segments

As part of the continued implementation of our esports strategy, we instituted changes to our internal organization and reporting
structure such that the Major League Gaming (“MLG”) business now operates as a division of Blizzard Entertainment, Inc.
(“Blizzard”). As such, commencing with the second quarter of 2017, MLG, which was previously a separate operating segment, is
now a component of the Blizzard operating segment. MLG is responsible for the operations of the Overwatch League™, along with
other esports events, and will also continue to serve as a multi-platform network for other Activision Blizzard esports content.

Based upon our organizational structure, we conduct our business through three reportable operating segments as follows:

(i) Activision Publishing, Inc.

Activision Publishing, Inc. (“Activision”) is a leading global developer and publisher of interactive software products and
entertainment content, particularly for the console platform. Activision primarily delivers content through retail and digital channels,
including full-game and in-game sales, as well as by licensing software to third-party or related-party companies that distribute
Activision products. Activision develops, markets, and sells products based on our internally developed intellectual properties, as well
as some licensed properties. We have also established a long-term alliance with Bungie to publish its game universe, Destiny.

(ii) Blizzard Entertainment, Inc.

Blizzard is a leading global developer and publisher of interactive software products and entertainment content, particularly for the PC
platform. Blizzard primarily delivers content through retail and digital channels, including subscriptions, full-game, and in-game sales,
as well as by licensing software to third-party or related-party companies that distribute Blizzard products. Blizzard also maintains a
proprietary online gaming service, Blizzard Battle.net®, which facilitates digital distribution of Blizzard content, along with
Activision’s Destiny 2 PC content, online social connectivity, and the creation of user-generated content. As noted above, Blizzard
also includes the activities of our MLG business, which is responsible for the operations of the Overwatch League, along with other
esports events, and will also continue to serve as a multi-platform network for other Activision Blizzard esports content.

Blizzard’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing game
for PC; StarCraft®, a real-time strategy PC franchise; Diablo®, an action role-playing franchise for the PC and console platforms;

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Hearthstone®, an online collectible card franchise for the PC and mobile platforms; Heroes of the Storm®, a free-to-play team brawler
for PC; and Overwatch®, a team-based first-person shooter for the PC and console platforms.

(iii) King Digital Entertainment

King Digital Entertainment (“King”) is a leading global developer and publisher of interactive entertainment content and services,
particularly on mobile platforms, such as Google Inc.’s (“Google”) Android and Apple Inc.’s (“Apple”) iOS. King also distributes its
content and services on the PC platform, primarily via Facebook, Inc. (“Facebook”). King’s games are free to play, however, players
can acquire in-game items, either with virtual currency the players purchase or directly using real currency.

Other

We also engage in other businesses that do not represent reportable segments, including:

•

the Activision Blizzard Studios (“Studios”) business, which is devoted to creating original film and television content
based on our library of globally recognized intellectual properties, and which, in October 2017, released the second
season of the animated TV series Skylanders™ Academy on Netflix; and

the Activision Blizzard Distribution (“Distribution”) business, which consists of operations in Europe that provide
warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, our
own publishing operations, and manufacturers of interactive entertainment hardware.

2. Summary of Significant Accounting Policies

Basis of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts and operations of the Company. All intercompany accounts
and transactions have been eliminated. The consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.

Certain reclassifications have been made to prior-year amounts to conform to the current period presentation.

The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, to
provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.

Cash and Cash Equivalents

We consider all money market funds and highly liquid investments with original maturities of three months or less at the time of
purchase to be “Cash and cash equivalents.”

Investment Securities

Investments designated as available-for-sale securities are carried at fair value, which is based on quoted market prices for such
securities, if available, or is estimated on the basis of quoted market prices of financial instruments with similar characteristics.
Unrealized gains and losses of the Company’s available-for-sale securities are excluded from earnings and are reported as a
component of “Other comprehensive income (loss).”

Investments with original maturities greater than 90 days and remaining maturities of less than one year are normally classified within
“Other current assets.” In addition, investments with maturities beyond one year may be classified within “Other current assets” if
they are highly liquid in nature and represent the investment of cash that is available for current operations.

The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses reflected in
“Interest and other expense (income), net” in our consolidated statements of operations.

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Cash in Escrow

As part of the King Acquisition, we were required to deposit $3.56 billion in cash to be held in an escrow account until the earlier of
(1) the completion of the King Acquisition, or (2) the termination of the transaction agreement. The cash was not accessible to the
Company for operating cash needs as its use had been administratively restricted for use in the consummation of the King Acquisition.

Financial Instruments

The carrying amounts of “Cash and cash equivalents,” “Accounts receivable, net of allowances,” “Accounts payable,” and “Accrued
expenses and other liabilities” approximate fair value due to the short-term nature of these accounts. Our investments in U.S.
treasuries, government agency securities, and corporate bonds, if any, are carried at fair value, which is based on quoted market prices
for such securities, if available, or is estimated on the basis of quoted market prices of financial instruments with similar
characteristics.

The Company transacts business in various foreign currencies and has significant international sales and expenses denominated in
foreign currencies, subjecting us to foreign currency risk. To mitigate our foreign currency risk resulting from our foreign
currency-denominated monetary assets, liabilities and earnings and our foreign currency risk related to functional currency-equivalent
cash flows resulting from our intercompany transactions, we periodically enter into currency derivative contracts, principally forward
contracts. These forward contracts generally have a maturity of less than one year. The counterparties for our currency derivative
contracts are large and reputable commercial or investment banks.

We assess the nature of these derivatives under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 815 to determine whether such derivatives should be designated as hedging instruments. The fair value of foreign
currency contracts are estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.
We report the fair value of these contracts within “Other current assets,” “Accrued expense and other liabilities,” “Other assets,” or
“Other liabilities,” as applicable, in our consolidated balance sheets based on the prevailing exchange rates of the various hedged
currencies as of the end of the relevant period.

We do not hold or purchase any foreign currency forward contracts for trading or speculative purposes.

For foreign currency forward contracts which are not designated as hedging instruments under ASC 815, changes in the estimated fair
value of these derivatives are recorded within “General and administrative expenses” and “Interest and other expense, net” in our
consolidated statements of operations, consistent with the nature of the underlying transactions.

For foreign currency forward contracts which have been designated as cash flow hedges in accordance with ASC 815, we assess the
effectiveness of these cash flow hedges at inception and on an ongoing basis and determine if the hedges are effective at providing
offsetting changes in cash flows of the hedged items. The Company records the effective portion of changes in the estimated fair value
of these derivatives in “Accumulated other comprehensive loss” and subsequently reclassifies the related amount of accumulated other
comprehensive income (loss) to earnings within “General and administrative” or “Net revenues” when the hedged item impacts
earnings, consistent with the nature and timing of the underlying transactions. Cash flows from these foreign currency forward
contracts are classified in the same category as the cash flows associated with the hedged item in the consolidated statements of cash
flows. We measure hedge ineffectiveness, if any, and if it is determined that a derivative has ceased to be a highly effective hedge, the
Company will discontinue hedge accounting for the derivative.

Concentration of Credit Risk

Our concentration of credit risk relates to depositors holding the Company’s cash and cash equivalents and customers with significant
accounts receivable balances.

Our cash and cash equivalents are invested primarily in money market funds consisting of short-term, high-quality debt instruments
issued by governments and governmental organizations, financial institutions and industrial companies.

Our customer base includes retailers and distributors, including mass-market retailers, first party digital storefronts, consumer
electronics stores, discount warehouses, and game specialty stores in the U.S. and other countries worldwide. We perform ongoing
credit evaluations of our customers and maintain allowances for potential credit losses. We generally do not require collateral or other
security from our customers.

For the year ended December 31, 2017, we had three customers—Apple, Sony Interactive Entertainment, Inc. (“Sony”), and Google—
who accounted for 16%, 14%, and 10%, respectively, of net revenues. For the year ended December 31, 2016, we had two

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customers—Sony and Apple—who each accounted for 13% of net revenues. For the year ended December 31, 2015, we had two
customers—Sony and Microsoft Corporation (“Microsoft”)—who accounted for 12% and 10%, respectively, of net revenues.

We had three customers—Sony, Microsoft, and Apple—who accounted for 17%, 14%, and 10%, respectively, of consolidated gross
receivables at December 31, 2017. We had three customers—Sony, Microsoft, and Wal-Mart Stores, Inc.—who accounted for 17%,
10%, and 10%, respectively, of consolidated gross receivables at December 31, 2016.

Software Development Costs and Intellectual Property Licenses

Software development costs include payments made to independent software developers under development agreements, as well as
direct costs incurred for internally developed products. Software development costs are capitalized once technological feasibility of a
product is established and such costs are determined to be recoverable. Technological feasibility of a product requires both technical
design documentation and game design documentation, or the completed and tested product design and a working model. Significant
management judgments and estimates are utilized in the assessment of when technological feasibility is established and the evaluation
is performed on a product-by-product basis. For products where proven technology exists, this may occur early in the development
cycle. Software development costs related to online hosted revenue arrangements are capitalized after the preliminary project phase is
complete and it is probable that the project will be completed and the software will be used to perform the function intended. Prior to a
product’s release, if and when we believe capitalized costs are not recoverable, we expense the amounts as part of “Cost of revenues—
software royalties, amortization, and intellectual property licenses.” Capitalized costs for products that are canceled or are expected to
be abandoned are charged to “Product development” in the period of cancellation. Amounts related to software development which
are not capitalized are charged immediately to “Product development.”

Commencing upon a product’s release, capitalized software development costs are amortized to “Cost of revenues—software
royalties, amortization, and intellectual property licenses” based on the ratio of current revenues to total projected revenues for the
specific product, generally resulting in an amortization period of six months to approximately two years.

Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks,
copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products.
Depending upon the agreement with the rights holder, we may obtain the right to use the intellectual property in multiple products
over a number of years, or alternatively, for a single product. Prior to a product’s release, if and when we believe capitalized costs are
not recoverable, we expense the amounts as part of “Cost of revenues—software royalties, amortization, and intellectual property
licenses.” Capitalized intellectual property costs for products that are canceled or are expected to be abandoned are charged to
“Product development” in the period of cancellation.

Commencing upon a product’s release, capitalized intellectual property license costs are amortized to “Cost of revenues—software
royalties, amortization, and intellectual property licenses” based on the ratio of current revenues for the specific product to total
projected revenues for all products in which the licensed property will be utilized. As intellectual property license contracts may
extend for multiple years and can be used in multiple products to be released over a period beyond one year, the amortization of
capitalized intellectual property license costs relating to such contracts may extend beyond one year.

We evaluate the future recoverability of capitalized software development costs and intellectual property licenses on a quarterly basis.
For products that have been released in prior periods, the primary evaluation criterion is the actual performance of the title to which
the costs relate. For products that are scheduled to be released in future periods, recoverability is evaluated based on the expected
performance of the specific products to which the costs relate or in which the licensed trademark or copyright is to be used. Criteria
used to evaluate expected product performance include: historical performance of comparable products developed with comparable
technology; market performance of comparable titles; orders for the product prior to its release; general market conditions; and, for
any sequel product, estimated performance based on the performance of the product on which the sequel is based. Further, as many of
our capitalized intellectual property licenses extend for multiple products over multiple years, we also assess the recoverability of
capitalized intellectual property license costs based on certain qualitative factors, such as the success of other products and/or
entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series
based on the intellectual property, and the rights holder’s continued promotion and exploitation of the intellectual property.

Significant management judgments and estimates are utilized in assessing the recoverability of capitalized costs. In evaluating the
recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of
additional costs to be incurred. If revised forecasted or actual product sales are less than the originally forecasted amounts utilized in
the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could
result in an impairment charge. Material differences may result in the amount and timing of expenses for any period if matters resolve
in a manner that is inconsistent with management’s expectations.

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Inventories

Inventories consist of materials (including manufacturing royalties paid to console manufacturers), labor, and freight-in and are stated
at the lower of cost (weighted-average method) or net realizable value. Inventories are relieved on a weighted-average cost method.

Allowance for Inventory Obsolescence

We regularly review inventory quantities on-hand and in the retail channels. We write down inventory based on excess or obsolete
inventories determined primarily by future anticipated demand for our products. Inventory write-downs are measured as the difference
between the cost of the inventory and net realizable value, based upon assumptions about future demand, which are inherently difficult
to assess and dependent on market conditions. At the point of a loss recognition, a new, lower cost basis for that inventory is
established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established
basis.

Long-Lived Assets

Property and Equipment. Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated
useful life (i.e., 25 to 33 years for buildings, and 2 to 5 years for computer equipment, office furniture and other equipment) of the
asset. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed and any resulting gains or
losses are included in the consolidated statements of operations. Leasehold improvements are amortized using the straight-line method
over the estimated life of the asset, not to exceed the length of the lease. Repair and maintenance costs are expensed as incurred.

Goodwill and Other Indefinite-Lived Assets. We account for goodwill in accordance with ASC Topic 350. Under ASC Topic 350,
goodwill is considered to have an indefinite life, and is carried at cost. Acquired trade names are assessed as indefinite lived assets if
there is no foreseeable limits on the periods of time over which they are expected to contribute cash flows. Goodwill and
indefinite-lived assets are not amortized, but are subject to an annual impairment test, as well as between annual tests when events or
circumstances indicate that the carrying value may not be recoverable. We perform our annual impairment testing at December 31.

Our annual goodwill impairment test is performed at the reporting unit level. We have determined our reporting units based on the
guidance within ASC Subtopic 350-20. As of December 31, 2017 and 2016, our reporting units are the same as our operating
segments. We test goodwill for possible impairment by first determining the fair value of the related reporting unit and comparing this
value to the recorded net assets of the reporting unit, including goodwill. The fair value of our reporting units is determined using an
income approach based on discounted cash flow models. In the event the recorded net assets of the reporting unit exceed the estimated
fair value of such assets, we perform a second step to measure the amount of the impairment, which is equal to the amount by which
the recorded goodwill exceeds the implied fair value of the goodwill after assessing the fair value of each of the assets and liabilities
within the reporting unit. We have determined that no impairment has occurred at December 31, 2017, 2016 and 2015 based upon a
set of assumptions regarding discounted future cash flows, which represent our best estimate of future performance at this time.

We test indefinite-lived acquired trade names for possible impairment by using a discounted cash flow model to estimate fair value.
We have determined that no impairment has occurred at December 31, 2017, 2016 and 2015 based upon a set of assumptions
regarding discounted future cash flows, which represent our best estimate of future performance at this time.

Changes in our assumptions underlying our estimates of fair value, which will be a function of our future financial performance and
changes in economic conditions, could result in future impairment charges.

Amortizable Intangible and Other Long-lived Assets. Intangible assets subject to amortization are carried at cost less accumulated
amortization, and amortized over the estimated useful life in proportion to the economic benefits received.

We evaluate the recoverability of our definite-lived intangible assets and other long-lived assets in accordance with ASC Subtopic
360-10, which generally requires the assessment of these assets for recoverability when events or circumstances indicate a potential
impairment exists. We considered certain events and circumstances in determining whether the carrying value of identifiable
intangible assets and other long-lived assets, other than indefinite-lived intangible assets, may not be recoverable including, but not
limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets;
significant negative industry or economic trends; a significant decline in our stock price for a sustained period of time; and changes in
our business strategy. If we determine that the carrying value may not be recoverable, we estimate the undiscounted cash flows to be
generated from the use and ultimate disposition of the asset group to determine whether an impairment exists. If an impairment is
indicated based on a comparison of the asset groups’ carrying values and the undiscounted cash flows, the impairment loss is
measured as the amount by which the carrying amount of the asset group exceeds its fair value. We did not record an impairment
charge to our definite-lived intangible assets as of December 31, 2017, 2016, and 2015.

