The Henry Fund

Henry B. Tippie School of Management

Luv Bhagria [luv-bhagria@uiowa.edu]

Activision Blizzard (ATVI) October 16, 2017

Information Technology- Video-game Software and Services Stock Rating BUY
Investment Thesis Target Price $70-72
Henry Fund DCF $71.57
We recommend a BUY rating for Activision Blizzard, as the company is poised to Henry Fund DDM $40.19
enter into a lucrative eSports market with its new franchise (Overwatch). Relative P/S Multiple $60.06
Moreover, domination in the First-Person shooter (FPS) genre with Call of Duty Price Data
titles, digitalization of the gaming industry and increasing demand for mobile
Current Price $61.66
games will be the key driving forces. The company managed to form a strong
senior management team this year to lead them in new businesses. Our model
52wk Range $35.12-66.58
suggests an upside of 16% for Activision, with a target price range of $70-72. Consensus 1yr Target $69.84
Key Statistics
Drivers of Thesis Market Cap (B) $46.60
 Continued dominance in FPS genre: Activision’s Call of Duty titles are the Shares Outstanding (M) 754.921
top selling FPS titles every year on consoles and PC. Although the last few Institutional Ownership 88.92%
titles have underperformed, the World War story lines will drive the console Five Year Beta 1.16
sales at 3.52% CAGR through 2025 Dividend Yield 0.42%
 Entry to huge eSports market: Activision, with its Overwatch title, Est. 5yr Growth 15.28%
announced to form its own eSports championship league, starting later in Price/Earnings (TTM) 42.5
2017, adding roughly $100 million to revenue in the first year
Price/Earnings (FY1) 24.61
 King Digital to strengthen Mobile games segment: Acquisition of King
Price/Sales (TTM) 6.72
Digital back in 2016 not only strengthened mobile games segment for
Activision but also provided them with expertise to produce more Price/Book (mrq) 4.80
breakthrough games (CAGR growth estimated at 5.44% through 2025)
 Strong Management: Adding former CFO of Walt Disney and bringing back Profitability
Coddy Johnson as COO strengthened the company’s talent pool Operating Margin(mrq) 14.44%
Profit Margin (mrq) 9.42%
Risks to Thesis Return on Assets (TTM) 5.83%
 Lack of innovative new franchises: The company cannot completely rely on Return on Equity (TTM) 12.27%
Call of Duty titles. The gamers need new story line or new franchise games ATVI Industry Sector
every couple of years 60
 Overwatch might not gain enough popularity in eSports: traditionally
Data Source: Factset and Yahoo
gamers in eSports have liked role-playing, strategy or Online Battle Arena
games 40
42.5

Earnings Estimates 20 27.5

Year 2014 2015 2016 2017E 2018E 2019E 19.8
17.0
20.9
15.8 14.4
EPS $1.14 $1.21 $1.30 $1.27 $1.87 $2.57 12.3 11.8
growth 18.4% 6.1% 7.4% -2.0% 46.9% 37.0% 0
P/E ROE EV/EBITDA
12 Month Performance Company Description
ATVI S&P 500
Activision Blizzard is a leading video-game
38% publishing company in the US, with FPS
28% (First-Person Shooter) titles like Call of Duty,
Destiny, World of Warcraft, Overwatch and
18%
Skylanders. The company recently acquired
8% King Digital, the makers of Candy Crush
-2% franchise, to strengthen the mobile games
-12%
segment. The firm plans on entering the
lucrative eSports market with its own league
-22%
S O N D J F M A M J J A
based around Overwatch.

Important disclosures appear on the last page of this report.

 EXECUTIVE SUMMARY Customers: The firm’s customers are:

We recommend a BUY rating for Activision Blizzard as the  Direct end consumers: through Battle.net
company is poised to grow in the next console cycle, platform
expected to release in late 2018. The company dominates  Platform providers: Sony, Microsoft (MSFT),
in the FPS genre games with 3 huge franchises. Moreover, Apple (AAPL)
it acquired the world leader in mobile games, King Digital,  Retailers: Walmart (WMT), GameStop (GME)
which will bring strong innovation to the segment.
Moreover, the company’s new PC games has witnessed For the fiscal year (FY) 2016, Sony and Apple accounted for
increased popularity over the last 2 years. 13% of the net revenues, whereas for FY 2015, Sony and
Microsoft accounted for 12% and 10% of the net revenues
Another huge factor that will drive the business is the respectively.1
entry into new eSports segment. Activision, with its
Overwatch title, has created its own championship league
in eSports expected to start later this year. eSports is a
huge market currently untapped in the US markets. This
will help the eSports segment to grow at a CAGR of 20% of
the next couple of years.

To handle all these new businesses, the company

introduced talented senior officials into the team with new
CFO Spencer Neumann, former CFO at Walt Disney Co.’s
(DIS) park divisions. Moreover, Coddy Johnson has
returned to Activision and will serve as the new COO of the
company.

As per our calculations, the intrinsic value of the company

is $71.57, nearly 16% above the current market price of
$61.66, putting the company’s rating as a buy.

COMPANY DESCRIPTION & ANALYSIS
Founded in 1979, the Santa Monica, California based
company, Activision Blizzard, is a leading developer and
publisher of interactive entertainment (Video-games)
software and services. The company distributes the
content and services on all major gaming platforms: video-
game consoles, personal computers (PCs), mobile devices
and other handheld devices.1 The merger of Activision Inc.
and Vivendi Games in 2008 resulted in the formation of the
parent company, Activision Blizzard.2 On February 23,
2016, the company acquired King Digital Entertainment, a
leading interactive mobile gaming company, at an
aggregate price of $5.8 billion.3
As of January 2017, Activision is one of the largest third-
party video-game publishers globally, as well as the top
publishers for 2016 in the US.4 (Appendix:1)
Data Source: ATVI, SEC filings, 10-K 2017
Products: The games developed by Activision cover a wide
range of genres: first-person shooter (FPS),
action/adventure, role-playing games (RPG), strategy and
match-three games (tile-matching: Candy Crush)
The services offered by the company include:
 Full games: access to main game content (console
or PC)
 Downloadable content (DLC): additional in-game
content to purchase following purchase of full
game
 Microtransactions: small parts of additional in-
game content of enhancements for gameplay (at
low price)
 Subscriptions: continual access to game content
online