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Revenue Recognition

We recognize revenues when there is persuasive evidence of an arrangement, the product or service has been provided to the
customer, the collection of our fees is reasonably assured and the amount of fees to be paid by the customer is fixed or determinable.
Certain products are sold to customers with a “street date” (which is the earliest date these products may be sold by retailers). For
these products, we recognize revenues on the later of the street date or the date the product is sold to the customer. Revenues are
recorded net of taxes assessed by governmental authorities that are both imposed on and concurrent with the specific
revenue-producing transaction between us and our customer, such as sales and value-added taxes.

Revenue Arrangements with Multiple Deliverables

Certain of our revenue arrangements have multiple deliverables, which we account for in accordance with ASC Topic 605. These
revenue arrangements include product sales consisting of both software, service (such as ongoing hosting arrangements), and
hardware deliverables (such as peripherals or other ancillary collectors’ items sold together with physical “boxed” software).

When a revenue arrangement contains multiple elements, such as hardware and software products, licenses and/or services, we
allocate revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor-specific
objective evidence (“VSOE”) if it is available, third-party evidence (“TPE”) if VSOE is not available, or best estimated selling price
(“BESP”) if neither VSOE nor TPE is available. In multiple element arrangements where more-than-incidental software deliverables
are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software
deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned
selling price hierarchy. Further, if the arrangement contains more than one software deliverable, the arrangement consideration
allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing
software revenue.

As noted above, when neither VSOE nor TPE is available for a deliverable, we use BESP. We did not have significant revenue
arrangements that required using BESP for the years ended December 31, 2017, 2016, and 2015. The inputs we use to determine the
selling price of our significant deliverables include the actual price charged by the Company for deliverables that the Company sells
separately (which represents VSOE) and the wholesale prices of the same or similar products for deliverables not sold separately
(which represents TPE).

Product Sales

Product sales consist of sales of our games, including physical products and digital full-game downloads. We recognize revenues from
the sale of our products after both (1) title and risk of loss have been transferred to our customers and (2) all performance obligations
have been completed. With respect to digital full-game downloads, this is when the product is available for download or is activated
for gameplay. Revenues from product sales are recognized after deducting the estimated allowance for returns and price protection.
Sales incentives and other consideration given by us to our customers, such as rebates and product placement fees, are considered
adjustments of the selling price of our products and are reflected as reductions to revenues. Sales incentives and other consideration
that represent costs incurred by us for assets or services received, such as the appearance of our products in a customer’s national
circular ad, are reflected as sales and marketing expenses when the benefit from the sales incentive is separable from sales to the same
customer and we can reasonably estimate the fair value of the benefit.

Products with Online Functionality or Online Hosted Arrangements

For our software products with online functionality or that are part of an online hosted arrangement, we evaluate whether that online
functionality constitutes a more-than-inconsequential separate deliverable in addition to the software product. This evaluation is
performed for each software product or product add-on (including downloadable content), when it is released. Determining whether
the online functionality for a particular product constitutes a more-than-inconsequential deliverable is subjective and requires
management’s judgment. When we determine that the online functionality constitutes a more-than-inconsequential separate service
deliverable in addition to the product, which is principally because of the online functionality’s importance to gameplay, we consider
our performance obligation for this title to extend beyond the sale of the game. In addition, VSOE of fair value does not exist for the
online functionality of some products, as we do not separately charge for this component. As a result, we initially defer all of the
software-related revenues from the sale of any such title (including downloadable content) and recognize the revenues ratably over the
estimated service period. In addition, we initially defer the cost of revenues for the title and recognize the costs of sales as the related
revenues are recognized. The cost of revenues that are initially deferred include product and distribution costs, software royalties and
amortization, and intellectual property licenses and exclude intangible asset amortization.

For our software products with online functionality that we consider to be incidental to the overall product offering and are
inconsequential deliverables, we recognize the related revenues when the revenue recognition criteria described above have been met.

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For our World of Warcraft boxed products, expansion packs and value-added services, we recognize revenues in each case with the
related subscription service revenues ratably over the estimated service period, beginning upon the activation of the software and
delivery of the related services. Revenues attributed to the sale of World of Warcraft boxed software and related expansion packs are
classified as “Product sales,” whereas revenues attributable to subscriptions and other value-added services are classified as
“Subscription, licensing, and other revenues.”

Subscription Revenues

Subscription revenues are mostly derived from World of Warcraft. World of Warcraft is a game that is playable through Blizzard’s
servers and is generally sold on a subscription-only basis.

For World of Warcraft, after the first month of free usage that is included with the World of Warcraft boxed software, the World of
Warcraft end user may enter into a subscription agreement for additional future access. Revenues associated with the sales of
subscriptions via boxed software and prepaid subscription cards, as well as prepaid subscriptions sales, are deferred until the
subscription service is activated by the consumer and are then recognized ratably over the subscription period. Value-added service
revenues associated with subscriptions are recognized ratably over the estimated service periods.

Licensing Revenues

In certain countries, we utilize third-party licensees to distribute and host our games in accordance with license agreements, for which
the licensees pay the Company a royalty. We recognize these royalties as revenues based on usage by the end user and over the
estimated service period when we have continuing service obligations. We recognize any upfront licensing fees received over the term
of the agreements.

With respect to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts,
revenues are generally recognized upon delivery of a master copy if all other performance obligations have been completed or over the
estimated service period when we have continuing service obligations. Per copy royalties on sales that exceed the guarantee are
recognized as earned. In addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be
probable.

Other Revenues

Other revenues primarily include revenues from digital downloadable content (e.g., multi-player content packs), microtransactions and
the licensing of intellectual property other than software to third-parties.

Microtransaction revenues are derived from the sale of virtual goods and currencies to our players to enhance their gameplay
experience. Proceeds from the sales of virtual goods and currencies are initially recorded in deferred revenues. Proceeds from the sales
of virtual currencies are recognized as revenues when a player uses the virtual goods purchased with the virtual currency. Proceeds
from the sales of virtual goods directly are also recognized as revenues when a player uses the virtual goods. We categorize our virtual
goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action;
accordingly, we recognize revenues from the sale of consumable virtual goods as the goods are consumed. Durable virtual goods
represent goods that are accessible to the player over an extended period of time; accordingly, we recognize revenues from the sale of
durable virtual goods ratably over the period of time the goods are available to the player, which is generally the estimated service
period.

Revenues from the licensing of intellectual property other than software to third-parties are recorded upon the receipt of licensee
statements, or upon the receipt of cash, provided the license period has begun and all performance obligations have been completed.

Estimated Service Period

We determine the estimated service period for players of our games with consideration of various data points, including the weighted
average number of days between players’ first and last days played online, the average total hours played, the average number of days
in which player activity stabilizes, and the weighted-average number of days between players’ first purchase date and last date played
online. We also consider known online trends, the service periods of our previously released games, and the service periods of our
competitors’ games that are similar in nature to ours, to the extent they are publicly available. Determining the estimated service
period is subjective and requires management’s judgment. Future usage patterns may differ from historical usage patterns and
therefore the estimated service period may change in the future. The estimated service periods for players of our current games are
generally less than 12 months.

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Principal Agent Considerations

We evaluate sales of our products and content via third party digital storefronts, such as Microsoft’s Xbox Games Store, Sony’s PSN,
the Apple App Store, and the Google Play Store, to determine whether revenues should be reported gross or net of fees retained by the
storefront. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following:

•

the party responsible for delivery/fulfillment of the product or service to the consumer;

the party responsible for consumer billing, fee collection, and refunds;

the storefront and terms of sale that govern the consumer’s purchase of the product or service; and

the party that sets the pricing with the consumer and has credit risk.

Based on evaluation of the above indicators, we report revenues on a gross basis for sales arrangements via Apple App Store and
Google Play Store, and we report revenues on a net basis (i.e. net of fees retained by the storefront) for sales arrangements via
Microsoft’s Xbox Games Store and Sony PSN.

Allowances for Returns, Price Protection, and Doubtful Accounts

We closely monitor and analyze the historical performance of our various titles, the performance of products released by other
publishers, market conditions, and the anticipated timing of other releases to assess future demand of current and upcoming titles.
Initial volumes shipped upon title launch and subsequent reorders are evaluated with the goal of ensuring that quantities are sufficient
to meet the demand from the retail markets, but at the same time are controlled to prevent excess inventory in the channel. We
benchmark units to be shipped to our customers using historical and industry data.

We may permit product returns from, or grant price protection to, our customers under certain conditions. In general, price protection
refers to the circumstances in which we elect to decrease, on a short- or longer-term basis, the wholesale price of a product by a certain
amount and, when granted and applicable, allow customers a credit against amounts owed by such customers to us with respect to
open and/or future invoices. The conditions our customers must meet to be granted the right to return products or receive price
protection credits include, among other things, compliance with applicable trading and payment terms and consistent return of
inventory and delivery of sell-through reports to us. We may also consider other factors, including achievement of sell-through
performance targets in certain instances, the facilitation of slow-moving inventory, and other market factors.

Significant management judgments and estimates with respect to potential future product returns and price protection related to
current period product revenues must be made and used when establishing the allowance for returns and price protection in any
accounting period. We estimate the amount of future returns and price protection for current period product revenues utilizing
historical experience and information regarding inventory levels and the demand and acceptance of our products by the end consumer.
The following factors are used to estimate the amount of future returns and price protection for a particular title: historical
performance of titles in similar genres; historical performance of the hardware platform; historical performance of the franchise;
console hardware life cycle; sales force and retail customer feedback; industry pricing; future pricing assumptions; weeks of on-hand
retail channel inventory; absolute quantity of on-hand retail channel inventory; our warehouse on-hand inventory levels; the title’s
recent sell-through history (if available); marketing trade programs; and the performance of competing titles. The relative importance
of these factors varies among titles depending upon, among other things, genre, platform, seasonality, and sales strategy.

Based upon historical experience, we believe that our estimates are reasonable. However, actual returns and price protection could
vary materially from our allowance estimates due to a number of reasons, including, among others: a lack of consumer acceptance of a
title, the release in the same period of a similarly themed title by a competitor, or technological obsolescence due to the emergence of
new hardware platforms. There may be material differences in the amount and timing of our revenues for any period if factors or
market conditions change or if matters resolve in a manner that is inconsistent with management’s assumptions utilized in determining
the allowances for returns and price protection.

Similarly, management must make estimates as to the collectability of our accounts receivable. In estimating the allowance for
doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer concentrations,
customer creditworthiness, current economic trends, and changes in our customers’ payment terms and their economic condition, as
well as whether we can obtain sufficient credit insurance. Any significant changes in any of these criteria would affect management’s
estimates in establishing our allowance for doubtful accounts.

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Shipping and Handling

Shipping and handling costs, which consist primarily of packaging and transportation charges incurred to move finished goods to
customers, are included in “Cost of revenues—product costs.”

Cost of Revenues

Our cost of revenues consist of the following:

Cost of revenues—product sales:

(1)

(2)

“Product costs”—includes the manufacturing costs of goods produced and sold. These generally include product
costs, manufacturing royalties, net of volume discounts, personnel-related costs, warehousing, and distribution costs.
We generally recognize volume discounts when they are earned (typically in connection with the achievement of
unit-based milestones).

“Software royalties, amortization, and intellectual property licenses”—includes the amortization of capitalized
software costs and royalties attributable to product sales revenues. These are costs 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 product sales revenues.

Cost of revenues—subscription, licensing, and other revenues:

(1)

(2)

“Game operations and distribution costs”—includes costs to operate our games, such as customer service, internet
bandwidth and server costs, platform provider fee, and payment provider fees.

“Software royalties, amortization, and intellectual property licenses”—includes the amortization of capitalized
software costs and royalties attributable to subscription, licensing and other revenues. These are costs 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.

Advertising Expenses

We expense advertising as incurred, except for production costs associated with media advertising, which are deferred and charged to
expense when the related advertisement is run for the first time. Advertising expenses for the years ended December 31, 2017, 2016,
and 2015 were $708 million, $641 million, and $523 million, respectively, and are included in “Sales and marketing” in the
consolidated statements of operations.

Income Taxes

We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with ASC Topic
740, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are
recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in
income in the period that includes the enactment date. We evaluate deferred tax assets each period for recoverability. For those assets
that do not meet the threshold of “more likely than not” that they will be realized in the future, a valuation allowance is recorded.

We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.
We recognize interest and penalties, if any, related to unrecognized tax benefits in “Income tax expense.”

On December 22, 2017, tax reform legislation known as the Tax Cuts and Jobs Act (the “U.S. Tax Reform Act”) was enacted in the
United States. The U.S. Tax Reform Act, among other things, reduced the U.S. corporate income tax rate from 35% to 21% beginning
in 2018 and implemented a modified territorial tax system that imposes a one-time tax on deemed repatriated earnings of foreign
subsidiaries (“Transition Tax”).

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the effects of the U.S. Tax Reform Act based on a reasonable estimate, subject to adjustment during a measurement period of up to
one year, until accounting is complete.

We continue to analyze the prospective effects of the U.S. Tax Reform Act, including new provisions impacting certain foreign
income, such as global intangible low-taxed income (“GILTI”) of foreign subsidiaries, base erosion anti-abuse tax (“BEAT”), and
foreign-derived intangible income (“FDII”), potential limitations on interest expense deductions, and changes to the provisions of
Section 162(m) of the Internal Revenue Code, among other provisions of the U.S. Tax Reform Act. The Company has elected to
account for the U.S. Tax Reform Act provisions related to GILTI as period costs if and when incurred pursuant to the FASB Staff
Q&A guidance issued in January 2018.

In March 2016, the FASB issued new guidance to simplify accounting for share-based payments. The new standard, amongst other
things:

•

requires that all excess tax benefits and tax deficiencies be recorded as an income tax expense or benefit in the
consolidated statement of operations and that the tax effects of exercised or vested awards be treated as discrete items in
the reporting period in which they occur;

requires excess tax benefits from share-based payments to be reported as operating activities on the statement of cash
flows; and

permits an accounting policy election to either estimate the number of awards that are expected to vest using an
estimated forfeiture rate, as currently required, or account for forfeitures when they occur.

We elected to early adopt this new standard in the third quarter of 2016, which required us to reflect any adjustments as of January 1,
2016. As part of the adoption, we made certain elections, including the following:

•

to apply the presentation requirements for our consolidated statement of cash flows related to excess tax benefits
retrospectively to all periods presented; and

•

to continue to estimate the number of awards that are expected to vest using an estimated forfeiture rate.

As a result of the adoption, we recognized excess tax benefits of $113 million and $81 million as a reduction to income tax expense in
our consolidated statement of operations for the years ended December 31, 2017 and 2016, respectively. For periods prior to 2016,
such excess tax benefits were recorded to shareholders equity.

Foreign Currency Translation

All assets and liabilities of our foreign subsidiaries who have a functional currency other than U.S. dollars are translated into U.S.
dollars at the exchange rate in effect at the balance sheet date, and revenue and expenses are translated at average exchange rates
during the period. The resulting translation adjustments are reflected as a component of “Accumulated other comprehensive loss” in
shareholders’ equity.

Earnings (Loss) Per Common Share

“Basic (loss) earnings per common share” is computed by dividing income (loss) available to common shareholders by the
weighted-average number of common shares outstanding for the periods presented. “Diluted earnings (loss) per common share” is
computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares
outstanding, increased by the weighted-average number of common stock equivalents. Common stock equivalents are calculated using
the treasury stock method and represent incremental shares issuable upon exercise of our outstanding options. However, potential
common shares are not included in the denominator of the diluted earnings (loss) per common share calculation when inclusion of
such shares would be anti-dilutive, such as in a period in which a net loss is recorded.