Page 2
REVENUE DECOMPOSITION:
Activision Blizzard reports and breaks down its revenue in
4 different ways:
 Business segments (Activision, Blizzard, King and
Others)
 Platforms (Consoles, Mobile, PC, Online and
others)
 Distribution Channels (Digital online, retail and
other)
 Geographic segments (Americas, EMEA and Asia
Pacific)
Although our report and thesis involve research on all the
different methods, we try to focus our revenue growth
forecasts purely on platforms segmentation. We believe
that each platform has its own drivers and growth factors,
and thus is a more efficient tool for forecasting.
Platform Segments:
Activision’s revenues are divided into four segments on
the basis of platforms:
 Consoles: (PS4, Xbox One, WiiU)
 PC and Online
 Mobile and Ancillary
 Others: (eSports, Studios, Distribution)
Until fiscal year 2015, the Consoles, as well as PC and
Online segments accounted for more than 80% of the net
revenues. However, after the acquisition of King Digital in
2016, the company’s Mobile and Ancillary business gained
incremental revenues, accounting for roughly 25% of net
revenues in FY 2016.
Page 3
Consoles
This segment deals with the video-game sales for the
gaming home console platforms (mostly the television
consoles). These consoles first appeared in 1972, and are
currently in their eighth generation. (Appendix:2)
The top 3 eighth generation consoles are:
 Sony’s PlayStation 4 (64.9 million units)
 Microsoft’s (MSFT) Xbox One (31.2 million units)
 Nintendo WiiU (13.96 million)
Activision publishes and markets games for these
consoles. Nintendo’s WiiU was released worldwide in
November 2012, whereas PlayStation 4 and Xbox One
were both released in November 2013. However, the
company still earns revenues from sales of games on
previous generation (7th generation) consoles, namely
PlayStation 3, Xbox 360 and Nintendo Wii.
Recent financial performance: In FY 2015, Activision’s
console segment accounted for 51.3% of the net revenues
($2.39 billion). The 8th generation consoles accounted for
nearly 63% ($1.49 billion) of console revenues and the 7th
generation consoles accounted for the rest.1 In FY 2016,
this segment’s revenue contribution dropped to 37.1%,
after the acquisition of King Digital. The company did not
provide the revenue breakdown for sub-segments in
consoles. However, the trend indicates that the 7th
generation consoles generated less than 5% of the total
console revenues in FY 2016.
Market Growth: According to a Newzoo global games
report, console gaming segment performed better than
expected in 2016, primarily driven by new digital business
models adopted by console manufacturers. Moreover,
they estimate the console gaming to generate $33.5 billion
in revenues globally in 2017, with digital revenues
accounting for two-thirds of these revenues.7 (Appendix: 3)
Forecast: Since Call of Duty, a major contributor to
Activision’s console sales, is expected to post lower unit
sales in 2017 compared to that in 2016, we believe the
console sales will be pressured in FY 2017, partially offset
by increased sales of new FPS games (Overwatch).
However, the market is expecting the lowered sales due to
cyclicity of hardware consoles. The first 6-month Console
sales is down 16.4% year-over-year (y-o-y). As per the
company guidance for Q3 of FY 2017, and our projections
for Q4, we believe the console sales will decline 2% y-o-y
in 2017, as gamers are saving their money to spend on new
consoles upgrades expected to release on November
2017.
Console Segment
2014 2015 2016 2017E
Revenue
($ Mil)
2,150 2,391 2,453 2,404
Growth -9.6% 11.2% 2.6% -2.0%
Data Source: Henry Fund Projections; ATVI SEC filings, 10-K
After the upgraded console and new generation console
releases in the next 18 months, we can see a jump in
console game sales, especially the Digital revenues. The
industry expects the console market to decline over the
next years, with the shift to online, mobile and casual
gaming. However, the top game developers might still
continue to grow in consoles with dominance in specific
genres. It is the smaller market players that will face the
decline, as gamers are still expected to play leading top
games in every genre.
We estimate the console revenues to grow at CAGR of
3.52% through 2025, driven by FPS games (Call of Duty,
Destiny and Overwatch). We might see cyclicity in the
revenue growth of consoles over the next 5 years.
PC and Online
This segment accounts for revenues generated by
Activision through game sales for PC platforms, as well as
online revenues. Almost all the Activision’s big franchise
games: Call of Duty, Destiny, Skylanders, World of
Warcraft, StarCraft, Diablo, Hearthstone, Heroes of the
Storm, Overwatch and even Candy Crush, are available on
PC platforms. Blizzard uses its online gaming service,
Battle.net, to distribute most of its content directly to PC.1
Furthermore, keeping up with the digitalization of games,
all the major game developers have started releasing
console and PC games as a basic pack. To add more
features, users can buy extension packs or Downloadable
2018E 2019E
contents (DLCs). This counts towards online sales for
2,536 2,650 Activision. Moreover, the mobile games have online
5.5% 4.5% purchases and receipts as well.
Apart from these additional buy-ons, Activision has World
of Warcraft (WoW) franchise whose revenues contribute
towards this segment.
Recent financial performance: This segment has
witnessed fluctuating growth over the past 3 years,
primarily driven by increase in PC game revenues and
digital receipts, partially offset by decreasing revenues
from WoW, as it witnesses decreasing subscriber base.
Over the past three years, this segment accounted for 32%
of the net revenues. We expect the revenue contribution
from this segment to remain stable around 32% for the
next 3-4 years.
Page 4
PC revenues have grown 3 folds over the past three years
boosted by increased sales from top FPS games, StarCraft
and Hearthstone. Users are shifting towards PC gaming for
role-playing and strategy games. The online revenues from
DLCs and extension packs are adding to the growth.
Market Growth: According to Newzoo’s report, revenues
for PC gaming segment is estimated to drop slightly in the
coming year. They expect the segment to generate $24.5
billion in 2017, down from previous estimate of $29
billion.7 To play premium PC games, a gamer must make a
significant investment in hardware to build their own
gaming PC. The cloud gaming technology, which requires
next to nothing in hardware costs, is estimated to steal
some market share.
However, Activision, with its specialized role-playing
games and PC card games, might not struggle that much.
The firm still managed to post growth last year when the
PC gaming segment struggled worldwide. Games such as
Overwatch earned $586 million for the company, most of
which was accounted as PC revenues. The “Premium” PC
games are expected to take a hit in 2017 but are expected
to bounce back in 2018.
On the other hand, a report by Technavio suggests that the
global online gaming market is estimated to grow at a
CAGR of 11% over the next 4 years.8 The introduction of
advanced Audio-Visual products and increasing
augmented demand for online gaming have compelled the
companies to focus on providing a better online
experience.
Forecast: With new better story lines in Call of Duty
franchises and new features in MMORPG game World of
Warcraft and Hearthstone, coupled with increasing
demand for digital expansion packs, we believe the
segment is poised to grow at a CAGR of 5.15% through
2025.
PC and Online Segment
2014 2015 2016 2017E
Revenue
1,418 1,499 2,124 2,166
($ Mil)
Growth 13.3% 5.7% 41.7% 2.0%
Data Source: Henry Fund Projections; ATVI SEC filings, 10-K
However, the segment is estimated to grow 2% in
revenues in FY 2017, due to lack of new titles in the last 6
months. With new titles planned to release next year in
the FPS, role-playing and strategy genres, we believe the
growth will jump back.
Mobile and Ancillary
This segment deals with the sales of games for the
handheld consoles, mobile and tablet devices, as well as
sales of ancillary products, such as toys and other physical
accessories for the Skylanders franchise. Before 2015,
Activision had a very small market in mobile games, which
was dominated by other small players, such as Supercell,
Gameloft SA (France), Glu mobile Inc. (GLUU), GungHo
Online Entertainment (Japan), Disney Interactive, King
Digital (KING) and Zynga (ZNGA).
After the Activision’s acquisition of King Digital
Entertainment in February 2016 (See: King Digital
Acquisition), the company strengthened its mobile games
portfolio by a margin. King Digital not only added 494
million Monthly Active Users (MAUs) and 141 million Daily
Active Users (DAUs), but also added $2 billion to the
revenue stream.9 On a worldwide basis, King’s Candy Crush
Saga and Candy Crush Soda Saga were among the top 10
2018E 2019E grossing games for the full year 2015 on both Apple App
store and Google Play store. Other games added to the
2,296 2,480
arsenal were Farm Heroes, Pet Rescue and Bubble Witch
6.0% 8.0% Saga.
According to Think Gaming, Candy Crush Saga still
generates nearly $2.15 million sales daily with more than
60,000 daily downloads.10 On the other hand, Candy Crush
Soda generates $1.24 million daily and 26,000 daily
downloads.10
Page 5
Recent financial performance: Due to lack of
groundbreaking mobile game titles in the market,
Activision’s Mobile and Ancillary segment’s revenues
dropped from $703 million in FY 2012 to $418 million in FY
2015. King’s incremental revenues drove the segment’s
revenue up 42% y-o-y. On the other hand, the ancillary
revenues from Skylanders’ toys and accessories added to
the growth. The segment’s revenue contribution jumped
from 10% in FY 2014 to 25.3% in FY 2016.
Market Growth: Acquiring one of the strongest player in
the mobile and casual gaming segment is a strategically
robust move. According to Newzoo report, mobile gaming
is the most lucrative segment, with smartphone and tablet
gaming estimated to grow 19% y-o-y in 2017.
Furthermore, the report suggests that the mobile gaming
will account for 50% of the total global gaming market by
2020.7
Forecast: We estimate the mobile and ancillary segment
for Activision to grow at a CAGR of 5.44% through 2025,
driven primarily by increasing mobile gaming users for
Candy Crush series and Call of Duty series. The increasing
number of smartphones and tablet circulations
worldwide, as well as strong expertise of King Digital will
be the key driving factors for this segment.
Mobile and Ancillary Segment
2014 2015 2016 2017E
Revenue
433 418 1,674 1,774
($ Mil)
Growth -31.2% -3.5% 300.5% 6.0%
Data Source: Henry Fund Projections; ATVI SEC filings, 10-K
Other
We believe this segment will the company’s next growth
driver, with 19% CAGR growth over the next 5 years,
primarily driven by entry to huge eSports market. The
segment deals with three sub-segments: Major League
Gaming (MLG) or eSports business, Studio business and
Distribution business.
eSports (Market Growth): Also known as Electronic
sports, it is competitive professional gaming competitions
between professional players on a multiplayer platform.
The common genre of games competitively played in
eSports are real-time strategy, fighting, FPS and
Multiplayer online battle arena (MOBA). The major
tournaments for this sport are ‘The International’, the
League of Legends Worlds Championship, the Evolution
Championship Series and the Intel Extreme Masters
(IEM).11 These sports provide huge cash prize money to
winners and the competition are broadcasted live on
various platforms. These organized competitions have
been there for a long time but were played among the
amateurs until late 2000s.
Gradually gaining popularity over the past decade, global
eSports posted revenues of roughly $900 million in 2016,
with Asia leading the market with more than one-third of
the market share. (Appendix: 4) These revenues are
2018E 2019E estimated to grow up to $3.5 billion by 2021, driven
majorly by ad-spend.12
1,863 1,994
5.0% 7.0%
eSports enthusiasts spend nearly $231 million on tickets,
merchandize and prize pool, implying increase in direct
consumer revenue by 36% y-o-y.12 The people watching
these sports are predominantly male (86%), with 46% of
them falling in the age range of 18-25 years.13 The final
Page 6
stages of the 3 big eSports tournaments witnessed over 90 Strike: Global Offensive. Off lately, titles such as StarCraft
million unique viewers. The 3 big factors that will drive the II, Call of Duty, Hearthstone and Overwatch, all of them
industry’s growth:14 owned by Activision, have started gaining popularity.