When we determine whether instruments granted in share-based payment transactions are participating securities, unvested
share-based awards which include the right to receive non-forfeitable dividends or dividend equivalents are considered to participate
with common stock in undistributed earnings. With participating securities, we are required to calculate basic and diluted earnings
(loss) per common share amounts under the two-class method. The two-class method excludes from the earnings (loss) per common
share calculation any dividends paid or owed to participating securities and any undistributed earnings considered to be attributable to
participating securities.

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Share-Based Payments

We account for share-based payments in accordance with ASC Subtopic 718-10 and ASC Subtopic 505-50. Share-based
compensation expense for a given grant is recognized over the requisite service period (that is, the period for which the employee is
being compensated) and is based on the value of share-based payment awards after a reduction for estimated forfeitures. Forfeitures
are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

We generally estimate the value of stock options using a binomial-lattice model. This estimate is affected by our stock price, as well as
assumptions regarding a number of highly complex and subjective variables, including our expected stock price volatility over the
term of the awards, and actual and projected employee stock option exercise behaviors.

We generally determine the fair value of restricted stock units based on the closing market price of the Company’s common stock on
the date of grant, reduced by the present value of the estimated future dividends during the vesting period in which the restricted stock
units holder will not participate. Certain restricted stock units granted to our employees and senior management vest based on the
achievement of pre-established performance or market conditions. For performance-based restricted stock units, each quarter we
update our assessment of the probability that the specified performance criteria will be achieved. We amortize the fair values of
performance-based restricted stock units over the requisite service period, adjusting for estimated forfeitures for each separately
vesting tranche of the award. For market-based restricted stock units, we estimate the fair value at the date of grant using a Monte
Carlo valuation methodology and amortize those fair values over the requisite service period, adjusting for estimated forfeitures for
each separately vesting tranche of the award. The Monte Carlo methodology that we use to estimate the fair value of market-based
restricted stock units at the date of grant incorporates into the valuation the possibility that the market condition may not be satisfied.
Provided that the requisite service is rendered, the total fair value of the market-based restricted stock units at the date of grant must be
recognized as compensation expense even if the market condition is not achieved. However, the number of shares that ultimately vest
can vary significantly with the performance of the specified market criteria.

For share-based compensation grants that are liability classified, we update our grant date valuation at each reporting period and
recognize a cumulative catch-up adjustment for changes in the value related to the requisite service already rendered.

Loss Contingencies

ASC Topic 450 governs the disclosure of loss contingencies and accrual of loss contingencies in respect of litigation and other claims.
We record an accrual for a potential loss when it is probable that a loss will occur and the amount of the loss can be reasonably
estimated. When the reasonable estimate of the potential loss is within a range of amounts, the minimum of the range of potential loss
is accrued, unless a higher amount within the range is a better estimate than any other amount within the range. Moreover, even if an
accrual is not required, we provide additional disclosure related to litigation and other claims when it is reasonably possible (i.e., more
than remote) that the outcomes of such litigation and other claims include potential material adverse impacts on us.

3. Cash and Cash Equivalents

The following table summarizes the components of our cash and cash equivalents (amounts in millions):

Cash ...........................................................................................................
Foreign government treasury bills .............................................................
Money market funds ..................................................................................
Cash and cash equivalents .........................................................................

At December 31,
2016
2017
$286
$269
38
39
2,921
4,405
$3,245
$4,713

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4. Inventories, Net

Our inventories, net consist of the following (amounts in millions):

Finished goods ...................................................................................................
Purchased parts and components .......................................................................
Inventories, net ..................................................................................................

At
December 31,
2016
2017
$40
$45
9
1
$49
$46

At December 31, 2017 and 2016, inventory reserves were $36 million and $45 million, respectively.

5. Software Development and Intellectual Property Licenses

The following table summarizes the components of our capitalized software development costs (amounts in millions):

Internally-developed software costs ..................................................................
Payments made to third-party software developers ...........................................
Total software development costs......................................................................

At
December 31,
2017
2016
$270 $277
189
$453 $466

183

As of December 31, 2017 and December 31, 2016, capitalized intellectual property licenses were not material.

Amortization of capitalized software development costs and intellectual property was the following (amounts in millions):

For the Years Ended
December 31,
2016

2017

2015

Amortization of capitalized software development costs and intellectual
property licenses ................................................................................

$314 $335 $410

Write-offs and impairments of capitalized software development costs and intellectual property licenses were not material for the
years ended December 31, 2017, 2016, and 2015.

6. Property and Equipment, Net

Property and equipment, net was comprised of the following (amounts in millions):

Land ...........................................................................................................
Buildings ....................................................................................................
Leasehold improvements ...........................................................................
Computer equipment .................................................................................
Office furniture and other equipment ........................................................
Total cost of property and equipment ....................................................
Less accumulated depreciation ..................................................................
Property and equipment, net ..................................................................

At December 31,
2016
2017

$1
4
224
658
92
979
(685)
$294

$1
4
162
560
78
805
(547)
$258

Depreciation expense for the years ended December 31, 2017, 2016, and 2015 was $130 million, $121 million, and $82 million,
respectively.

Rental expense was $71 million, $65 million and $39 million for the years ended December 31, 2017, 2016, and 2015, respectively.

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7. Intangible Assets, Net

Intangible assets, net consist of the following (amounts in millions):

At December 31, 2017

Estimated
useful
lives

Gross
carrying
amount

Accumulated
amortization

Net
carrying
amount

Acquired definite-lived intangible assets:

Internally-developed franchises .......................................................
Developed software .........................................................................
Customer base .................................................................................
Trade names ....................................................................................
Other ................................................................................................
Total definite-lived intangible assets ...................................................

Acquired indefinite-lived intangible assets:

Activision trademark .......................................................................
Acquired trade names ......................................................................
Total indefinite-lived intangible assets ................................................
Total intangible assets, net ..................................................................

3 - 11 years
2 - 5 years
2 years
7 - 10 years
1 - 15 years

Indefinite
Indefinite

$1,154
601
617
54
19
$2,445

$(869)
(301)
(573)
(16)
(13)
$(1,772)

$285
300
44
38
6
$673

386
47
$433
$1,106

At December 31, 2016

Estimated
useful
lives

Gross
carrying
amount

Accumulated
amortization

Net
carrying
amount

Acquired definite-lived intangible assets:

Acquired indefinite-lived intangible assets:

3 - 11 years
2 - 5 years
2 years
7 - 10 years
1 - 8 years

Indefinite
Indefinite

$1,154
595
617
54
18
$2,438

$(583)
(145)
(266)
(8)
(11)
$(1,013)

$571
450
351
46
7
$1,425

386
47
$433
$1,858

Amortization expense of intangible assets was $759 million, $708 million, and $13 million for the years ended December 31, 2017,
2016, and 2015, respectively.

At December 31, 2017, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):

2018 ..............................................................................................................................
2019 ..............................................................................................................................
2020 ..............................................................................................................................
2021 ..............................................................................................................................
2022 ..............................................................................................................................
Thereafter .....................................................................................................................
Total ..............................................................................................................................

$369
209
72
12
7
4
$673

We did not record any impairment charges against our intangible assets for the years ended December 31, 2017, 2016, and 2015.

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8. Goodwill

The changes in the carrying amount of goodwill by operating segment are as follows (amounts in millions):

Balance at December 31, 2015 ....................................................................
Additions through acquisition .................................................................
Other ........................................................................................................
Balance at December 31, 2016 ....................................................................

Other ........................................................................................................
Balance at December 31, 2017 ....................................................................

Activision

Blizzard(1)

$6,905
—
(2)
$6,903

(5)
$6,898

$190
—
—
$190

—
$190

King

$—
2,675
—
$2,675

—
$2,675

Total
$7,095
2,675
(2)
$9,768

(5)
$9,763

(1)

As a result of the change in our operating segments discussed in Note 1, goodwill of $12 million previously reported within
the “Other segments” is now included in the “Blizzard” reportable segment. The prior period balance has been revised to
reflect this change.

For 2016, the addition to goodwill through acquisition is attributed to the King Acquisition (see Note 20). At December 31, 2017,
2016, and 2015, there were no accumulated impairment losses.

9. Other Assets and Liabilities

Included in “Accrued expenses and other liabilities” of our consolidated balance sheets are accrued payroll-related costs of
$441 million and $393 million at December 31, 2017 and 2016, respectively.

Included in “Other liabilities” of our consolidated balance sheets are income tax payable of $473 million and $49 million at
December 31, 2017 and 2016, respectively.

10. Fair Value Measurements

FASB literature regarding fair value measurements for certain assets and liabilities establishes a three-level fair value hierarchy that
prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and
minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:

• Level 1—Quoted prices in active markets for identical assets or liabilities;

• Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or
liabilities in active markets or other inputs that are observable or can be corroborated by observable market data; and

• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques
that use significant unobservable inputs.

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Fair Value Measurements on a Recurring Basis

The table below segregates all of our financial assets and liabilities that are measured at fair value on a recurring basis into the most
appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date,
generally including money market funds, treasury bills, available-for-sale and derivative financial instruments, and other investments
(amounts in millions):

Fair Value Measurements at
December 31, 2017 Using

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

As of
December 31,
2017

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance Sheet
Classification

Financial Assets:
Recurring fair value measurements:
Money market funds ............................
Foreign government treasury bills .......
U.S. treasuries and government agency
securities ..........................................
Total recurring fair value measurements

Financial Liabilities:
Foreign currency forward contracts

$4,405
39

55
$4,499

$4,405
39

55
$4,499

$—
—

—
$—

designated as hedges ........................

$(5)

$—

$(5)

$— Cash and cash equivalents
— Cash and cash equivalents

— Other current assets
$—

Accrued expenses and other
liabilities

$—

Fair Value Measurements at
December 31, 2016 Using

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

As of
December 31,
2016

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance Sheet
Classification

$2,921
38

22
9
$2,990

$2,921
38

—
—
$2,959

$—
—

22
—
$22

$— Cash and cash equivalents
— Cash and cash equivalents

— Other current assets
9 Other assets
$9

Financial Assets:
Recurring fair value measurements:
Money market funds ...........................
Foreign government treasury bills ......
Foreign currency forward contracts

designated as hedges .......................
Auction rate securities ........................
Total recurring fair value measurements

Foreign Currency Forward Contracts

Foreign Currency Forward Contracts Designated as Hedges (“Cash Flow Hedges”)

At December 31, 2017, the gross notional amount of outstanding Cash Flow Hedges was approximately $521 million. The fair value
of these contracts, all of which have remaining maturities of 12 months or less, was $5 million of net unrealized losses. Additionally,
at December 31, 2017, we had approximately $10 million of net realized but unrecognized losses recorded within “Accumulated other
comprehensive income (loss)” associated with contracts that had settled but were deferred and will be amortized into earnings, along
with the associated hedged revenues. Such amounts will be reclassified into earnings within the next 12 months.

At December 31, 2016, the gross notional amount of outstanding Cash Flow Hedges was approximately $346 million. The fair value
of these contracts was $22 million of net unrealized gains.

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During the years ended December 31, 2017 and 2016, there was no ineffectiveness relating to our Cash Flow Hedges. During the
years ended December 31, 2017 and 2016, the amount of pre-tax net realized gains associated with these contracts that were
reclassified out of “Accumulated other comprehensive income (loss)” and into earnings was not material.

Fair Value Measurements on a Non-Recurring Basis

We measure the fair value of certain assets on a non-recurring basis, generally annually or when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.

For the years ended December 31, 2017, 2016, and 2015, there were no impairment charges related to assets that are measured on a
non-recurring basis.

11. Debt

Credit Facilities

At December 31, 2016, we had outstanding term loans “A” of approximately $2.7 billion (the “2016 TLA”) and $250 million
available under a revolving credit facility (the “Revolver”) pursuant to a credit agreement executed on October 11, 2013 (as amended
thereafter and from time to time, the “Credit Agreement”).

On February 3, 2017, we entered into a sixth amendment (the “Sixth Amendment”) to the Credit Agreement. The Sixth Amendment:
(1) provided for a new tranche of term loans “A” in an aggregate principal amount of $2.55 billion (the “2017 TLA” and, together
with the Revolver, the “Credit Facilities”) and (2) released each of our subsidiary guarantors from their respective guarantees provided
under the Credit Agreement. All proceeds of the 2017 TLA, together with additional cash on hand of $139 million, were used to fully
retire the 2016 TLA, including all accrued and unpaid interest thereon. The terms of the 2017 TLA, other than the absence of the
subsidiary guarantees, are generally the same as the terms of the 2016 TLA. The 2017 TLA will mature on August 23, 2021.

Borrowings under the 2017 TLA and the Revolver will bear interest, at the Company’s option, at either (1) a base rate equal to the
highest of (i) the federal funds rate, plus 0.5%, (ii) the prime commercial lending rate of Bank of America, N.A. and (iii) the London
Interbank Offered Rate (“LIBOR”) for an interest period of one month beginning on such day plus 1.00%, or (2) LIBOR, in each case,
plus an applicable interest margin. LIBOR will be subject to a floor of 0% and the base rate will be subject to an effective floor of
1.00%. The applicable interest margin for borrowings under the 2017 TLA and Revolver will range from 1.125% to 2.00% for LIBOR
borrowings and from 0.125% to 1.00% for base rate borrowings and will be determined by reference to a pricing grid based on the
Company’s credit ratings. At December 31, 2017, the 2017 TLA bore interest at 2.73%.

Borrowings under the Revolver may be borrowed, repaid, and re-borrowed by the Company, and are available for working capital and
other general corporate purposes. Up to $50 million of the Revolver may be used for letters of credit. To date, we have not drawn on
the Revolver.

During the year ended December 31, 2017, we reduced our total outstanding term loan balances by $1.7 billion. This included
$139 million of cash used to retire the 2016 TLA, as discussed above, along with prepayments on the 2017 TLA of $361 million made
on February 15, 2017, and $1.2 billion made on May 26, 2017. The May prepayment was made using proceeds from a concurrent
issuance of $1.2 billion in notes, as discussed further below. As part of that refinancing, we wrote-off unamortized discount and
deferred financing costs of $12 million, which is included in “Loss on extinguishment of debt” in the consolidated statement of
operations. The prepayments made on our 2017 TLA have satisfied the remaining required quarterly principal repayments for the
entire term of the Credit Agreement. As a result of these prepayments, at December 31, 2017, the outstanding balance of our 2017
TLA was $990 million.

The Company is subject to a financial covenant requiring the Company’s Consolidated Total Net Debt Ratio (as defined in the Credit
Agreement) not to exceed 3.50:1.00. The Credit Agreement contains other covenants that are customary for issuers with similar credit
ratings. A violation of any of these covenants could result in an event of default under the Credit Agreement. Upon the occurrence of
an event of default, payment of any outstanding amounts under the Credit Agreement may be accelerated, and the lenders’
commitments to extend credit under the Credit Agreement may be terminated. In addition, an event of default under the Credit
Agreement could, under certain circumstances, permit the holders of other outstanding unsecured debt, including the debt holders
described below, to accelerate the repayment of such obligations. The Company was in compliance with the terms of the Credit
Facilities as of December 31, 2017.

On February 1, 2018, our Board of Directors authorized repayments of up to $1.8 billion of the company’s outstanding debt during
2018. As of the date hereof, we have not made any additional repayments on our outstanding debt and the determination as to if and
when we make any such repayment will be dependent on market conditions and other factors.

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Unsecured Senior Notes

At December 31, 2016, we had the following unsecured senior notes outstanding:

•

$750 million of 6.125% unsecured senior notes due September 2023 that we issued on September 19, 2013 (the “2023
Notes”), in a private offering made in accordance with Rule 144A under the Securities Act of 1933, as amended (the
“Securities Act”); and

$650 million of 2.3% unsecured senior notes due September 2021 (the “Unregistered 2021 Notes”) and $850 million of
3.4% unsecured senior notes due September 2026 (the “Unregistered 2026 Notes”) that we issued on September 19,
2016, in a private offering made in accordance with Rule 144A and Regulation S under the Securities Act.

In connection with the issuance of the Unregistered 2021 Notes and the Unregistered 2026 Notes, we entered into a registration rights
agreement (the “Registration Rights Agreement”), among the Company, and the representatives of the initial purchasers of the
Unregistered 2021 Notes and the Unregistered 2026 Notes. Under the Registration Rights Agreement, we were required to use
commercially reasonable efforts to, within one year of the issue date of the Unregistered 2021 Notes and the Unregistered 2026 Notes,
among other things, (1) file a registration statement with respect to an offer to exchange each series of the Unregistered 2021 Notes
and the Unregistered 2026 Notes for new notes that were substantially identical in all material respects (except for the provisions
relating to the transfer restrictions and payment of additional interest) (the “Exchange Offer”), and (2) cause that registration statement
(the “Exchange Offer Registration Statement”) to be declared effective by the SEC under the Securities Act. The Exchange Offer
Registration Statement was declared effective by the SEC on April 28, 2017, and we completed the Exchange Offer on June 1, 2017,
such that all the Unregistered 2021 Notes and Unregistered 2026 Notes were exchanged for registered 2021 notes (the “2021 Notes”)
and registered 2026 notes (the “2026 Notes”), respectively.

In addition, on May 26, 2017, in a public underwritten offering, we issued $400 million of 2.6% unsecured senior notes due June 2022
(the “2022 Notes”), $400 million of 3.4% unsecured senior notes due June 2027 (the “2027 Notes”), and $400 million of 4.5%
unsecured senior notes due June 2047 (the “2047 Notes”, and together with the 2021 Notes, the 2022 Notes, the 2023 Notes, the 2026
Notes, and the 2027 Notes, the “Notes”), which were outstanding at December 31, 2017.

We may redeem the 2023 Notes on or after September 15, 2018, in whole or in part on any one or more occasions, at specified
redemption prices, plus accrued and unpaid interest. In addition, we may redeem some or all of the 2023 Notes prior to September 15,
2018, at a price equal to 100% of the aggregate principal amount thereof plus a “make-whole premium” and accrued and unpaid
interest. Further, upon the occurrence of one or more qualified equity offerings, we may also redeem up to 35% of the aggregate
principal amount of the 2023 Notes outstanding with the net cash proceeds from such offerings.

We may redeem some or all of the 2021 Notes, the 2022 Notes, the 2026 Notes, the 2027 Notes, and the 2047 Notes prior to
August 15, 2021, May 15, 2022, June 15, 2026, March 15, 2027, and December 15, 2046, respectively, and in each case at a price
equal to 100% of the aggregate principal amount thereof plus a “make-whole” premium and accrued and unpaid interest. Any
redemption of all or a portion of the applicable class of note after the applicable date would be at 100% of aggregate principal amount
plus accrued and unpaid interest.

Upon the occurrence of certain change of control events, we will be required to offer to repurchase the Notes at a purchase price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest. These repurchase requirements are considered clearly and
closely related to the Notes and are not accounted for separately upon issuance.

The Notes are general senior obligations of the Company and rank pari passu in right of payment to all of the Company’s existing and
future senior indebtedness, including the Credit Facilities described above. The Notes are not secured and are effectively subordinated
to any of the Company’s existing or future indebtedness that is secured.

The 2023 Notes contain customary covenants that place restrictions in certain circumstances on, among other things, the incurrence of
debt, granting of liens, payment of dividends, sales of assets, and certain merger and consolidation transactions. The Notes, with the
exception of the 2023 Notes, contain customary covenants that place restrictions in certain circumstances on, among other things, the
incurrence of secured debt, entry into sale or leaseback transactions, and certain merger or consolidation transactions. The Company
was in compliance with the terms of the Notes as of December 31, 2017.

Interest is payable semi-annually in arrears on March 15 and September 15 of each year for the 2021 Notes, the 2023 Notes, and 2026
Notes, and payable semi-annually in arrears on June 15 and December 15 of each year for the 2022 Notes, the 2027 Notes, and 2047
Notes. Accrued interest payable is recorded within “Accrued expenses and other liabilities” in our consolidated balance sheets. As of
December 31, 2017 and December 31, 2016, we had accrued interest payable of $28 million and $25 million, respectively, related to
the Notes.

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Interest expense and financing costs

Fees and discounts associated with the issuance of our debt instruments are recorded as debt discount, which reduces their respective
carrying values, and is amortized over their respective terms. Amortization expense is recorded within “Interest and other expense
(income), net” in our condensed consolidated statement of operations.

In connection with the May 2017 note issuances, we incurred approximately $20 million of discounts and financing costs that were
capitalized and recorded within “Long-term debt, net” in our consolidated balance sheet.

For the years ended December 31, 2017, 2016, and 2015: interest expense was $150 million, $197 million, and $193 million,
respectively; amortization of the debt discount and deferred financing costs was $12 million, $20 million, and $7 million, respectively;
and commitment fees for the Revolver were not material.

A summary of our outstanding debt is as follows (amounts in millions):

2017 TLA ................................................
2021 Notes ...............................................
2022 Notes ...............................................
2023 Notes ...............................................
2026 Notes ...............................................
2027 Notes ...............................................
2047 Notes ...............................................
Total long-term debt ................................

2016 TLA ...............................................
2021 Notes ..............................................
2023 Notes ..............................................
2026 Notes ..............................................
Total long-term debt ...............................

At December 31, 2017
Unamortized
Discount and
Deferred
Financing Costs

Gross Carrying
Amount

Net Carrying
Amount

$990
650
400
750
850
400
400
$4,440

$(8)
(4)
(4)
(9)
(9)
(6)
(10)
$(50)

$982
646
396
741
841
394
390
$4,390

At December 31, 2016
Unamortized
Discount and
Deferred
Financing Costs

Gross Carrying
Amount

$2,690
650
750
850
$4,940

$(27)
(5)
(11)
(10)
$(53)

Net Carrying
Amount

$2,663
645
739
840
$4,887

As of December 31, 2017 the scheduled maturities and contractual principal repayments of our debt for each of the five succeeding
years are as follows (amounts in millions):

For the year ending December 31,

2018 .......................................................................................................................
2019 .......................................................................................................................
2020 .......................................................................................................................
2021 .......................................................................................................................
2022 .......................................................................................................................
Thereafter...............................................................................................................
Total ...................................................................................................................

$—
—
—
1,640
400
2,400
$4,440

With the exception of the 2023 Notes and the 2047 Notes, using Level 2 inputs (i.e., observable market prices in less-than-active
markets), the carrying values of our debt instruments approximated their fair values as of December 31, 2017, as the interest rates are
similar to current rates at which we can borrow funds over the selected interest periods. At December 31, 2017, based on Level 2
inputs, the fair values of the 2023 Notes and the 2047 Notes were $795 million and $421 million, respectively.

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At December 31, 2016, the carrying value of the 2016 TLA approximated its fair value, based on Level 2 inputs. At December 31,
2016, based on Level 2 inputs, the fair values of the 2021 Notes, 2023 Notes, and 2026 Notes were $635 million, $818 million, and
$808 million, respectively.

12. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows (amounts in millions):

For the Year Ended December 31, 2017

Foreign currency
translation
adjustments

Unrealized gain
(loss)
on available-for-
sale securities

Balance at December 31, 2016 ..............................................

Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income (loss) into earnings ............................................
Balance at December 31, 2017 ..............................................

$(659)
20

16
$(623)

$1
(1)

—
$—

Unrealized gain
(loss)
on forward
contracts

Total
$29 $(629)
(26)
(45)

17
$(15) $(638)

For the Year Ended December 31, 2016

Foreign currency
translation
adjustments

Unrealized gain
(loss)
on available-for-
sale securities

Balance at December 31, 2015 .............................................

Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income (loss) into earnings ...........................................
Balance at December 31, 2016 .............................................

$(630)
(29)

—
$(659)

$1
—

—
$1

Unrealized gain
(loss)
on forward
contracts

Total
$(4) $(633)
8

(4)
(4)
$29 $(629)

Income taxes were not provided for foreign currency translation items, as these are considered indefinite investments in non-U.S.
subsidiaries. Due to the U.S. Tax Reform Act, we are re-evaluating our indefinite reinvestment assertions, but we have not yet
completed this evaluation. In accordance with SAB 118, we intend to complete this evaluation during the measurement period of up to
one year and will record adjustments, if any, during those respective periods.

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13. Operating Segments and Geographic Region

Currently, we have three reportable segments. Our operating segments are consistent with the manner in which our operations are
reviewed and managed by our Chief Executive Officer, who is our chief operating decision maker (“CODM”). The CODM reviews
segment performance exclusive of: the impact of the change in deferred revenues and related cost of revenues with respect to certain
of our online-enabled games; share-based compensation expense; amortization of intangible assets as a result of purchase price
accounting; fees and other expenses (including legal fees, expenses, and accruals) related to acquisitions, associated integration
activities, and financings; certain restructuring costs; and certain other non-cash charges. The CODM does not review any information
regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto.

Our operating segments are also consistent with our internal organization structure, the way we assess operating performance and
allocate resources, and the availability of separate financial information. We do not aggregate operating segments. As discussed in
Note 1, commencing with the second quarter of 2017, we made changes to our operating segments which reflect the changes in our
organization and reporting structure. Our MLG business, which was previously included in the non-reportable “Other segments,” is
now presented within the “Blizzard” reportable segment. Prior period amounts have been revised to reflect this change. The change
had no impact on consolidated net revenues or operating income.

Information on the reportable segments net revenues and segment operating income are presented below (amounts in millions):

Year Ended December 31, 2017

Activision

Blizzard

King

Total

Segment Revenues
Net revenues from external customers ....................
Intersegment net revenues(1) ..................................
Segment net revenues .............................................

Segment operating income ...................................

$2,628
—
$2,628

$1,005

$2,120 $1,998 $6,746
19
$2,139 $1,998 $6,765

—

$712

$700 $2,417

Year Ended December 31, 2016

Activision

Blizzard

King

Total

$2,220
—
$2,220

$2,439 $1,586 $6,245
—
$2,439 $1,586 $6,245

—

Segment operating income ...................................

$788

$995

$537 $2,320

Year Ended December 31, 2015

Activision

Blizzard

King

Total

Segment Revenues
Net revenues from external customers ...............
Intersegment net revenues(1) .............................
Segment net revenues ........................................

$2,700
—
$2,700

$1,565
—
$1,565

Segment operating income ..............................

$868

$561

$— $4,265
—
$— $4,265

—

$— $1,429

(1)

Intersegment revenues reflect licensing and service fees charged between segments.

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Years Ended December 31,
2016

2015

2017

Reconciliation to consolidated net revenues:
Segment net revenues ................................................................................................................
Revenues from other segments(1) .............................................................................................
Net effect from recognition (deferral) of deferred net revenues ................................................
Elimination of intersegment revenues(2)...................................................................................
Consolidated net revenues .........................................................................................................

Reconciliation to consolidated income before income tax expense:
Segment operating income ........................................................................................................
Operating (loss) income from other segments(1) ......................................................................
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues ...
Share-based compensation expense ...........................................................................................
Amortization of intangible assets ..............................................................................................
Fees and other expenses related to the King Acquisition(3) ......................................................
Restructuring costs(4) ................................................................................................................
Other non-cash charges(5) .........................................................................................................
Discrete tax-related items(6) .....................................................................................................
Consolidated operating income .................................................................................................
Interest and other expense (income), net ...................................................................................
Loss on extinguishment of debt .................................................................................................
Consolidated income before income tax expense ......................................................................

$6,765
410
(139)
(19)
$7,017

$2,417
(19)
(71)
(178)
(757)
(15)
(15)
(14)
(39)
1,309
146
12
$1,151

$6,245
354
9
—
$6,608

$2,320
14
(10)
(159)
(706)
(47)
—
—
—
1,412
214
92
$1,106

$4,265
356
43
—
$4,664

$1,429
37
(39)
(92)
(11)
(5)
—
—
—
1,319
198
—
$1,121

(1)

(2)

(3)

(4)

(5)

Includes other income and expenses from operating segments managed outside the reportable segments, including our
Studios and Distribution businesses. Also includes unallocated corporate income and expenses.

Intersegment revenues reflect licensing and service fees charged between segments.

Reflects fees and other expenses, such as legal, banking, and professional services fees, related to the King Acquisition and
associated integration activities, inclusive of related debt financings.

Reflects restructuring charges, primarily severance costs.

Reflects a non-cash accounting charge to reclassify certain cumulative translation gains (losses) into earnings due to the
substantial liquidation of certain of our foreign entities.

(6)

Reflects the impact of other unusual or unique tax-related items and activities.

Net revenues by distribution channels were as follows (amounts in millions):

Net revenues by distribution channel:

Digital online channels(1) .......................................................
Retail channels ........................................................................
Other(2) ..................................................................................
Total consolidated net revenues ..................................................

$5,479
1,033
505
$7,017

$4,865
1,386
357
$6,608

$2,502
1,806
356
$4,664

Years Ended December 31,
2015
2016
2017

(1)

(2)

Include revenues from digitally-distributed subscriptions, licensing royalties, value-added services,
downloadable content, microtransactions, and products.

Include revenues from our Studios and Distribution businesses, as well as revenues from MLG and the
Overwatch League.

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Geographic information presented below is based on the location of the paying customer. Net revenues by geographic region were as
follows (amounts in millions):

Net revenues by geographic region:

Americas .................................................................................
EMEA(1) ................................................................................
Asia Pacific .............................................................................
Total consolidated net revenues ..................................................

$3,607
2,464
946
$7,017

$3,423
2,221
964
$6,608

$2,409
1,741
514
$4,664

Years Ended December 31,
2015
2016
2017

(1)

Consists of the Europe, Middle East, and Africa geographic regions.

The Company’s net revenues in the U.S. were 45%, 45%, and 48% of consolidated net revenues for the years ended December 31,
2017, 2016, and 2015, respectively. The Company’s net revenues in the United Kingdom (“U.K.”) were 12%, 11%, and 14% of
consolidated net revenues for the years ended December 31, 2017, 2016, and 2015, respectively. No other country’s net revenues
exceeded 10% of consolidated net revenues for the years ended December 31, 2017, 2016, or 2015.

Net revenues by platform were as follows (amounts in millions):

Years Ended December 31,
2015
2016
2017

Net revenues by platform:

Console ...................................................................................
PC ...........................................................................................
Mobile and ancillary(1) ..........................................................
Other(2) ..................................................................................
Total consolidated net revenues ..................................................

$2,389
2,042
2,081
505
$7,017

$2,453
2,124
1,674
357
$6,608

$2,391
1,499
418
356
$4,664

(1)

(2)

Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform
specific game-related revenues, such as standalone sales of toys and accessories from our Skylanders®
franchise and other physical merchandise and accessories.

Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as
revenues from MLG and the Overwatch League.

Long-lived assets by geographic region were as follows (amounts in millions):

At December 31,
2016

2017

2015

Long-lived assets* by geographic region:

Americas ............................................................................................
EMEA ................................................................................................
Asia Pacific ........................................................................................
Total long-lived assets by geographic region ........................................