 Increasing attendance and digital viewership: the
IEM World Championship 2017 in Poland,
witnessed 173K viewers to stadium, up 53% y-o-y.
It was the most watched event in the history with
46 million unique viewers.
Studios: This unit deals with creating original movie and
television content based on the company’s IPs. In October
2016, it released the 1st season of animated TV series,
Skylanders Academy on Netflix (NFLX). Although not huge,
this unit has a slight growth potential to contribute
additional revenue as the company creates more original
content for Netflix.

Distribution: This unit deals with distribution operations in

Europe, consisting of sales distribution to third-party
publishers.

Recent financial performance and forecast: The segment

only contributed 5.4% of the net revenues in FY 2016.
However, with the introduction of eSports division and a
new eSports league around Overwatch, we believe the
segment will jump from $300 mil in 2016 to over $1 billion
by 2021.
 Strong ad-revenues: The IEM World Other (eSports, Studio and Distribution) Segment
Championship had 55 million fans on social media 2014 2015 2016 2017E 2018E 2019E
networks, up 83% y-o-y, generating 255 million
Revenue
impressions. This generated strong ad-revenues 407 356 357 464 594 743
($ Mil)
for Intel (INTC), the tournaments title sponsors.
Growth 26.0% -12.5% 0.3% 30.0% 28.0% 25.0%
This will encourage other companies to enter this
Data Source: Henry Fund Projections; ATVI SEC filings, 10-K
market and aid to its growth.
 Broadcasting revenues: ESL (Electronic Sports
League), an eSports company that organizes these
events with partnerships, gained a lot from IEM
championship in 2017. The event was broadcasted
by 70 linear and digital outlets globally, making it
ESL’s far-reaching event to date. Newzoo’s report
mentions that more than 100 million viewers
spent more than 800 million hours over the period
from August 2015 to May 2016, watching eSports
games on Twitch, a leading video platform for
gamers.15

Undoubtedly, looking at the huge growth potential of this

market, Activision Blizzard launched a new eSports division
back in October 2015.16 Steve Bornstein, former CEO of
ESPN and the NFL network is serving as the chairman of Top Franchises: The company keeps on releasing new
this unit. Recently, the company announced to build a editions (intellectual properties) for different game
professional eSports league on its FPS title Overwatch.17 franchises every year. Some of the top franchises for the
last 3 years are:1
The most common game titles played in these
competitions are Dota 2, League of Legends and Counter-

Page 7
  FY 2016: Call of Duty, Candy Crush, World of
Warcraft (WoW) and Overwatch- collectively
accounting for 69% of net revenues ($4.56 billion)
 FY 2015: Call of Duty, World of Warcraft (WoW),
Destiny and Hearthstone – collectively accounting
for 75% of net revenues ($3.5 billion)
 FY 2014: Call of Duty, World of Warcraft (WoW),
Skylanders and Diablo – collectively accounting for
75% of net revenues ($3.3 billion)
Call of Duty (COD)
Call of Duty is a first-person shooter (FPS) video game
franchise, which first started off as a PC game but is now
highly popular on the consoles, primarily because of their
online community base and multiplayer game popularity.
The World War II editions of the game have sold a total of
15.74 million units worldwide, with Sony’s PS2 and PS3
accounting for more than 50% of these sales, and
Microsoft’s Xbox consoles accounting for 32% of sales.5
The franchise later changed its story in 2007 and started
releasing a new story lines called Modern Warfare and
Black Ops. There were 3 original Modern Warfare (MW)
Page 8
titles: COD MW1 (2007), COD MW2 (2009) and COD MW3
(2011), released on all major gaming platforms. The
Modern Warfare titles have generated net 74.58 million
units in sales as of now.5 The PlayStation and Xbox
consoles accounted for 41.3% and 51% of the total MW
unit sales, with PC accounting for merely 5% of volume
sales.
On the other hand, Black Ops series is one of the most
successful story line of this franchise. The 4 Black Ops
titles: World at War, Black Ops 1, 2 and 3, in total
accounted for 104.77 million units in sales as of now.5 The
PlayStation and Xbox consoles accounted for 41% and
50.6% of these sales respectively.
The other individual story lines are:
 Call of Duty: Ghosts (2013) – 27.53 Mil units
 Call of Duty: Advanced Warfare (2014) -22.18 Mil
units
 Call of Duty: Infinite Warfare (2016) – 12.53 Mil
units
Call of Duty has been the top FPS game worldwide for the
last 7 years, except 2016. The only top-tier console game
that competes with the same game sales worldwide is
Electronic Arts’ FIFA franchise. Due to the unmotivating
story line and no special features in Call of Duty: Infinite
Warfare (2016), the sales took a hit. As a result, the gamers
shifted to other FPS games, such as Sony’s Uncharted 4,
Activision’s Overwatch and Electronic Arts’ Battlefield 1.