$197 $154 $138
42
9
$294 $258 $189

75
22

87
17

The only long-lived assets that we classify by region are our long-term tangible fixed assets, which consist of
property, plant, and equipment assets; all other long-term assets are not allocated by location.

For information regarding significant customers, see “Concentration of Credit Risk” in Note 2.

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14. Share-Based Payments

Activision Blizzard Equity Incentive Plans

On June 5, 2014, the Activision Blizzard, Inc. 2014 Incentive Plan (the “2014 Plan”) became effective. Under the 2014 Plan, the
Compensation Committee of our Board of Directors is authorized to provide share-based compensation in the form of stock options,
share appreciation rights, restricted stock, restricted stock units, performance shares, and other performance- or value-based awards
structured by the Compensation Committee within parameters set forth in the 2014 Plan. Upon the effective date of the 2014 Plan, we
ceased making awards under our prior equity incentive plans (collectively, the “Prior Plans”), although such plans will remain in
effect and continue to govern outstanding awards.

While the Compensation Committee has broad discretion to create equity incentives, our share-based compensation program currently
utilizes a combination of options and restricted stock units. The majority of our options have time-based vesting schedules, generally
vesting annually over a period of three to five years, and expire ten years from the grant date. In addition, under the terms of the 2014
Plan, the exercise price for the options must be equal to or greater than the closing price per share of our common stock on the date the
award is granted, as reported on Nasdaq. Restricted stock units have time-based vesting schedules, generally vesting in their entirety
on an anniversary of the date of grant, or vest annually over a period of three to five years, and may also be contingent on the
achievement of specified performance measures.

As of the date it was approved by our shareholders, there were 46 million shares available for issuance under the 2014 Plan. The
number of shares of our common stock reserved for issuance under the 2014 Plan has been, and may be further, increased from time to
time by: (1) the number of shares relating to awards outstanding under any Prior Plan that: (i) expire, or are forfeited, terminated or
canceled, without the issuance of shares; (ii) are settled in cash in lieu of shares; or (iii) are exchanged, prior to the issuance of shares
of our common stock, for awards not involving our common stock; (2) if the exercise price of any option outstanding under any Prior
Plans is, or the tax withholding requirements with respect to any award outstanding under any Prior Plans are, satisfied by withholding
shares otherwise then deliverable in respect of the award or the actual or constructive transfer to the Company of shares already
owned, the number of shares equal to the withheld or transferred shares; and (3) if a share appreciation right is exercised and settled in
shares, a number of shares equal to the difference between the total number of shares with respect to which the award is exercised and
the number of shares actually issued or transferred. As of December 31, 2017, we had approximately 30 million shares of our common
stock reserved for future issuance under the 2014 Plan. Shares issued in connection with awards made under the 2014 Plan are
generally issued as new stock issuances.

Additionally, in connection with the King Acquisition, a majority of the outstanding options and awards with respect to King shares
that were unvested as of the King Closing Date were converted into equivalent options and awards with respect to shares of the
Company’s common stock (see Note 20 for further discussion). As part of the conversion, we assumed King’s equity incentive plan
(the “King Plan”) and amended the King Plan to convert it to a plan with respect to shares of the Company’s common stock for the
King shares assumed. No future shares can be granted from the King Plan, but it continues to govern outstanding awards.

Fair Value Valuation Assumptions

Valuation of Stock Options

The fair value of stock options granted are principally estimated using a binomial-lattice model. The inputs in our binomial-lattice
model include expected stock price volatility, risk-free interest rate, dividend yield, contractual term, and vesting schedule, as well as
measures of employees’ cancellations, exercise, and post-vesting termination behavior. Statistical methods are used to estimate
employee rank-specific termination rates.

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The following table presents the weighted-average assumptions, weighted average grant date fair value, and the range of expected
stock price volatilities:

Employee and Director
Options
For the Years Ended
December 31,
2016

2017

2015

Expected life (in years) ..................................................................................................................
Volatility ........................................................................................................................................
Risk free interest rate .....................................................................................................................
Dividend yield ...............................................................................................................................
Weighted-average grant date fair value .........................................................................................
Stock price volatility range:

7.01

6.86

6.26
35.00% 35.31% 36.13%
1.90%
1.56%
0.72%
0.67%
$9.87
$12.83

2.14%
0.50%
$21.11

Low ............................................................................................................................................
High ...........................................................................................................................................

28.19% 29.20% 26.96%
35.00% 36.00% 37.00%

Expected life

The expected life of employee stock options is a derived output of the binomial-lattice model and represents the weighted-average
period the stock options are expected to remain outstanding. A binomial-lattice model can be viewed as assuming that employees will
exercise their options when the stock price equals or exceeds an exercise multiple, of which the multiple is based on historical
employee exercise behaviors.

Volatility

To estimate volatility for the binomial-lattice model, we consider the implied volatility of exchange-traded options on our stock to
estimate short-term volatility, the historical volatility of our common shares during the option’s contractual term to estimate long-term
volatility, and a statistical model to estimate the transition from short-term volatility to long-term volatility.

Risk-free interest rate

As is the case for volatility, the risk-free interest rate is assumed to change during the option’s contractual term. The risk-free interest
rate, which is based on U.S. Treasury yield curves, reflects the expected movement in the interest rate from one time period to the next
(“forward rate”).

Dividend yield

The expected dividend yield assumption is based on our historical and expected future amount of dividend payouts.

Share-based compensation expense recognized is based on awards ultimately expected to vest and therefore has been reduced for
estimated forfeitures in the consolidated statement of operations for the years ended December 31, 2017, 2016, and 2015. Forfeitures
are estimated at the time of grant based on historical experience and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.

Valuation of Restricted Stock Units (“RSUs”)

The fair value of the Company’s RSU awards granted is principally based upon the closing price of the Company’s stock price on the
date of grant reduced by the present value of dividends expected to be paid on our common stock prior to vesting.

Accuracy of Fair Value Estimates

We developed the assumptions used in the models above, including model inputs and measures of employees’ exercise and
post-vesting termination behavior. Our ability to accurately estimate the fair value of share-based payment awards at the grant date
depends upon the accuracy of the model and our ability to accurately forecast model inputs as long as 10 years into the future. These
inputs include, but are not limited to, expected stock price volatility, risk-free rate, dividend yield, and employee termination rates.
Although the fair value of employee stock options is determined using an option-pricing model, the estimates that are produced by this
model may not be indicative of the fair value observed between a willing buyer and a willing seller. Unfortunately, it is difficult to

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determine if this is the case, as markets do not currently exist that permit the active trading of employee stock option and other
share-based instruments.

Stock Option Activity

Stock option activity is as follows:

Number of
Shares
(in thousands)

Weighted-
average
exercise price

Weighted-
average
remaining
contractual
term (in years)

Aggregate
intrinsic value
(in millions)

Outstanding stock options at December 31, 2016 ................
Granted .................................................................................
Exercised ..............................................................................
Forfeited ...............................................................................
Expired .................................................................................
Outstanding stock options at December 31, 2017 ................

Vested and expected to vest at December 31, 2017 .............
Exercisable at December 31, 2017 .......................................

31,485
2,579
(10,861)
(2,650)
(9)
20,544

16,077
6,747

$26.79
59.89
16.44
41.32
16.41
$34.54
$31.79
$21.36

7.07
7.26
5.79

$591
$507
$283

For options assumed in the King Acquisition, 0.4 million of the options are based on performance conditions which do not have an
accounting grant date as of December 31, 2017, as there is not a mutual understanding between the Company and the employee of the
performance terms.

The aggregate intrinsic values in the table above represents the total pretax intrinsic value (i.e. the difference between our closing
stock price on the last trading day of the period and the exercise price, times the number of shares for options where the closing stock
price is greater than the exercise price) that would have been received by the option holders had all option holders exercised their
options on that date. This amount changes based on the market value of our stock. The total intrinsic value of options actually
exercised was $372 million, $161 million, and $125 million for the years ended December 31, 2017, 2016, and 2015, respectively.
The total grant date fair value of options vested was $47 million, $40 million, and $19 million for the years ended December 31, 2017,
2016, and 2015, respectively.

At December 31, 2017, $80 million of total unrecognized compensation cost related to stock options is expected to be recognized over
a weighted-average period of 1.27 years.

RSU Activity

We grant RSUs, which represent the right to receive shares of our common stock. Vesting for RSUs is contingent upon the holders’
continued employment with us and may be subject to other conditions (which may include the satisfaction of a performance measure).
Also, certain of our performance-based RSUs include a range of shares that may be released at vesting which are above or below the
targeted number of RSUs based on actual performance relative to the grant date performance measure. If the vesting conditions are not
met, unvested RSUs will be forfeited. Upon vesting of the RSUs, we may withhold shares otherwise deliverable to satisfy tax
withholding requirements.

The following table summarizes our RSU activity with performance-based RSUs presented at the maximum potential shares that
could be earned and issued at vesting (amounts in thousands except per share amounts):

Number of
shares

Weighted-
Average Grant
Date Fair Value

Unvested RSUs at December 31, 2016..............................................................................
Granted ..............................................................................................................................
Vested ................................................................................................................................
Forfeited ............................................................................................................................
Unvested RSUs at December 31, 2017..............................................................................

11,977
3,298
(2,233)
(1,221)
11,821

$17.44
63.75
29.50
26.41
$27.20

Certain of our performance-based RSUs did not have an accounting grant date as of December 31, 2017, as there is not a mutual
understanding between the Company and the employee of the performance terms. Generally, these performance terms relate to

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operating income performance for future years where the performance goals have not yet been set. As of December 31, 2017, there
were 4.4 million performance-based RSUs outstanding for which the accounting grant date has not been set, of which 1.9 million were
2017 grants. Accordingly, no grant date fair value was established and the weighted average grant date fair value calculated above for
2017 grants excludes these RSUs.

At December 31, 2017, approximately $111 million of total unrecognized compensation cost was related to RSUs and is expected to
be recognized over a weighted-average period of 1.44 years. Of the total unrecognized compensation cost, $102 million was related to
performance-based RSUs, which is expected to be recognized over a weighted-average period of 1.54 years. The total grant date fair
value of vested RSUs was $64 million, $123 million and $93 million for the years ended December 31, 2017, 2016 and 2015,
respectively.

The income tax benefit from stock option exercises and RSU vestings was $160 million, $134 million, and $109 million for the years
ended December 31, 2017, 2016, and 2015, respectively.

Share-Based Compensation Expense

The following table sets forth the total share-based compensation expense included in our consolidated statements of operations
(amounts in millions):

For the Years Ended
December 31,
2016

2015

2017

Cost of revenues—product sales: Software royalties, amortization, and intellectual property licenses
Cost of revenues—subscription, licensing, and other revenues: Game Operations and Distribution

Costs ................................................................................................................................................
Cost of revenues—subscription, licensing, and other revenues: Software royalties, amortization, and
intellectual property licenses ............................................................................................................
Product development ...........................................................................................................................
Sales and marketing .............................................................................................................................
General and administrative ..................................................................................................................
Share-based compensation expense before income taxes ....................................................................
Income tax benefit ...............................................................................................................................
Total share-based compensation expense, net of income tax benefit ...................................................

$10

$20

$12

—

3
57
15
92
178
(34)
$144

2
47
15
73
159
(42)
$117

3
25
9
43
92
(27)
$65

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15. Income Taxes

Domestic and foreign income (loss) before income taxes and details of the income tax expense (benefit) are as follows (amounts in
millions):

For the Years Ended
December 31,
2016

2017

2015

Income before income tax expense:

Domestic ....................................................................................................................................
Foreign.......................................................................................................................................

Income tax expense (benefit):

Current:

Federal ...................................................................................................................................
State .......................................................................................................................................
Foreign...................................................................................................................................
Total current ..........................................................................................................................

Deferred:

Federal ...................................................................................................................................
State .......................................................................................................................................
Foreign...................................................................................................................................
Total deferred ........................................................................................................................
Income tax expense .......................................................................................................................

$185
966
$1,151

$228
878
$1,106

$355
766
$1,121

$696
26
335
1,057

(111)
(32)
(36)
(179)
$878

$(15)
16
150
151

40
(13)
(38)
(11)
$140

$169
31
40
240

1
(21)
9
(11)
$229

For the year ended December 31, 2017 and 2016, excess tax benefits attributable to share-based compensation transactions are
recognized to the extent that tax deduction on share-based compensation exceeds the corresponding compensation cost recorded on
the financial statement. For the years ended December 31, 2017 and 2016, we recognized $113 million and $81 million, respectively,
of excess tax benefits from share-based payments as a reduction to income tax expense due to our adoption of a new accounting
standard in 2016. For periods prior to 2016, such excess tax benefits were recorded to shareholders’ equity.

The items accounting for the difference between income taxes computed at the U.S. federal statutory income tax rate and the income
tax expense (benefit) at the effective tax rate for each of the years are as follows (amounts in millions):

Federal income tax provision at statutory rate ......................................
State taxes, net of federal benefit ..........................................................
Research and development credits........................................................
Foreign rate differential ........................................................................
Change in tax reserves ..........................................................................
Net operating loss tax attribute assumed from the Purchase Transaction
Excess tax benefits related to share-based payments ............................
U.S. Tax Reform Act ............................................................................
Other .....................................................................................................
Income tax expense ..............................................................................

For the Years Ended December 31,
2016

2015

2017

$403
4
(26)
(271)
291
(36)
(113)
636
(10)
$878

35%
—
(2)
(24)
25
(3)
(10)
55
—
76%

$387
9
(36)
(239)
210
(114)
(81)
—
4
$140

35%
1
(3)
(22)
19
(10)
(7)
—
—
13%

$392
5
(26)
(228)
136
(63)
—
—
13
$229

35%
—
(2)
(20)
12
(6)
—
—
1
20%

The Company’s tax rate is affected by the tax rates in the jurisdictions in which the Company operates, the relative amount of income
earned by jurisdiction, and the jurisdictions with a statutory tax rate less than the U.S. rate of 35%.

On December 22, 2017, the U.S. Tax Reform Act was enacted. The U.S. Tax Reform Act, among other things, reduced the U.S.
corporate income tax rate from 35% to 21% beginning in 2018 and implemented a modified territorial tax system that imposes a
one-time tax on deemed repatriated earnings of foreign subsidiaries (“Transition Tax”).

On December 22, 2017, the SEC staff issued SAB 118, which provides guidance on how to account for the effects of the U.S. Tax
Reform Act under ASC 740. SAB 118 enables companies to record a provisional amount for the effects of the U.S. Tax Reform Act
based on a reasonable estimate, subject to adjustment during a measurement period of up to one year, until accounting is complete.

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We recorded a provisional amount for the effects of the U.S. Tax Reform Act based on a reasonable estimate in the fourth quarter of
2017 resulting in a charge of $636 million. This includes current tax expense of $555 million related to the Transition Tax, which is
payable over eight years, and deferred tax expense of $81 million related to the remeasurement of deferred taxes resulting from the
U.S. corporate income tax rate reduction. Accounting for the income tax effects of the U.S. Tax Reform Act requires complex new
calculations to be performed and significant judgments in interpreting the legislation. Additional guidance may be issued on how the
provisions of the U.S. Tax Reform Act will be applied or otherwise administered that is different from our interpretation. We may
make adjustments to the provisional amounts as we collect and prepare the data necessary to finalize our calculations, interpret the
U.S. Tax Reform Act and any additional guidance issued, and consider the effects of any additional actions we may take as a result of
the U.S. Tax Reform Act.

In 2013, in connection with the October 11, 2013 repurchase of approximately 429 million shares of our common stock (“Purchase
Transaction”), we assumed certain tax attributes, generally consisting of net operating loss (“NOL”) carryforwards of approximately
$760 million, which represent a potential tax benefit of approximately $266 million. The Company also obtained indemnification from
Vivendi against losses attributable to the disallowance of claimed utilization of such NOL carryforwards of up to $200 million in
unrealized tax benefits in the aggregate, limited to taxable years ending on or prior to December 31, 2016. No benefit for these tax
attributes or indemnification was recorded upon the close of the Purchase Transaction. As of December 31, 2017, we had utilized
approximately $760 million of the original NOL and had recorded an indemnification asset of $200 million in “Other assets.”
Correspondingly, the same amount was recorded as a reduction to the consideration paid for the shares repurchased in “Treasury
stock.” In each of the years ended December 31, 2017, 2016, and 2015, we utilized $103 million, $326 million, and $180 million of
the NOL and recognized a corresponding reserve of $36 million, $114 million, and $63 million in each of those years ended,
respectively.

Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting
purposes and the amounts used for income tax purposes. The components of the net deferred tax assets (liabilities) are as follows
(amounts in millions):

Deferred tax assets:

Allowance for sales returns and price protection ........................................................................................
Inventory reserve ........................................................................................................................................
Accrued expenses .......................................................................................................................................
Deferred revenue ........................................................................................................................................
Tax credit carryforwards ............................................................................................................................
Net operating loss carryforwards ................................................................................................................
Share-based compensation .........................................................................................................................
Acquired intangibles ...................................................................................................................................
State taxes ...................................................................................................................................................
Other ...........................................................................................................................................................
Deferred tax assets ..........................................................................................................................................
Valuation allowance .......................................................................................................................................
Deferred tax assets, net of valuation allowance ..............................................................................................
Deferred tax liabilities:

Acquired intangibles ...................................................................................................................................
Prepaid royalties .........................................................................................................................................
Capitalized software development expenses ..............................................................................................
Other ...........................................................................................................................................................
Deferred tax liabilities ....................................................................................................................................
Net deferred tax assets ....................................................................................................................................

As of December 31,

2017

2016

$47
5
26
245
60
11
59
149
22
39
663
—
663

$64
9
25
233
48
10
61
111
24
28
613
—
613

(146)
(19)
(55)
(5)
(225)
$438

(219)
(60)
(91)
(4)
(374)
$239

As of December 31, 2017, we had gross tax credit carryforwards of $152 million for state purposes. The tax credit carryforwards are
presented in “Deferred tax assets” net of unrealized tax benefits that would apply upon the realization of uncertain tax positions. In
addition, we had foreign NOL carryforwards of $33 million at December 31, 2017, attributed mainly to losses in France which can be
carried forward indefinitely.

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We evaluate our deferred tax assets, including net operating losses and tax credits, to determine if a valuation allowance is required.
We assess whether a valuation allowance should be established or released based on the consideration of all available evidence using a
“more-likely-than-not” standard. Realization of the U.S. deferred tax assets is dependent upon the continued generation of sufficient
taxable income. In making such judgments, significant weight is given to evidence that can be objectively verified. Although
realization is not assured, management believes it is more likely than not that the net carrying value of the U.S. deferred tax assets will
be realized. At December 31, 2017 and 2016, there are no valuation allowances on deferred tax assets.

As of December 31, 2017, we no longer consider the available cash balances related to undistributed earnings of our most significant
foreign subsidiaries to be indefinitely reinvested. As a result of the U.S. Tax Reform Act, we continue to assess and may change our
intentions related to the indefinite reinvestment assertion. Any impact resulting from such a change in this assertion during the
SAB 118 measurement period will be recorded as an adjustment to the provisional amount recorded for the effects of the U.S. Tax
Reform Act in the period in which such determination is made.

Activision Blizzard’s tax years 2009 through 2016 remain open to examination by the major taxing jurisdictions to which we are
subject. The IRS is currently examining the Company’s federal tax returns for the 2009 through 2011 tax years, and during February
2018, the Company was notified that our tax returns for 2012 through 2016 tax years will be subject to examination. The Company
also has several state and non-U.S. audits pending. In addition, as part of purchase price accounting for the King Acquisition, the
Company assumed $74 million of uncertain tax positions primarily related to the transfer pricing on King tax years occurring prior to
the King Acquisition. The Company is currently in negotiations with the relevant jurisdictions and taxing authorities with respect to
King’s transfer pricing, which could result in a different allocation of profits and losses between the relevant jurisdictions.

On December 28, 2017, we received a Notice of Reassessment from the French Tax Authority (“FTA”) related to transfer pricing
concerning intercompany transactions involving one of our French subsidiaries for the 2011 through 2013 tax years. The total
assessment, including penalties and interest, was approximately €571 million ($680 million). We disagree with the proposed
assessment and intend to vigorously contest it. We plan to pursue all remedies available to us to successfully resolve this matter,
including administrative remedies with the FTA, and judicial remedies, if necessary. While we believe our tax provisions at
December 31, 2017 are appropriate, until such time as this matter is ultimately resolved we could be subject to significant additional
tax liabilities. In addition to the risk of additional tax for years 2011 through 2013, if litigation regarding this matter were adversely
determined and/or if the FTA were to seek adjustments of a similar nature for subsequent years, we could be subject to significant
additional tax liabilities.

In addition, certain of our subsidiaries are under examination or investigation or may be subject to examination or investigation by tax
authorities in various jurisdictions. These proceedings may lead to adjustments or proposed adjustments to our taxes or provisions for
uncertain tax positions. Such proceedings may have a material adverse effect on the Company’s consolidated financial position,
liquidity or results of operations in the period or periods in which the matters are resolved or in which appropriate tax provisions are
taken into account in our financial statements. If we were to receive a materially adverse assessment from a taxing jurisdiction, we
would plan to vigorously contest it and consider all of our options, including the pursuit of judicial remedies.

As of December 31, 2017, we had approximately $1,138 million of gross unrecognized tax benefits, of which $1,114 million would
affect our effective tax rate, if recognized. A reconciliation of total gross unrecognized tax benefits is as follows (amounts in millions):

Unrecognized tax benefits balance at January 1 ................................................................................
Gross increase for tax positions of prior-years ..................................................................................
Gross decrease for tax positions of prior-years .................................................................................
Gross increase for tax positions of current year ................................................................................
Settlement with taxing authorities .....................................................................................................
Lapse of statute of limitations ...........................................................................................................
Unrecognized tax benefits balance at December 31 ..........................................................................

For the Years Ended
December 31,

2017

$846
66
—
229
(1)
(2)
$1,138

2016
$552
89
(17)
240
(18)
—
$846

2015
$419
8
(11)
136
—
—
$552

As of December 31, 2017 and 2016, we had approximately $121 million and $71 million, respectively, of accrued interest and
penalties related to uncertain tax positions. For the year ended December 31, 2017, 2016, and 2015, we recorded $28 million,
$17 million, and $10 million, respectively, of interest expense related to uncertain tax positions.

The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis of
disputes, including the probability determination and estimation of the potential exposure. Based on current information, in the

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opinion of the Company’s management, the ultimate resolution of these matters is not expected to have a material adverse effect on
the Company’s consolidated financial position, liquidity or results of operations, except as noted above.

16. Computation of Basic/Diluted Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per share
data):

For the Years Ended
December 31,
2016

2017

2015

Numerator:

Consolidated net income ..........................................................................................................
Less: Distributed earnings to unvested share-based awards that participate in earnings ......
Less: Undistributed earnings allocated to unvested share-based awards that participate in

$273
—

$966
(2)

$892
(4)

earnings ............................................................................................................................

—

(2)

(7)

Numerator for basic and diluted earnings per common share—income available to common

shareholders .............................................................................................................................

$273

$962

$881

Denominator:
Denominator for basic earnings per common share—weighted-average common shares

outstanding ...............................................................................................................................
Effect of dilutive stock options and awards under the treasury stock method .............................
Denominator for diluted earnings per common share—weighted-average common shares

754
12

740
14

728
11

outstanding plus dilutive common shares under the treasury stock method .............................
Basic earnings per common share ................................................................................................

766
$0.36

754
$1.30

739
$1.21

Diluted earnings per common share .............................................................................................

$0.36

$1.28

$1.19

Certain of our unvested restricted stock units meet the definition of participating securities as they participate in earnings based on
their rights to dividends or dividend equivalents. Therefore, we are required to use the two-class method in our computation of basic
and diluted earnings per common share. For the years ended December 31, 2017, 2016, and 2015, on a weighted-average basis, we
had outstanding unvested restricted stock units of less than 1 million, 3 million, and 8 million shares of common stock, respectively,
that are participating in earnings.

The vesting of certain of our employee-related restricted stock units and options are contingent upon the satisfaction of pre-defined
performance measures. The shares underlying these equity awards are included in the weighted-average dilutive common shares only
if the performance measures are met as of the end of the reporting period. Approximately 7 million, 8 million, and 3 million shares are
not included in the computation of diluted earnings per common share for the years ended December 31, 2017, 2016, and 2015,
respectively, as their respective performance measures had not yet been met.

Potential common shares are not included in the denominator of the diluted earnings per common share calculation when the inclusion
of such shares would be anti-dilutive. Therefore, options to acquire 1 million, 5 million, and 1 million shares of common stock were
not included in the calculation of diluted earnings per common share for the years ended December 31, 2017, 2016, and 2015,
respectively, as the effect of their inclusion would be anti-dilutive.

17. Capital Transactions

Repurchase Programs

On February 2, 2017, our Board of Directors authorized a stock repurchase program under which we are authorized to repurchase up
to $1 billion of our common stock during the two-year period from February 13, 2017 through February 12, 2019. As of the date
hereof, we have not repurchased any shares under this program and the determination as to if and when we make any such stock
repurchases will be dependent on market conditions and other factors.

Dividends

On February 1, 2018, our Board of Director approved a cash dividend of $0.34 per common share. Such dividend is payable on
May 9, 2018, to shareholders of record at the close of business on March 30, 2018.

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On February 2, 2017, our Board of Directors approved a cash dividend of $0.30 per common share. On May 10, 2017, we made an
aggregate cash dividend payment of $226 million to shareholders of record at the close of business on March 30, 2017. On May 26,
2017, we made related dividend equivalent payments of less than $1 million to certain holders of restricted stock units.

On February 2, 2016, our Board of Directors approved a cash dividend of $0.26 per common share. On May 11, 2016, we made an
aggregate cash dividend payment of $192 million to shareholders of record at the close of business on March 30, 2016. On May 27,
2016, we made related dividend equivalent payments of $3 million to certain holders of restricted stock units.

On February 3, 2015, our Board of Directors approved a cash dividend of $0.23 per common share. On May 13, 2015, we made an
aggregate cash dividend payment of $167 million to shareholders of record at the close of business on March 30,2015. On May 29,
2015, we made related dividend equivalent payments of $3 million to certain holders of restricted stock units.

18. Supplemental Cash Flow Information

Supplemental cash flow information is as follows (amounts in millions):

For the Years Ended
December 31,
2016

2017

2015

Supplemental cash flow information:

Cash paid for income taxes, net of refunds ..........................................
Cash paid for interest ...........................................................................

$176 $121
209

145

$20
193

For the year ended December 31, 2016, we had non-cash purchase price consideration of $89 million related to vested and unvested
stock options and awards that were assumed and replaced with Activision Blizzard equity or deferred cash awards in the King
Acquisition. Refer to Note 20 for further discussion.

19. Commitments and Contingencies

Commitments and Obligations

In the normal course of business, we enter into contractual arrangements with third parties for non-cancelable operating lease
agreements for our offices, for the development of products and for the rights to intellectual property. Under these agreements, we
commit to provide specified payments to a lessor, developer or intellectual property holder, as the case may be, based upon contractual
arrangements. The payments to third-party developers are generally conditioned upon the achievement by the developers of
contractually specified development milestones. Further, these payments to third-party developers and intellectual property holders
typically are deemed to be advances and, as such, are recoupable against future royalties earned by the developer or intellectual
property holder based on sales of the related game. Additionally, in connection with certain intellectual property rights, acquisitions
and development agreements, we commit to spend specified amounts for marketing support for the game(s) which is (are) to be
developed or in which the intellectual property will be utilized.

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Assuming all contractual provisions are met, the total future minimum commitments for these and other contractual arrangements in
place at December 31, 2017 are scheduled to be paid as follows (amounts in millions):

For the years ending December 31,

2018 ........................................................................
2019 ........................................................................
2020 ........................................................................
2021 ........................................................................
2022 ........................................................................
Thereafter ...............................................................
Total ...................................................................

Contractual Obligations(1)

Facility and
Equipment
Leases

Developer and
Intellectual
Properties

Marketing

Long-Term
Debt
Obligations(2)

Total

$81
70
61
48
41
88
$389

$202
2
1
—
—
—
$205

$19
—
—
—
—
—
$19

$461
$159
231
159
221
159
1,838
1,790
553
512
3,064
3,152
$5,843 $6,456

(1)

(2)

We have omitted uncertain income tax liabilities from this table due to the inherent uncertainty regarding the timing of the
potential issue resolution of the underlying matters. Specifically, either (a) the underlying positions have not been fully
developed under audit to quantify at this time or, (b) the years relating to the matters for certain jurisdictions are not currently
under audit. At December 31, 2017, we had $455 million and $495 million of net unrecognized tax benefits included in
“Accrued expenses and other liabilities” and “Other liabilities,” respectively, in our consolidated balance sheet.

Additionally, as a result of the U.S. Tax Reform Act, we recorded a liability at December 31, 2017, of $467 million which
reflects our estimated Transition Tax net payments. This provisional amount is subject to change as we collect and prepare
the data necessary to finalize our calculations, interpret the U.S. Tax Reform Act and any additional guidance issued. The
Transition Tax liability is payable over up to eight years and is not reflected in our Contractual Obligations table above. We
expect to pay $77 million of the Transition Tax during 2018.

Long term debt obligations represent our obligations related to the contractual principal repayments and interest payments
under the 2017 TLA and the Notes as of December 31, 2017. There was no outstanding balance under our Revolver as of
December 31, 2017. The Notes are subject to fixed interest rates and we have calculated the interest obligation based on the
applicable rates and payment dates. The 2017 TLA bears a variable interest rate and interest is payable at least quarterly. We
have calculated the expected interest obligation based on the outstanding principal balance and interest rate applicable at
December 31, 2017. Refer to Note 11 for additional information on our debt obligations.

Legal Proceedings

As described in Note 15, on December 28, 2017, we received a Notice of Reassessment from the FTA related to transfer pricing
concerning intercompany transactions involving one of our French subsidiaries for the 2011 through 2013 tax years. The total
assessment, including penalties and interest, was approximately €571 million ($680 million). We disagree with the proposed
assessment and intend to vigorously contest it. We plan to pursue all remedies available to us to successfully resolve this matter,
including administrative remedies with the FTA, and judicial remedies, if necessary. While we believe our tax provisions at
December 31, 2017 are appropriate, until such time as this matter is ultimately resolved we could be subject to significant additional
tax liabilities. In addition to the risk of additional tax for years 2011 through 2013, if litigation regarding this matter were adversely
determined and/or if the FTA were to seek adjustments of a similar nature for subsequent years, we could be subject to significant
additional tax liabilities.

In addition, we are party to routine claims, suits, investigations, audits, and other proceedings arising from the ordinary course of
business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters,
tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation
with legal counsel, such routine claims and lawsuits are not significant and we do not expect them to have a material adverse effect on
our business, financial condition, results of operations, or liquidity.