Since, the company is bringing back the World War II story
this year with Call of Duty: World War II yet to release on
November 3, 2017.6 We believe the Call of Duty sales,
although lower than their previous counterparts, will still
remain strong for Activision in 2017 and 2018 driving the
console sales by 5.5% in 2018. The gamers historically tend
to opt for a game with better story line. Moreover,
according to the trend in console cycle (See: Seasonality),
we generally see a boost in sales before the release of new
consoles, which we believe will be out in later 2018 or early
2019. According to our estimates, Call of Duty will be low
in 2017 as well, but will be back in 25 million range by
2018.
Destiny
It is an online-only multiplayer role-playing FPS game, first
released in September 2014. It was developed by the
makers of the famous Halo franchise. It is set in a post-
apocalyptic world and works on shared-world
environment. It was released on all major platforms
(PlayStation and Xbox). Further expansion packs to the
game in 2015 and 2016 has kept the volume sale of this
franchise in top 100 games of the year for the past 2 years.
Activision released the full game sequel to the franchise,
Destiny 2, on PS4 and Xbox One on September 6, 2017. The
PC version of the game will be released in late October
2017. Although it is a vast improvement to its predecessor,
the first month sales of this game were down 50% y-o-y
compared to its first version.
Overwatch
It is a team-based multiplayer online FPS game released in
May 2016 for all major platforms. This game assigns
Page 9
players into 2 teams of six, and each player chooses one of
the 25 rosters available. Since its release, it has been
recognized more as an eSports game. As a result, Activision
created a professional gaming league based on this game,
yet to start later this year.
Skylanders
It is a toys-to-life action game, where game is played by
placing character figurines on a portal, that reads the
figures’ tag through NFC (Near Field Communication)
technique. Its first edition was released back in 2011. Since
then the company has released a new version every year,
with the latest version released in 2016 called Skylanders:
Imaginators. This edition is also planned to release on
Nintendo Switch, the upgraded console from Nintendo.
This game not only earns revenue from game sales, but
also from the sales of toys and accessories required to play
the game. It is the most successful game in Kids gaming
genre.
SEASONALITY
The video-game publishing and developing industry is a
cyclical business in two ways:
 Hardware Console Cycle: Hardware here refers to
the video-game consoles, namely Sony’s
PlayStation, Microsoft’s Xbox and Nintendo’s Wii.
Historically, these consoles are released every 4-5
years. The latest version (eighth generation) of
Nintendo’s console: the Nintendo WiiU was
released in November 2012, whereas the
PlayStation 4 and Xbox One were both released in
November 2013.
Historically, just before the release of new
generation consoles, the software game sales
trend up. In this period, gamers generally avoid
buying the old consoles and wait a year or two for
the new consoles. They rather spend that money
on new game titles, boosting up the software
sales. On the other hand, at the start of new
console cycle (just after the new consoles are
released), gamers tend to upgrade and spend
more money on hardware. As a result, software
sales take a hit.
 This is clearly visible in Activision’s revenue growth
chart below:

FORECASTING
 Software Cycle: Although each video-game
publisher and developer release video-games Revenue
throughout the year, most of the big franchise
games, such as Activision’s Call of Duty, Destiny,
Overwatch and Skylanders, as well as Electronic
Arts’ (EA) FIFA and Madden NFL, are released near
the end of 3rd quarter or in the 4th quarter. The
strategy behind this is to release the game as close
to the holiday season (December end) as possible,
as users generally tend to spend more during this
period. However, the pre-orders of the game are
generally released a month before the actual
release to generate hype.

Every year, an E3 (Electronic Entertainment Expo)

conference takes place in the US, where all the big
game developers (both hardware and software)
showcase the new releases planned for the year.
Geographic Segments:
The company has three major operating regions
geographically: Americas, EMEA and Asia-Pacific. We
estimate the Americas region to grow at a CAGR of 6%
through 2025, because of the introduction of eSports in
North America. Moreover, the console sales in FPS genre
will dominate in the North America region. The growth
rate is estimated to be 5.9% in Europe and 5.78% in Asia
through 2025. This is because eSports is already big in Asia,
and most of the growth will come from North America.
Revenue forecasts for the company has been done based
on platform revenue growth prospects. We estimate the
company’s revenue to grow 3.0% y-o-y in FY’17 to post
revenue of $6.8 billion. Although the company gave the
revenue guidance in the range of $6.4 billion in its Q2
earnings transcript, the market is estimating the revenues
in the range of $6.6 to $7 billion for FY 2017.
Thereafter, we estimate the company’s revenues to grow
at a CAGR of 6.3% through 2025, primarily driven by
increasing market share in mobile games, dominance in
FPS genre console games and potential strong growth in
eSports market.

Page 10
Margins
COST OF GOODS SOLD
The cost of goods sold (including Depreciation and
Amortization costs) as a percentage of sales decreased
from 54% in 2009 to 36% in 2016, primarily due to shift
towards digitalization and shift towards online games.
Moreover, the cost required to develop a new franchise is
higher than just revamping the old edition and coming up
with a new story. Furthermore, the shift towards mobile
and casual games would further reduce the cost. As a
result, we estimate the cost of goods sold to drop to 33%
in FY 2017, giving a boost to the gross profits (67% in FY
2017). Thereafter we expect the cost to further decrease
to 22% by 2025.
PRODUCT DEVELOPMENT EXPENSES
Product development cost as percentage of sales declined
from 14.6% in 2009 to 12.44% in 2012, as the company
kept on revamping the Call of Duty titles and had no new
franchise. Moreover, due to no innovation, World of
Warcraft subscriber base started declining. After the
release of new consoles (8th generation), the company
started coming up with new story lines in Call of Duty
series, and new IPs, such as Destiny, Overwatch and
Hearthstone. As a result, product development cost as
percentage of sales increased to 14.5% in 2016, slightly
boosted by acquisition of King Digital. To maintain the
research & development, the company needs to maintain
this cost level. Thus, we estimate the product
development cost to remain around the same level
through 2025.
Page 11
SALES & MARKETING, GENERAL AND ADMINISTRATIVE
EXPENSES
Historically, sales and marketing expenses increased from
12.7% ($544 mil) of the sales in 2009 to 15.7% ($734 mil)
of sales in 2015. Furthermore, the acquisition of King
Digital drove up this expense to 18.3% of the sales in 2016.
As the company is trying to get into new markets (eSports),
we believe the figure will rise to 20% of the sales in the
next two years before coming back to 17% of the sales by
the end of our forecasting period (2025).
Similarly, the G&A as percentage of sales is estimated to
jump from 9.6% ($634 mil) in 2016 to 12.87% ($876 mil) in
2017, and thereafter normalizing back to 11.25% ($1.2 bil)
by the end of 2025.
Source: ATVI 10-K SEC filings, Henry Fund Model Projection
PROFIT MARGINS
Operating margins of the company increased from 10.5%
in FY’09 to 28.3% in FY’15, but dropped to 21.4% in FY’16
primarily due to additional operational costs incurred after
the King Digital acquisition. We forecast the operating
margins to fall further to 19.3% in FY’17, as the company
faces more operational costs after the merger. However,
the shift towards higher margin businesses and increased
revenues from consoles will boost the margins to around
35% by 2025. This increase will eventually trickle down to
net profit margins, and thus we estimate the profit
margins to rise from 14.62% in FY’17 to 28% in FY’25.
Lower costs as part of optimizing synergies and higher
revenues from premium priced products will drive these
margins.
 The firm updated its FY 2017 revenue from $6.1 billion to
$6.4 billion, whereas it expects its Q3 revenues to drop
12% y-o-y at $1.385 billion. We estimate the FY 2017
revenues to grow 3% y-o-y and overperform than the
company guidance. The company is expected to release its
Q3 FY’17 report on November 3, 2017.19

Source: ATVI 10-K SEC filings, Henry Fund Model Projection
RECENT DEVELOPMENTS
Change in Leadership
Coddy Johnson, who held several positions at Activision
from 2008 to 2016, including CFO and head of operations
of Activision Publishing positions, left the company to help
lead a private-school company. The company recently
announced that he returned to the company to serve as
President and COO, effective June 2017.20 Previous Chief
Operating Officer, Thomas Tippl is now made the Vice
Chairman.

Moreover, the company strengthened its senior

Beats Q2 FY 2017 Earnings Estimate management by appointing Spencer Neumann, former
Activision Blizzard reported its Q2 financial result for FY CFO at Walt Disney Co.’s (DIS) park divisions, as its new
2017 on August 3, 2017, posting 4% y-o-y increase in the Chief Financial officer.21 These changes seems to be done
GAAP net revenues to $1.63 billion, with 15% y-o-y on the account of expanding its businesses into new
increase in digital channel sales. horizons. The company hired former ESPN CEO Steven
Bornstein as chairman of its eSports business back in 2015.
Activision Blizzard
In February, Tim Kiplin, former Mattel Inc. (MAT) president
($ Mil) Q2 2017 Q2 2016 Change
was appointed to handle the consumer products
Consoles $ 568 $ 650 -13% business.21
PC and Online $ 508 $ 411 24%
Mobile and Ancillary $ 493 $ 454 9% Important Acquisitions
Other $ 62 $ 55 13%
Total $ 1,631 $ 1,570 4% King Digital Entertainment: On February 23, 2016,
Activision completed the acquisition of King Digital
Source: ATVI 10-Q SEC filing, Q2 2017 EDGAR Entertainment for a total equity value of $5.9 billion,
implying $18 in cash per share acquisition.22 King continues
Based on platforms, only consoles faced decline 13% in
to be led by its CEO Riccardo Zacconi. This acquisition not
sales y-o-y, due to lower revenue generation from Call of
only added two of the top-5 grossing mobile games (Candy
Duty titles. This is primarily because last Q2 had
Crush Saga and Candy Crush Soda Saga) to Activision’s
tremendous sales from Black Ops III and Advanced
arsenal, but also will aid the company to utilize the
Warfare. Otherwise, the console sales are above the Q2
expertise to make more blockbuster games.
average. The company beat revenue estimates by $190
million and EPS estimates by 16 cents.18
INDUSTRY TRENDS
The company posted 407 Monthly Active Users (MAUs) in
Q2. Blizzard witnessed biggest quarterly online community Shift to eSports
with 46 million MAUs (up 38% y-o-y), driven by Overwatch
As discussed in earlier section, eSports have been
community and Hearthstone’s new expansion pack.
gradually gaining popularity over the past decade with net
Activision unit posted 47 million MAUs, driven by launch
industry revenues of roughly $900 million in 2016. Asia has
of Zombie Chronicles in COD Black Ops III series. King had
been the market leader with nearly 33% of the market
314 MAUs, down y-o-y but had better bookings per paying
user.
Page 12
share. (Appendix: 4) These revenues are estimated to grow
up to $3.5 billion by 2021, driven majorly by ad-spend.12
Companies such as Twitch, a leading video platform for
gamers, have benefitted hugely by this industry. A Newzoo
report mentions that more than 100 million viewers spent
more than 800 million hours over the period from August
2015 to May 2016, watching eSports games on Twitch.15
Looking at the strong untapped market, Activision Blizzard
(ATVI) and Electronic Arts (EA) did not waste time in setting
up their huge own eSports divisions and starting a league
around one of their IPs. In July 2017, Activision announced
that the formation of an Overwatch league, set to launch
later this year, with teams from major cities around the
world.29 Following the same path, the owners of sports
game franchises, Electronic Arts teamed up with NFL
(National Football League) to start a new Madden NFL Club
Championship. Other companies such as Tencent’s Riot
Games are also following the same route.30
Adoption of Virtual Reality in gaming
Big video-game hardware developers spent millions on
R&D and have started releasing their own Virtual reality
(VR) devices out in the market. The interest of gamers in
VR gaming has been increasing. VR hardware sales are
expected to grow from $1.4 billion in 2016 to $2.4 billion
in 2017.31 Facebook (FB) with its Oculus VR, Google
(GOOGL) with its Google Cardboard headset, Microsoft
with HoloLens and HTC with its Vive headset, among
others, are already making a breakthrough success in the
markets. Microsoft plans to reveal a VR component to its
upgraded Xbox One X console later this year. As a result,
the software companies, such as Activision, Electronic
Arts, Ubisoft and Take-Two Interactive are stepping up in
their game and working on towards making VR titles. With
games like Pokemon Go, augmented Reality has already
gained momentum in the gaming industry.
MARKETS AND COMPETITION
Video-game software and services industry is a highly
competitive and cyclical industry, characterized by
continued innovation in video-games. Some of the
products can be occasionally expensive and can face
downward pricing pressures in low-income regions
development. To develop a new innovative game title with
compelling story line and attractive graphics, it involves
huge capital requirements. Thus, a new company can
enter the industry through a new innovative product. Most
of the firms in the industry invest heavily on their R&D, and
still faces declining returns on those investments, as the
markets for several products saturate quickly. As a result,
requirement for large economies of scale to sustain
margins, as well as fast rate of technological changes pose
huge challenge for new competitors.
Power of Suppliers in the industry is low, due to large
number of players in that space with high intense
competition among themselves. Most of the requirements
from supplier side is human talent and IT software.
Power of Buyers is medium. In terms of demand, this
industry has cyclical demand curve. Software sales tend to
rise near the holiday season (December). Since most of the
games are played on Consoles, the companies have
started partnering up with console manufacturers to
release their games as bundles to boost initial sales. If a
particular game is expensive, user might not buy it and opt
for similar games in same genre from other publishers.
However, big players in the market have more of the
bargaining power since they release annual editions of
popular franchises, which are in high demand every year.
Threat of substitutes is high. Users can shift to other
modes of entertainment, such as movies or Netflix or
online flash player games. Due to continuous innovation
and improvements in technology, there is significant
threat of substitutes. Thus, the firms not only need to stay
on top of their competitors within the industry but stay
aware of advancements within the whole gaming
ecosystem. However, an improved substitute generally
comes at higher cost.
Peer Comparisons
Activision’s primary competitors are Electronic Arts (EA),
Take-Two Interactive (TTWO), Ubisoft, Microsoft (MSFT)
and Sony.
Revenue
Market (Bil)
Currency P/E (ttm) ROE EV/EBITDA
Cap (FY'17E)

internationally. Activision Blizzard ATVI $ 47.55 6.81 42.5 13.4% 20.9

Electronic Arts EA $ 36.32 4.94 29.9 28.6% 20.8
Threat of new entrants is medium to low, primarily due to Take-Two Interactive TTWO $ 10.92 1.90 29.2 20.3% 45.9
high initial capital requirements for research and Ubisoft UBI € 7.37 1.46 73.7 10.0% 30.0
Nintendo 7974 (TYO) ¥ 3103.5 828.3 35.1 12.8% 75.5

Page 13
Electronic Arts (EA)
Electronic Arts is another giant player in the video-game
industry, that specializes and dominates in the sports
game genre. The key products for EA are its FIFA and
Madden NFL franchise. Recently, the company has
stepped up in the FPS genre with its Titanfall and
Battlefield franchises. FIFA and Madden NFL are the
company’s biggest cash generating franchises, with FIFA
generating most of its cash from Europe and Asia, whereas
Madden NFL makes almost all revenues from North
America.
EA is trading at a multiple of 29.9, much lower than that of
Activision. Although EA has also stepped up its game in the
eSports segment with the introduction of the Madden NFL
Club Championship, we believe Activision has an upper
hand with dominance in FPS games and mobile gaming.
Historically, gamers opt to stay away from sports genre
games in eSports leagues and prefer role-playing and
shooter games more. Moreover, Activision has an upper
hand in the mobile gaming segment and PC segment as
well. Thus, Activision is appropriately trading at a premium
over EA.
EA’s margins are close to 23%, way more than Activision,
primarily because they have had favorable years with
digital revenues. As a result, EA’s ROE is close to 28%, as
compared to 13.4% for Activision. In terms of unit sales,
Call of Duty has historically beaten FIFA sales worldwide
over the past 5-6 years. As a result, EA has been working
on getting into FPS genre as well. EV/EBITDA multiple for
both the firms are comparable at 20.8.
Take-Two Interactive (TTWO)
Take-Two Interactive is another American video-game
publisher that owns Rockstar Games and 2K Games. The
company’s notable game franchise is Grand Theft Auto, its
sports titles, such as NBA 2K, WWE 2K and Bioshock series.
The firm has smaller revenues as compared to its other
two big peers in America. TTWO does not have a larger
portfolio of games, but its Grand Theft Auto series has
been a blockbuster success. The franchise still remains
among the top 10 games sold in terms of units.
TTWO is trading at a higher multiple of 69, compared to
Activision’s 42.5. The market is leveraging its upcoming
next year’s release Red Redemption 2 as a huge success.
We believe despite the continuing success of GTA series,
the company is overvalued. The street estimate both the
Page 14
companies (TTWO and ATVI) to grow in double-digits over
the next couple of years.
Activision has an advantage of a diverse and rich game
portfolio as compared to Take-Two Interactive.
ECONOMIC OUTLOOK
Increasing global GDP
According to IMF, economic activity is estimated to gain
momentum in 2017, after a sluggish growth in 2016.
Advanced economies are expected to grow by 1.90% in
2017 and 2.00% in 2018.26 The key driving factor will be the
economic growth in emerging markets and developing
economies (EMDE), which is estimated to be roughly 4.5%
in 2017. GDP growth will translate to increased disposable
incomes and better consumer markets. Much of the
economic outlook depends on the new US administration
and its policies with foreign nations. U.S. GDP grew at an
annual rate of 3.1% in the second quarter of 2017
compared to 1.2% annualized growth rate in the first
quarter of 2017.27 The rise in GDP in 2nd quarter indicates
an upturn in the private inventory investment and federal
government spending, as well as deceleration in imports.
Real Gross Domestic Income (GDI) rose 2.9% in the 2nd
quarter, compared to 2.7% increase in the 1st quarter of
2017.
Real GDI (Gross Domestic Income), on the other hand,
increased 2.9% in second quarter compared to 2.7% in first
quarter.
Unemployment Data
According to Bureau of Labor Statistics, the
unemployment rate in US has declined steadily over the
last 5 years and currently sit at 4.2%, as of September
2017, compared to 4.4% by end of August 2017. 28