Purchase Transaction Matters

In prior periods, the Company reported on litigation related to the Purchase Transaction. During the period ended June 30, 2015, the
cases were resolved and dismissed with prejudice. As part of the resolution of the claims, we received a settlement payment of
$202 million in July 2015 from Vivendi, ASAC LP, and our insurers. We recorded the settlement within “Shareholders’ equity” in our
consolidated balance sheet as of December 31, 2015.

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Letters of Credit

As described in Note 11, a portion of our Revolver can be used to issue letters of credit of up to $50 million, subject to the availability
of the Revolver. At December 31, 2017, we did not have any letters of credit issued or outstanding under the Revolver.

20. Acquisitions

King Digital Entertainment

On February 23, 2016, we completed the King Acquisition, purchasing all of its outstanding shares. As a result, King became a
wholly-owned subsidiary of Activision Blizzard. King is a leading global developer and publisher of interactive entertainment content
and services, particularly on mobile platforms, such as Android and iOS, and on online and social platforms, such as Facebook and the
king.com websites. King’s results of operations since the King Closing Date are included in our consolidated financial statements.

We made this acquisition because we believed that the addition of King’s highly-complementary mobile business positioned the
Company as a global leader in interactive entertainment across console, PC, and mobile platforms, and aligned us for future growth.

The aggregate purchase price of the King Acquisition was approximately $5.8 billion, which was paid on the King Closing Date and
funded primarily with $3.6 billion of existing cash and $2.2 billion of cash from new debt issued by the Company. We identified and
recorded assets acquired and liabilities assumed at their estimated fair values at the King Closing Date, and allocated the remaining
value of approximately $2.7 billion to goodwill.

The final purchase price allocation was as follows (in millions):

Tangible assets and liabilities assumed:

Cash and cash equivalents ...............................................
Accounts receivable .........................................................
Other current assets..........................................................
Property and equipment ...................................................
Deferred income tax assets, net .......................................
Other assets ......................................................................
Accounts payable .............................................................
Accrued expenses and other liabilities .............................
Other liabilities ................................................................
Deferred income tax liabilities, net ..................................

Intangible assets

Internally-developed franchises .......................................
Customer base ..................................................................
Developed software .........................................................
Trade name ......................................................................
Goodwill ..............................................................................
Total purchase price .............................................................

February 23,
2016

Estimated
useful lives

$1,151
162
72
57
27
47
(9)
(272)
(110)
(52)

845
609
580
46
2,675
$5,828

2 - 7 years

3 - 5 years
2 years
3 - 4 years
7 years

During the year ended December 31, 2016, the Company incurred $38 million of expenses related to the King Acquisition, which are
included within “General and administrative” in the consolidated statements of operations. In connection with the debt financing that
occurred on the King Closing Date, we incurred $38 million of discounts and financing costs that were capitalized and recorded within
“Long-term debt, net” on our consolidated balance sheet. The amortization of these capitalized costs was not material to our
consolidated statement of operations for the year ended December 31, 2016.

Share-Based Compensation

In connection with the King Acquisition, a majority of the outstanding King options and other equity awards that were unvested as of
the King Closing Date were converted into equivalent options and awards with respect to shares of the Company’s common stock,
using an equity award exchange ratio calculated in accordance with the transaction agreement. As a result, replacement options and
other equity awards of 10 million and 3 million, respectively, were issued. The portion of the fair value related to pre-combination
services of $76 million was included in the purchase price, while the remaining fair value will be recognized over the remaining

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service periods. As of December 31, 2016, the future expense for the converted King unvested stock options and equity awards was
approximately $40 million, which will be recognized over a weighted average service period of approximately 1.6 years.

The remaining portion of outstanding unvested awards that were assumed were replaced with deferred cash awards. The cash proceeds
were placed in an escrow-like account with the cash releases to occur based on the awards’ original vesting schedule upon future
service being rendered. The cash associated with these awards is recorded in “Other current assets” and “Other assets” in our
consolidated balance sheet. The portion of the fair value related to pre-combination services of $22 million was included in the
purchase price while the remaining fair value of approximately $9 million will be recognized over the remaining service periods.

Identifiable Intangible Assets Acquired and Goodwill

The internally-developed franchises, customer base, developed software, and trade name intangible assets from the acquisition of King
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. The intangible assets will be
amortized over their estimated useful lives in proportion to the economic benefits received.

The $2.7 billion of goodwill recognized is primarily attributable to the benefits the Company expects to derive from accelerated
expansion as an interactive entertainment provider in the mobile sector, future franchises, and technology, as well as the management
team’s proven ability to create future games and franchises. Approximately $620 million of the goodwill is expected to be deductible
for tax purposes in the U.S.

King Net Revenue and Earnings

The amount of net revenue and earnings attributable to King in the Company’s consolidated statement of operations during the year
ended December 31, 2016, the period of the King Acquisition, are included in the table below. The amounts presented represent the
net revenues and earnings after adjustments for purchase price accounting, inclusive of amortization of intangible assets, share-based
payments, and deferrals of revenues and related cost of revenues.

(in millions)
Net revenues .........................................................................................
Net loss .................................................................................................

For the Year
Ended
December 31, 2016

$1,523
$(230)

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of the Company and King, on a
pro forma basis, as though the acquisition had occurred on January 1, 2015. The 2016 pro forma financial information presented
includes the effects of adjustments related to amortization charges from acquired intangible assets, employee compensation from
replacement equity awards issued in the King Acquisition and the profit sharing bonus plan established as part of the King
Acquisition, and interest expense from the new debt issued in connection with the King Acquisition, among other adjustments. We
also adjusted for Activision Blizzard and King non-recurring acquisition-related costs of approximately $74 million incurred for the
year ended December 31, 2016. The 2015 pro forma financial information for the year ended December 31, 2015 were adjusted to
include these charges.

The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative
of the results of operations that would have been achieved if the King Acquisition, and any borrowings undertaken to finance the King
Acquisition, had taken place at the beginning of the earliest period presented, nor does it intend to be a projection of future results.

(in millions)
Net revenues ..............................................................................................
Net income .................................................................................................
Basic earnings per common share .............................................................
Diluted earnings per common share ..........................................................

For the Year
Ended
December 31,

2016
$6,888
$1,005
$1.35
$1.32

2015
$6,677
$639
$0.87
$0.85

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21. Recently Issued Accounting Pronouncements

Recently adopted accounting pronouncements

Inventory

In July 2015, the FASB issued new guidance related to the measurement of inventory which requires inventory within the scope of the
guidance to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in
the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We adopted this new
standard as of January 1, 2017, and applied it prospectively. The adoption of this guidance did not have a material impact on our
financial statements.

Recent accounting pronouncements not yet adopted

Revenue recognition

In May 2014, the FASB issued new accounting guidance related to revenue recognition. The new standard will replace all current
U.S. GAAP guidance on this topic and eliminate all industry-specific guidance, providing a unified model to determine when and how
revenue is recognized. The core principle is that a company should recognize revenue upon the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or
services. This guidance is effective for us beginning with the first quarter of 2018. We are adopting the accounting standard using the
modified retrospective method, which recognizes the cumulative effect upon adoption as an adjustment to retained earnings at the
adoption date. We will report our adoption in our Form 10-Q for the first quarter of 2018.

The most significant impacts of the new revenue recognition standard are expected to be:

•

The accounting for our sales of our games with significant online functionality for which we do not have VSOE for
unspecified future updates and ongoing online services provided. Under the current accounting standards, VSOE for
undelivered elements is required. This requirement will be eliminated under the new standard. Accordingly, we will be
required to recognize as revenue a portion of the sales price upon delivery of the software, as compared to the current
requirement of recognizing the entire sales price ratably over an estimated service period. We expect this difference to
primarily impact revenues from our Call of Duty franchise, where we expect that approximately 20% of the sales price
will be recognized as revenue upon delivery of the games to our customers. Many of our other franchises, such as
Destiny, Overwatch, World of Warcraft, and Candy Crush, are online hosted arrangements, and we do not expect any
significant impact on the accounting for our sales of these games; and

The accounting for certain of our software licensing arrangements. While the impacts of the new standard may differ on
a contract-by-contract basis (the actual revenue recognition treatment required under the standard will depend on
contract-specific terms), we generally expect earlier revenue recognition for these arrangements under the new revenue
standard.

We estimate that the cumulative effect of adopting this standard will result in an adjustment to retained earnings at the adoption date
of approximately $60 million to $100 million, inclusive of the associated tax impacts. Additionally, we expect that the new disclosure
requirements will require us to design and implement additional internal controls over financial reporting, and we are in process of
adjusting our processes and internal controls in preparation for adopting the new standard.

Leases

In February 2016, the FASB issued new guidance related to the accounting for leases. The new standard will replace all current
U.S. GAAP guidance on this topic. The new standard, among other things, requires a lessee to classify a lease as either an operating or
financing lease, and lessees will need to recognize a lease liability and a right-of-use asset for their leases. The liability will be equal to
the present value of lease payments. The asset will be based on the liability, subject to adjustment for initial direct costs, lease
incentives received, and any prepaid lease payments. Operating leases will result in a straight-line expense pattern, while finance
leases will result in a front-loaded expense pattern. Classification will be based on criteria that are largely similar to those applied in
current lease accounting. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and will
require application of the new guidance at the beginning of the earliest comparative period presented, with certain transition practical
expedients available to provide relief in adopting the new standard. We are evaluating the impact of this new accounting guidance on
our financial statements. Currently, we do not plan to early adopt this new standard but we do expect to elect and apply the available
transition practical expedients upon adoption.

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Financial Instruments

In January 2016, the FASB issued new guidance related to the recognition and measurement of financial assets and financial
liabilities. The new standard, among other things, generally requires companies to measure investments in other entities, except those
accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The new standard also
simplifies the impairment assessment of equity investments without readily determinable fair values. The new standard is effective for
fiscal years beginning after December 15, 2017, and the guidance should be applied by means of a cumulative-effect adjustment to the
balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity investments without readily
determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the
date of adoption. Based on our current financial instruments held, we do not anticipate this new guidance will have a material impact
on our financial statements.

Statement of Cash Flows—Restricted Cash

In November 2016, the FASB issued new guidance related to the classification of restricted cash in the statement of cash flows. The
new standard requires that a statement of cash flows explain any change during the period in total cash, cash equivalents, and
restricted cash. Therefore, restricted cash will be included with “Cash and cash equivalents” when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. The new standard is effective for fiscal years beginning after
December 15, 2018, and should be applied retrospectively. Early adoption is permitted.

We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements. We expect there will be a
significant impact to the consolidated statements of cash flows for the years ended December 31, 2015 and 2016, as those years
include, as an investing activity, the $3.6 billion movement in restricted cash as a result of transferring cash into escrow at
December 31, 2015 to facilitate the King Acquisition and the subsequent release of that cash in 2016 in connection with the King
Acquisition. Under this new standard, the restricted cash balance will be included in the beginning and ending total cash, cash
equivalents, and restricted cash balances and hence would not be included as an investing activity in the statement of cash flows.

Goodwill

In January 2017, the FASB issued new guidance which eliminates Step 2 from the goodwill impairment test. Instead, if any entity
forgoes a Step 0 test, an entity will be required to perform its annual or interim goodwill impairment test by comparing the fair value
of a reporting unit, as determined in Step 1 from the goodwill impairment test, with its carrying amount and recognize an impairment
charge, if any, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of
goodwill allocated to the reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019 and should
be applied prospectively. Early adoption is permitted. The effect of adoption should be reflected as of the beginning of the fiscal year
of adoption. We are evaluating the impact, if any, of adopting this new accounting guidance on our consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued new guidance related to the accounting for derivatives and hedging. The new guidance expands and
refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of
hedging instruments and hedged items in the financial statements, and includes certain targeted improvements to ease the application
of current guidance related to the assessment of a hedge’s effectiveness. The new standard is effective for fiscal years beginning after
December 15, 2018. Early adoption is permitted. If early adopted, the new standard must generally be applied as of the beginning of
the fiscal year of adoption. We are evaluating the impact of this new accounting guidance on our financial statements and related
disclosures. We expect, based on our current outstanding derivative instruments, the new guidance will not have a material impact on
our financial statements.

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22. Quarterly Financial Information (Unaudited)

Net revenues ............................................
Cost of revenues ......................................
Operating income ....................................
Net income (loss) ....................................
Basic earnings (loss) per common share .
Diluted earnings (loss) per common share

Net revenues ............................................
Cost of revenues ......................................
Operating income ....................................
Net income(1) ..........................................
Basic earnings per common share(1) .......
Diluted earnings per common share(1) ....

December 31,
2017

For the Quarters Ended
September 30,
2017

June 30,
2017

March 31,
2017

(Amounts in millions, except per share data)
$1,618
$2,043
552
803
257
221
188
(584)
0.25
(0.77)
0.25
(0.77)

$1,631
561
339
243
0.32
0.32

$1,726
585
493
426
0.57
0.56

December 31,
2016

For the Quarters Ended
September 30,
2016

June 30,
2016

March 31,
2016

(Amounts in millions, except per share data)
$1,568
$2,014
529
776
294
425
199
254
0.27
0.34
0.26
0.33

$1,570
598
232
151
0.20
0.20

$1,455
491
461
363
0.49
0.48

(1)

During the third quarter of 2016, we early adopted an accounting standard which simplifies the accounting for share-based
payments. The standard, among other things, requires all excess tax benefits and tax deficiencies to be recorded as an income
tax expense or benefit in the consolidated statement of operations. The adoption of the standard impacted our previously
reported results for the quarters ended June 30, 2016 and March 31, 2016. As a result of the adoption of this standard, our net
income, basic earnings per common share, and diluted earnings per common share increased by $24 million, $0.03, and
$0.03, respectively, for the quarter ended June 30, 2016, and $27 million, $0.04, and $0.03, respectively, for the quarter
ended March 31, 2016.

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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER

PURCHASES OF EQUITY SECURITIES

Market Information and Holders

Our common stock is quoted on the Nasdaq National Market under the symbol “ATVI.” The following table sets forth, for the periods
indicated, the high and low reported sale prices for our common stock. At February 20, 2018, there were 1,663 holders of record of
our common stock.

2017
First Quarter Ended March 31, 2017 .........................................................................................................
Second Quarter Ended June 30, 2017 ........................................................................................................
Third Quarter Ended September 30, 2017 .................................................................................................
Fourth Quarter Ended December 31, 2017 ................................................................................................

2016
First Quarter Ended March 31, 2016 .........................................................................................................
Second Quarter Ended June 30, 2016 ........................................................................................................
Third Quarter Ended September 30, 2016 .................................................................................................
Fourth Quarter Ended December 31, 2016 ................................................................................................

High

Low

$50.40
61.58
66.58
67.40

$36.18
48.41
55.86
57.29

High

Low

$38.09
39.99
45.12
45.55

$26.49
33.03
39.28
35.12

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Stock Performance Graph

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the
liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Activision Blizzard, Inc. under
the Exchange Act or the Securities Act of 1933.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
among Activision Blizzard, Inc., the Nasdaq Composite Index, the S&P 500 Index,
and the RDG Technology Composite Index

The following graph and table compare the cumulative total stockholder return on our common stock, the Nasdaq Composite Index,
the S&P 500 Index, and the RDG Technology Composite Index. The graph and table assume that $100 was invested on December 31,
2012, and that dividends were reinvested daily. The stock price performance on the following graph and table is not necessarily
indicative of future stock price performance.

$700

$600

$500

$400

$300

$200

$100

12/12

12/13

12/14

12/15

12/16

12/17

Activision Blizzard, Inc.

NASDAQ Composite

S&P 500

RDG Technology Composite

Fiscal year ending December 31:
Activision Blizzard, Inc. ..............................................
Nasdaq Composite .......................................................
S&P 500 ......................................................................
RDG Technology Composite ......................................