The number of unemployed people declined by 331,000
and stayed at 6.8 million. Employment in September
increased in transportation and warehousing, healthcare
and financial activities. Statista research estimates the
unemployment rate to remain close to 4.4% in 2017,
indicating a steady rise in labor costs. However, the
estimate forecasts the rate to increase gradually to 5% by
the end of 2020.
CATALYSTS FOR GROWTH
Increasing working age population
World population is expected to increase to 8.5 billion by
2030 from the current figures of 7.3 billion, reflecting a
CAGR of 1.02%.23 According to United Nations data, there
were 1.2 billion young people in 2015 aged 15-24 years.
This is the demographic that is the biggest consumer of
gaming industry. As per the report, this demographic is
estimated to increase by 7% to 1.3 billion by 2030.24 As
more of these users start earning, they spend more money
on leisure interactive entertainment worldwide, especially
in the developing economies.
Increasing smartphone market
According to a report by Persistence Market Research, the
global smartphone market is estimated to grow at a strong
CAGR of 7.9% in terms of value and 5.8% in volume over
the next 7 years.25 Changing lifestyle and increasing
disposable income, has led to increased spending on
media and entertainment. However, the urban population
is more favorable to buy these devices than rural
population, and thus there is more demand for
smartphones in developed markets. Big players include
Apple (AAPL), Samsung Electronics, Huawei Technologies,
Lenovo Group and LG Electronics.
Page 15
By 2024, iOS is estimated to account for $585 billion in
sales, growing at a CAGR of 9.1% and market share of
nearly 50%.25 This is followed by Android segment with
CAGR of 6.7% and market share of 47%.
INVESTMENT POSITIVES
• Activision’s Call of Duty, Destiny II and Overwatch will be
the drivers for the console segment. Call of Duty has been
the top selling FPS game for the past 8 out of 10 years, and
will remain s strong cash cow for the company
• With Overwatch gaining a lot of popularity, the PC
revenues will gain momentum, coupled by some extra
boost from Hearthstone and StarCraft, both of which
received great acceptance from gamers
• King’s Candy Crush franchise continues to dominate in
the mobile gaming segment. Further innovative games
from this unit will drive the mobile segment growth
• eSports segment for Activision will bring in revenues
from ads and ticket sales. Starting an own league in this
lucrative market is a strong positive for the company
• Increase in smartphone and tablet sales will only add to
mobile gaming revenues
• Strong and talented senior management officials to
strategically manage the new businesses
• Studios segment continue to create original movie and
television content, and a partnership with Netflix will be a
boost to revenues
INVESTMENT NEGATIVES
• Nearly 50% of Activision’s revenues come from
International markets. Foreign exchange rate fluctuations
will negatively affect the margins
• High debt to create potential cash flow risks
• Slowdown in sales of Call of Duty game titles in the next
two years might help the competitors in stealing the
market share in FPS genre
• King Digital might not be able to come up with any other
cash cow franchises soon, potentially losing the growth
opportunity
• eSports market might not accept Activision’s FPS games
as much as role-playing strategy games, such as Dota 2 and
League of Legends
VALUATION
Revenue projections for FY 2017 are based on individual
segmental revenue forecast and company’s guidance. (See
Company Description, Page: 2-10) Due to improved COD
and Destiny titles in the coming 2-3 years for consoles and
PC, increasing demand for mobile and handheld casual
gaming, tremendous growth potential in eSports market
and growing contribution of digital revenues, we estimate
the revenues to grow at a CAGR of 6.3% through FY 2025.
Capital expenditure forecast is based on company’s long-
term guidance to spend more on new innovative games
and on eSports leagues. We estimate the capital
expenditure to fluctuate between the range 1.1% to 1.3%
of the total revenues over the next few years.
Our calculations are based on three varying valuation
methods – Discounted Cash Flow, dividend discount, and
relative multiple (P/E). Differences in these methods
revealed a model range of $48-72. However, the dividend
discount model is insignificant as the company has a low
payout ratio, and it may not correctly translate to intrinsic
value. The relative multiple models are difficult to use for
this company as the direct competitors in the US market
are merely two (EA and TTWO). Moreover, TTWO is
trading at an unusually high forward multiple because of
one-time low earnings. Other competitors such as
Microsoft (MSFT) and Walt Disney (DIS) have a different
product mix, of which gaming segment is a very small part.
As a result, there are not enough samples to use. If we take
International competitors, we get even more skewed
price, because of the different interest risk and market risk
scenario in those markets.
Thus, the more accurate DCF model gives a price estimate
of $70.57 implying an upside of roughly 16% from the
current market price.
WACC Calculations
RISK FREE RATE
To determine the risk-free rate, we used the 30-year
Treasury bond yield, which stood at 2.82%, as of October
17, 2017.
Page 16
Cost of Debt
To find cost of debt, we looked at Moody’s credit rating for
Activision’s new note offerings, which was Baa2, implying
a default premium of 1.60%. We then added that default
premium to a risk-free rate (30-year treasury rate. This
gave us the pre-tax cost of debt of around 4.42%.
BETA
A raw Bloomberg Beta of 1.16 was used for our
calculations.
COST OF EQUITY
To determine cost of equity, we used a CAPM model. Our
model incorporates a market risk premium of 4.8%, which
reflects our expectations of forward-looking market
conditions. This resulted in 8.40% cost of equity.
WACC
Our weighted average cost of capital, through a CAPM
model was 7.98%.
DCF/EP Models
Our model assumes a 4% terminal growth rate for
NOPLAT. Our DCF price of $71.57 implies an upside of 16%
from the current stock price. This is justified by
incremental income resulting from growth mobile and
eSports division. Moreover, the company looks strong in
capturing majority of the growth in console and PC
markets after the release of the next generation consoles.
Sensitivity Analysis
Sensitivity analysis of our DCF model suggests that the
price estimate is highly sensitive to 3 key metrics: beta, CV
NOPLAT growth, and Sales & Marketing as percentage of
sales. We used a beta of 1.16 for our model. With 0.96 as
our beta, we estimate the company’s stock price to reach
$96.85.
We used a 4.19% CV growth for NOPLAT. However,
decreasing it to 3.29% drives our price estimate down to
$60.23. According to our estimates, Sales & Marketing as
percentage of sales should remain close to 20% for the
next couple of years. However, increasing the expense to
24% of the sales, will result to 14% drop in our price
estimate to $61.48. On the other hand, it is moderately
sensitive to cost of debt, risk-free rate, marginal tax rate
and depreciation rate forecast.
REFERENCES
1. Activision Blizzard, SEC filing 10-K, December 31, 2016
2. Investor relations, Activision Blizzard,
www.investor.activision.com, Dec 2, 2007
3. Activision Blizzard completes King acquisition, Investor
relations, Activision Blizzard,
www.investor.activision.com, Feb 23, 2016
4. Top 25 companies by game revenues,
www.newzoo.com, June 2017
5. www.VGChartz.com, Call of Duty, August 2017
6. Call of Duty: WW2 Release date, www.eurogamer.net,
June 10, 2017
7. Global Games Market, Newzoo, April 20, 2017
8. Global Online gaming market, Technavio, May 2016
9. King Digital Entertainment, SEC Filings, 6-K, Feb 11,
2016
10. Think Gaming, Candy Crush data
11. eSports, Wikipedia
12. eSports revenues to reach $3.5 billion by 2021, Juniper
research, Mar 14, 2017
13. SuperData, eSports Market Report
14. The eSports audience is escalating quickly, Business
insider, Mar 20, 2017
15. Twitch’s 100 million viewers watched 800 million
hours of eSports in the last 10 months,
www.venturebeat.com, June 10, 2016
16. Why Activision-Blizzard just launched a new eSports
division, www.fortune.com, Oct 22, 2015
17. Activision Blizzard, Investor Relations, Jul 12, 2017
18. Activision Blizzard, 8-K SEC filing, Aug 3, 2017
19. Activision Blizzard to release Q3 earnings, Investor
relations, Oct 5, 2017
20. Activision’s Hires Greeted With $40 Million Welcome
Package, Bloomberg Technology, May 11, 2017
21. Activision hires new CFO from Disney, Bloomberg
Technology, May 10, 2017
22. Activision Blizzard completes King Acquisition, Investor
Relations, Feb 23, 2016
Page 17
23. UN Department of Economic and Social Affairs- World
Population forecasts
24. Population facts, United Nations, May 2015
25. Global Market Study on Smartphones, Persistence
Market Research, Sep 2016
26. IMF- World Economic Outlook January 2017
27. US Real GDP estimates, Bureau of Economic Analysis,
September 28, 2017
28. Unemployment Rate, Bureau of Labor Statistics,
September 18, 2017
29. Activision Blizzard's 'Overwatch' eSports League Lands
Owners From NBA, NFL, MLB; www.fortune.com, July
12, 2017
30. The NFL and EA Sports Are Launching a 'Madden NFL'
E-Sports Tournament; www.fortune.com, August 21,
2017
31. Virtual Reality Companies: Top 20 VR Companies to
Watch, www.datamation.com, July 12, 2017
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
APPENDIX:1