12/12
$100.00
100.00
100.00
100.00

12/13
$170.11
141.63
132.39
132.51

12/14
$194.06
162.09
150.51
155.05

12/15
$376.61
173.33
152.59
161.00

12/16
$354.16
187.19
170.84
181.12

12/17
$624.78
242.29
208.14
247.79

Cash Dividends

We have paid a dividend annually since 2010. Below is a summary of cash dividends paid over the past three fiscal years, along with
the dividend most recently declared by the Board of Directors that will be paid in May 2018:

Year
2018 ........................................................................................................................
2017 ........................................................................................................................
2016 ........................................................................................................................
2015 ........................................................................................................................

Per Share
Amount

$0.34
$0.30
$0.26
$0.23

Record
Date

3/30/2018
3/30/2017
3/30/2016
3/30/2015

Dividend
Payment
Date
5/9/2018
5/10/2017
5/11/2016
5/13/2015

Future dividends will depend upon our earnings, financial condition, cash requirements, anticipated future prospects, and other factors
deemed relevant by our Board of Directors. Further, agreements governing certain of our indebtedness, as described in Note 11 of the
notes to consolidated financial statements included in this Annual Report, may, under certain circumstances, limit our ability to pay
distributions or dividends. There can be no assurances that dividends will be declared in the future.

v_9_Activision Financials (3-27-18)_3pm_pst.pdf 88

3/29/18 1:50 PM

10b5-1 Stock Trading Plans

The Company’s directors and employees may, at a time they are not aware of material non-public information, enter into plans to
purchase or sell shares of our common stock that satisfy the requirements of Exchange Act Rule 10b5-1 (“Rule 10b5-1 Plans”).
Rule 10b5-1 Plans permit persons whose ability to purchase or sell our common stock may otherwise be substantially restricted (by
quarterly and special stock-trading blackouts and by their possession from time to time of material nonpublic information) to trade on
a pre-arranged, “automatic-pilot” basis.

Trading under Rule 10b5-1 Plans is subject to certain conditions, including that the person for whom the plan is created (or anyone
else aware of material non-public information acting on such person’s behalf) not exercise any subsequent influence regarding the
amount, price and dates of transactions under the plan. In addition, the Company requires Rule 10b5-1 Plans to be established and
maintained in accordance with the Company’s “Policy on Establishing and Maintaining 10b5-1 Trading Plans.”

Trades under a Rule 10b5-1 Plan by our directors and employees are not necessarily indicative of their respective opinions of our
current or potential future performance at the time of the trade. Trades by our directors and executive officers pursuant to a
Rule 10b5-1 Plan will be disclosed publicly through Form 144 and Form 4 filings with the SEC, in accordance with applicable laws,
rules, and regulations.

Issuer Purchase of Equity Securities

v_9_Activision Financials (3-27-18)_3pm_pst.pdf 89

3/29/18 1:50 PM

CAUTIONARY STATEMENT

This Annual Report on Form contains, or incorporates by reference, certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical facts
and include, but are not limited to: (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow, or
other financial items; (2) statements of our plans and objectives, including those related to releases of products or services;
(3) statements of future financial or operating performance, including the impact of tax items thereon; and (4) statements of
assumptions underlying such statements. Activision Blizzard, Inc. generally uses words such as “outlook,” “forecast,” “will,”
“could,” “should,” “would,” “to be,” “plan,” “plans,” “believes,” “may,” “might,” “expects,” “intends,” “intends as,”
“anticipates,” “estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,”
“upcoming” and other similar expressions to help identify forward-looking statements. Forward-looking statements are subject to
business and economic risks, reflect management’s current expectations, estimates and projections about our business, and are
inherently uncertain and difficult to predict.

The company cautions that a number of important factors could cause Activision Blizzard, Inc.’s actual future results and other future
circumstances to differ materially from those expressed in any forward-looking statements. Some of the risk factors that could cause
our actual results to differ from those stated in forward-looking statements can be found in “Risk Factors” included in Part I, Item 1A
of our Annual Report on Form 10-K for the year ended December 31, 2017. The forward-looking statements contained herein are
based upon information available to us as of the date of this Annual Report and we assume no obligation to update any such
forward-looking statements. Although these forward-looking statements are believed to be true when made, they may ultimately prove
to be incorrect. These statements are not guarantees of our future performance and are subject to risks, uncertainties and other
factors, some of which are beyond our control and may cause actual results to differ materially from current expectations.

Activision Blizzard Inc.’s names, abbreviations thereof, logos, and product and service designators are all either the registered or
unregistered trademarks or trade names of Activision Blizzard. All other product or service names are the property of their respective
owners. All dollar amounts referred to in, or contemplated by, this Annual Report refer to United States (“U.S.”) dollars, unless
otherwise explicitly stated to the contrary.

v_9_Activision Financials (3-27-18)_3pm_pst.pdf 90

3/29/18 1:50 PM

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
NET REVENUES BY PLATFORM
For the Year Ended December 31, 2017 and 2016
(Amounts in millions)

Year Ended

December 31, 2017
Amount % of Total1 Amount % of Total1

December 31, 2016

$ Increase
(Decrease)

% Increase
(Decrease)

Net Revenues by Platform

Console
PC
Mobile and ancillary2
Other3

Total consolidated net revenues

Change in deferred revenues4

Console
PC
Mobile and ancillary2
Other3

Total changes in deferred revenues

2,389
2,042
2,081
505
7,017

210
(67 )
14
(18 )
139

34 % $
29
30
7
100 % $

2,453
2,124
1,674
357
6,608

(184 )
135
32
8
(9 )

37 % $
32
25
5
100 % $

(64 )
(82 )
407
148
409

(3 )%
(4 )
24
41
6

1
2

3
4

The percentages of total are presented as calculated. Therefore, the sum of these percentages, as presented, may differ due to the impact of rounding.
Net revenues from Mobile and ancillary include revenues from mobile devices, as well as non-platform specific game related revenues such as standalone sales of toys and accessories
from the Skylanders franchise and other physical merchandise and accessories.
Net revenues from Other include revenues from our studios and distribution businesses, as well as revenues from Major League Gaming and the Overwatch League.
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.

v_9_Activision Financials (3-27-18)_3pm_pst.pdf 91

3/29/18 1:50 PM

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
NET REVENUES BY DISTRIBUTION CHANNEL
For the Year Ended December 31, 2017 and 2016
(Amounts in millions)

Year Ended

December 31, 2017
Amount % of Total1 Amount % of Total1

December 31, 2016

$ Increase
(Decrease)

% Increase
(Decrease)

Net Revenues by Distribution Channel

Digital online channels2
Retail channels
Other3

Total consolidated net revenues

Change in deferred revenues4

Digital online channels2
Retail channels
Other3

Total changes in deferred revenues

5,479
1,033
505
7,017

(53 )
210
(18 )
139

78 % $
15
7
100 % $

4,865
1,386
357
6,608

351
(368 )
8
(9 )

74 % $
21
5
100 % $

614
(353 )
148
409

13 %
(25 )
41
6

The percentages of total are presented as calculated. Therefore, the sum of these percentages, as presented, may differ due to the impact of rounding.

1
2 Net revenues from Digital online channels represent revenues from digitally-distributed subscriptions, licensing royalties, value-added services, downloadable

content, microtransactions, and products.
Net revenues from Other include revenues from our studios and distribution businesses, as well as revenues from Major League Gaming and the Overwatch
League.
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.

v_9_Activision Financials (3-27-18)_3pm_pst.pdf 92

3/29/18 1:50 PM

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
NET REVENUES BY GEOGRAPHIC REGION
For the Year Ended December 31, 2017 and 2016
(Amounts in millions)

Year Ended

December 31, 2017
Amount % of Total1 Amount % of Total1

December 31, 2016

$ Increase
(Decrease)

% Increase
(Decrease)

Net Revenues by Geographic Region

Americas
EMEA2
Asia Pacific

Total consolidated net revenues

Change in deferred revenues3

Americas
EMEA2
Asia Pacific

Total changes in deferred revenues

3,607
2,464
946
7,017

75
88
(24 )
139

51 % $
35
13
100 % $

3,423
2,221
964
6,608

52 % $
34
15
100 % $

184
243
(18 )
409

5 %
11
(2 )
6

(32 )
(13 )
36
(9 )

1
2

The percentages of total are presented as calculated. Therefore, the sum of these percentages, as presented, may differ due to the impact of rounding.
Consists of the Europe, Middle East, and Africa geographic regions.

3 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.

v_9_Activision Financials (3-27-18)_3pm_pst.pdf 93

3/29/18 1:50 PM

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v_9_Activision Financials (3-27-18)_3pm_pst.pdf 94

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v_9_Activision Financials (3-27-18)_3pm_pst.pdf 95

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v_9_Activision Financials (3-27-18)_3pm_pst.pdf 98

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Activision 2017 10-K Thursday, March 15, 2018 9:00am PST Andra Design LLC

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v_9_Activision Financials (3-27-18)_3pm_pst.pdf 99

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Activision 2017 10-K Thursday, March 15, 2018 9:00am PST Andra Design LLC

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
For the Trailing Twelve Months Ending December 31, 2017
EBIDTA and Adjusted EBIDTA
(Amounts in millions)

GAAP Net Income (Loss)1

Interest and other expense (income), net
Loss on extinguishment of debt
Provision for income taxes1
Depreciation and amortization

EBITDA

Share-based compensation expense2
Fees and other expenses related to the King Acquisition3
Restructuring costs4
Other non-cash charges5
Discrete tax-related items6

Adjusted EBITDA

Change in deferred net revenues and related cost of
revenues7

March 31,
2017

June 30,
2017

September 30,
2017

December 31,
2017

Trailing Twelve
Months Ended
December 31,
2017

426
40
—
27
224
717

33
4

11
16
—
781

243
34
12
50
226
565

39
5

—
(1)
—
608

188
37
—
32
220
477

47
3

—
(1)
—
526

(584 ) $
36
—
769
219
440

58
3

5
—
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545

273
146
12
878
888
2,197

178
15

15
14
39
2,458

(396 ) $

(105 ) $

132

441

1 We recognized $69 million, $13 million, $15 million, and $15 million of excess tax benefits from share-based payments as an income tax

benefit in the provision for income taxes for the three months ended March 31, June 30, September 30, and December 31, 2017, respectively.
Provision for income taxes for the three months ended December 31, 2017 also includes an impact from significant discrete tax-related items,
including amounts related to changes in tax laws (including a reasonable estimate of the impact of the Tax Cuts and Jobs Act enacted in
December 2017, as provided for in accordance with Securities and Exchange Commission guidance), amounts related to the potential or final
resolution of tax positions, and/or other unusual or unique tax-related items and activities.
Includes expenses related to share-based compensation.
Reflects fees and other expenses related to the King Acquisition, inclusive of related debt financings and integration costs.
Reflects restructuring charges, primarily severance costs.
Reflects a non-cash accounting charge to reclassify certain cumulative translation (gains) losses into earnings due to the substantial liquidation
of certain of our foreign entities.
Reflects the impact of other unusual or unique tax-related items and activities.
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our
online enabled products.

Trailing twelve months amounts are presented as calculated. Therefore, the sum of the four quarters, as presented, may differ due to the impact of
rounding.

v_9_Activision Financials (3-27-18)_3pm_pst.pdf 100

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100
100

Activision 2017 10-K Thursday, March 15, 2018 9:00am PST Andra Design LLC corporate information

board of directors

officers

special advisors

annual meeting

Robert A. Kotick
Chief Executive Officer,
Activision Blizzard

Collister Johnson
President and
Chief Operating Officer,
Activision Blizzard

Dennis Durkin
Chief Corporate Officer,
Activision Blizzard

Mike Morhaime
President and Chief
Executive Officer,
Blizzard Entertainment

Spencer Neumann
Chief Financial Officer,
Activision Blizzard

Brian Stolz
Chief People Officer,
Activision Blizzard

Chris Walther
Chief Legal Officer,
Activision Blizzard

Riccardo Zacconi
Chief Executive Officer,
King Digital Entertainment

Portland, Maine
Redmond, Washington
Rogers, Arkansas
San Francisco, California
San Jose, California
Santa Monica, California
Seattle, Washington
Sherman Oaks, California
Woodland Hills, California

Reveta Bowers
Independent Governance and
Organizational Consultant

Robert Corti
Retired Chief Financial Officer,
Avon Products

Hendrik J. Hartong III
Chairman and Chief
Executive Officer,
Brynwood Partners

Brian G. Kelly
Chairman of the Board,
Activision Blizzard

Robert A. Kotick
President and Chief
Executive Officer,
Activision Blizzard

Barry Meyer
Retired Chairman and
Chief Executive Officer,
Warner Bros. Entertainment

Robert Morgado
Former Chairman and
Chief Executive Officer,
Warner Music Group

Peter Nolan
Senior Advisor,
Leonard Green & Partners

Casey Wasserman
Chairman and Chief
Executive Officer,
Wasserman

Elaine Wynn
Co-founder, Wynn Resorts

domestic offices

Amesbury, Massachusetts
Austin, Texas
Bloomington, Minnesota
Boulder, Colorado
Burbank, California
Carlsbad, California
Chicago, Illinois
Columbus, Ohio
Dallas, Texas
Eden Prairie, Minnesota
El Segundo, California
Foster City, California
Fresno, California
Irvine, California
Los Angeles, California
Menands, New York
Middleton, Wisconsin
New York, New York
Novato, California

Thomas Tippl
Vice Chairman,
Activision Blizzard

transfer agent

Broadridge Corporate
Issuer Solutions
(800) 685-4509

auditor

PricewaterhouseCoopers LLP
Los Angeles, California

corporate
headquarters

Activision Blizzard, Inc.
3100 Ocean Park Boulevard
Santa Monica, CA 90405
(310) 255-2000

world wide web site

www.activisionblizzard.com

e-mail

IR@activisionblizzard.com

June 26, 2018, 9:00 am PDT
Equity Office
3200 Ocean Park Boulevard
Santa Monica, California 90405

annual report
on form 10-K

Activision Blizzard’s Annual
Report on Form 10-K for the
year ended December 31, 2017
is available to shareholders without
charge upon request by calling our
Investor Relations department at
(310) 255-2000 or by mailing a
request to our Corporate Secretary
at our corporate headquarters.

non-incorporation

Portions of the Company’s 2017
Form 10-K, as filed with the SEC,
are included within this Annual
Report. Other than these portions
of the Form 10-K, all other portions
of this Annual Report are not “filed”
with the SEC and shall not be
deemed so.

international offices

Amsterdam, The Netherlands
Barcelona, Spain
Berlin, Germany
Birmingham, United Kingdom
Bucharest, Romania
Burglengenfeld, Germany
Milan, Italy
Cork, Ireland
Datchet, United Kingdom
Dublin, Ireland
Helsinki, Finland
Hong Kong SAR, China
Krakow, Poland
London, United Kingdom
Madrid, Spain
Malmö, Sweden
St. Julians, Malta
Melbourne, Australia
Mexico City, Mexico

Mississauga, Canada
Munich, Germany
Paris, France
Quebec City, Canada
São Paulo, Brazil
Seoul, South Korea
Shanghai, China
Singapore
Stockholm, Sweden
Sydney, Australia
Taipei, Region of Taiwan
The Hague, The Netherlands
Tokyo, Japan
Vancouver, Canada
Venlo, The Netherlands
Versailles, France
Warrington, United Kingdom

Activision Blizzard, Inc.
3100 Ocean Park Boulevard
Santa Monica, California 90405

activisionblizzard.com