Source: www.newzoo.com

Page 18
APPENDIX: 2

Page 19
APPENDIX: 3

APPENDIX: 4

Page 20
Activision Blizzard
Revenue Decomposition
(figures in $ millions)
Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Total Platform Revenues:
Console 2,150.0 2,391.0 2,453.0 2,403.9 2,536.2 2,650.3 2,716.5 2,933.9
PC and Online 1,418.0 1,499.0 2,124.0 2,166.5 2,296.5 2,480.2 2,653.8 2,826.3
Mobile and Ancillary 433.0 418.0 1,674.0 1,774.4 1,863.2 1,993.6 2,113.2 2,218.9
Other (MLG, Studios, Distribution) 407.0 356.0 357.0 464.1 594.0 742.6 891.1 1,069.3
Total Revenue 4,408.0 4,664.0 6,608.0 6,809.0 7,289.8 7,866.6 8,374.6 9,048.3

% Platform Revenues:
Console 48.8% 51.3% 37.1% 35.3% 34.8% 33.7% 32.4% 32.4%
PC and Online 32.2% 32.1% 32.1% 31.8% 31.5% 31.5% 31.7% 31.2%
Mobile and Ancillary 9.8% 9.0% 25.3% 26.1% 25.6% 25.3% 25.2% 24.5%
Other (MLG, Studios, Distribution) 9.2% 7.6% 5.4% 6.8% 8.1% 9.4% 10.6% 11.8%
Total % Platform Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Total Platform Revenue Growth:

Console -9.6% 11.2% 2.6% -2.0% 5.5% 4.5% 2.5% 8.0%
PC and Online 13.3% 5.7% 41.7% 2.0% 6.0% 8.0% 7.0% 6.5%
Mobile and Ancillary -31.2% -3.5% 300.5% 6.0% 5.0% 7.0% 6.0% 5.0%
Other (MLG, Studios, Distribution) 26.0% -12.5% 0.3% 30.0% 28.0% 25.0% 20.0% 20.0%
Total Revenue Growth -3.8% 5.8% 41.7% 3.0% 7.1% 7.9% 6.5% 8.0%

Total Segment Revenues:

Activision 2,686.0 2,700.0 2,220.0 2,047.1 2,164.4 2,297.9 2,405.6 2,579.7
Blizzard 1,720.0 1,565.0 2,428.0 2,566.6 2,713.7 2,881.2 3,016.2 3,234.5
King Digital - - 1,586.0 1,731.2 1,817.7 1,945.0 2,061.7 2,164.7
Other (MLG, distribution) 407.0 356.0 365.0 464.1 594.0 742.6 891.1 1,069.3
Deferral of net revenues (405.0) 43.0 9.0 - - - - -
Total Revenue 4,408.0 4,664.0 6,608.0 6,809.0 7,289.8 7,866.6 8,374.6 9,048.3

% Revenues:
Activision 60.9% 57.9% 33.6% 30.1% 29.7% 29.2% 28.7% 28.5%
Blizzard 39.0% 33.6% 36.7% 37.7% 37.2% 36.6% 36.0% 35.7%
King Digital 0.0% 0.0% 24.0% 25.4% 24.9% 24.7% 24.6% 23.9%
Other (MLG, distribution) 9.2% 7.6% 5.5% 6.8% 8.1% 9.4% 10.6% 11.8%
Deferral of net revenues -9.2% 0.9% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0%
Total % Revenue 100.0% 100.0% 100.0% 100.0% 100% 100.0% 100.0% 100.0%

Total Segment Revenue Growth:

Activision -7.2% 0.5% -17.8% -7.8% 5.7% 6.2% 4.7% 7.2%
Blizzard 53.0% -9.0% 55.1% 5.7% 5.7% 6.2% 4.7% 7.2%
King Digital 0.0% 0.0% 0.0% 9.2% 5.0% 7.0% 6.0% 5.0%
Other (MLG, distribution) 26.0% -12.5% 2.5% 27.2% 28.0% 25.0% 20.0% 20.0%
Deferral of net revenues -268.0% -110.6% -79.1% -100.0% 0.0% 0.0% 0.0% 0.0%
Total Revenue Growth -3.8% 5.8% 41.7% 3.0% 7.1% 7.9% 6.5% 8.0%

Total Distribution Channel Revenues:

Digital Online Channels 1,897.0 2,502.0 4,865.0 5,038.6 5,394.5 5,837.0 6,197.2 6,677.6
Retail Channels 2,104.0 1,806.0 1,386.0 1,306.2 1,301.3 1,287.0 1,286.3 1,301.4
Other (MLG, Studios, Distribution) 407.0 356.0 357.0 464.1 594.0 742.6 891.1 1,069.3
Total Revenue 4,408.0 4,664.0 6,608.0 6,809.0 7,289.8 7,866.6 8,374.6 9,048.3

% Distribution Channel Revenues:

Digital Online Channels 43.0% 53.6% 73.6% 74.0% 74.0% 74.2% 74.0% 73.8%
Retail Channels 47.7% 38.7% 21.0% 19.2% 17.9% 16.4% 15.4% 14.4%
Other (MLG, Studios, Distribution) 9.2% 7.6% 5.4% 6.8% 8.1% 9.4% 10.6% 11.8%
Total % Distribution Channel Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Total Distribution Channel Revenue Growth:

Digital Online Channels 21.7% 31.9% 94.4% 3.6% 7.1% 8.2% 6.2% 7.8%
Retail Channels -22.1% -14.2% -23.3% -5.8% -0.4% -1.1% -0.1% 1.2%
Other (MLG, Studios, Distribution) 26.0% -12.5% 0.3% 30.0% 28.0% 25.0% 20.0% 20.0%
Total Revenue Growth -3.8% 5.8% 41.7% 3.0% 7.1% 7.9% 6.5% 8.0%

Total Geographic Revenues:

Americas 2,190.0 2,409.0 3,423.0 3,540.7 3,790.7 4,098.5 4,363.2 4,714.2
EMEA 1,824.0 1,741.0 2,221.0 2,274.2 2,449.4 2,635.3 2,805.5 3,031.2
Asia Pacific 394.0 514.0 964.0 993.3 1,049.7 1,132.8 1,205.9 1,303.0
Total Revenue 4,408.0 4,664.0 6,608.0 6,809.0 7,289.8 7,866.6 8,374.6 9,048.3

%Geographic Revenues:
Americas 49.7% 51.7% 51.8% 52.0% 52.0% 52.1% 52.1% 52.1%
EMEA 41.4% 37.3% 33.6% 33.4% 33.6% 33.5% 33.5% 33.5%
Asia Pacific 8.9% 11.0% 14.6% 14.6% 14.4% 14.4% 14.4% 14.4%
Total % Geographic Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Total Geographic Revenue Growth:

Americas -9.3% 10.0% 42.1% 3.4% 7.1% 8.1% 6.5% 8.0%
EMEA -0.1% -4.6% 27.6% 2.4% 7.7% 7.6% 6.5% 8.0%
Asia Pacific 14.9% 30.5% 87.5% 3.0% 5.7% 7.9% 6.5% 8.0%
Total Revenue Growth -3.8% 5.8% 41.7% 3.0% 7.1% 7.9% 6.5% 8.0%
Activision Blizzard
Income Statement
(figures in $ millions)
Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
(values and shares In millions)
Sales 4,408.0 4,664.0 6,608.0 6,809.0 7,289.8 7,866.6 8,374.6 9,048.3
Cost of revenues- product sales 1,172.2 1,166.8 723.8 680.9 729.0 786.7 837.5 904.8
Cost of revenues- subscription, licensing and other 263.8 323.2 841.2 749.0 801.9 849.6 904.5 977.2
Depreciation 76.0 82.0 121.0 49.0 53.7 58.7 64.1 70.1
Amortization of Intangible Assets 13.0 13.0 708.0 756.0 361.0 216.0 72.0 11.0
Gross Profit 2,883.0 3,079.0 4,214.0 4,574.1 5,344.3 5,955.7 6,496.6 7,085.2
Operating Expenses:
Product Development (R&D) 571.0 646.0 958.0 1,021.3 1,093.5 1,140.7 1,214.3 1,312.0
Sales and Marketing 712.0 734.0 1,210.0 1,361.8 1,458.0 1,416.0 1,465.6 1,583.5
General and Administrative 417.0 380.0 634.0 876.3 938.2 944.0 963.1 1,040.6
Impairment of intangible assets - - - - - - - -
Total Operating Expenses 1,700.0 1,760.0 2,802.0 3,259.4 3,489.6 3,500.6 3,643.0 3,936.0
Income from Operations 1,183.0 1,319.0 1,412.0 1,314.6 1,854.7 2,455.0 2,853.6 3,149.2
Interest Expense 208.0 200.0 217.0 216.0 245.3 239.0 243.9 251.0
Interest income 6.0 2.0 3.0 0.6 0.5 0.5 0.8 1.1
Loss on extinguishment of debt - - 92.0 - - - - -
Income before income taxes 981.0 1,121.0 1,106.0 1,099.2 1,609.9 2,216.5 2,610.5 2,899.3
Provision from income taxes 146.0 229.0 140.0 153.9 225.4 310.3 365.5 405.9
Net Earnings 835.0 892.0 966.0 945.3 1,384.5 1,906.2 2,245.0 2,493.4
Less: distributed earnings to unvested share based awards (4.0) (4.0) (2.0) - - - - -
(14.0)
Less: undistributed earnings allocated to unvested share based awards (7.0) (2.0) - - - - -
Numerator for EPS calculations 817.0 881.0 962.0 945.3 1,384.5 1,906.2 2,245.0 2,493.4

Net income total per common share:

Basic ($) 1.14 1.21 1.30 1.27 1.87 2.57 3.01 3.32
Weighted avg no. of shares outstanding
Basic 716.0 728.0 740.0 741.7 739.3 742.9 746.6 750.4

Annual Dividends $ 0.20 $ 0.23 $ 0.26 $ 0.30 $ 0.44 $ 0.56 $ 0.66 $ 0.73
Dividend payout Ratio 17% 19% 20% 24% 24% 22% 22% 22%
Dividends paid 143.2 167.4 192.4 222.5 325.9 419.4 493.9 548.5
Activision Blizzard
Balance Sheet
(figures in $ millions)
Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

ASSETS
Current Assets:
Cash and cash equivalents 4,848.0 1,823.0 3,245.0 5,058.3 6,243.8 8,169.5 10,323.8 12,507.5
Short-term investments 10.0 8.0 13.0 11.4 11.1 16.3 22.4 26.4
Accounts Receivables 659.0 679.0 732.0 817.1 801.9 865.3 921.2 995.3
Inventories 123.0 128.0 49.0 136.2 127.6 137.7 125.6 135.7
Software development 452.0 336.0 412.0 424.5 454.5 490.5 522.1 564.1
IP licenses 5.0 - - - - - - -
Deferred income taxes, net - - - - - - - -
Other current assets 444.0 413.0 379.0 390.5 418.1 451.2 480.3 519.0
Total Current Assets 6,541.0 3,387.0 4,830.0 6,838.0 8,057.0 10,130.4 12,395.5 14,748.0

Cash in escrow - 3,561.0 - - - - - -

Long-term investments 9.0 9.0 13.0 11.4 11.1 16.3 22.4 26.4
Software development 20.0 80.0 54.0 55.6 59.6 64.3 68.4 73.9
IP licenses 18.0 - - - - - - -
Property, plant and equipment, at cost 501.0 597.0 805.0 878.4 958.5 1,045.9 1,141.3 1,245.4
Less accumulated depreciation (344.0) (408.0) (547.0) (596.0) (649.7) (708.4) (772.5) (842.6)
Property, plant and equipment, net 157.0 189.0 258.0 282.4 308.8 337.6 368.8 402.8
Deferred income taxes, net 264.0 275.0 283.0 305.9 231.5 250.2 189.3 204.6
Other assets 85.0 168.0 388.0 322.5 386.7 394.9 432.3 460.7
Other Intangible assets, gross 840.0 873.0 2,871.0 2,982.4 2,926.7 2,954.6 2,940.7 2,947.6
Less accumulated amortization (378.0) (391.0) (1,013.0) (1,769.0) (2,130.0) (2,346.0) (2,418.0) (2,429.0)
Other Intangible assets, net 462.0 482.0 1,858.0 1,213.4 796.7 608.6 522.7 518.6
Goodwill 7,086.0 7,095.0 9,768.0 9,768.0 9,768.0 9,768.0 9,768.0 9,768.0
Total Assets 14,642.0 15,246.0 17,452.0 18,797.2 19,619.3 21,570.3 23,767.4 26,203.1

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Current portion of long-term debt - - - 145.0 145.0 247.0 393.0 393.0
Accounts payable 325.0 284.0 222.0 238.3 255.1 295.0 335.0 361.9
Deferred revenues 1,797.0 1,702.0 1,628.0 1,677.5 1,796.0 1,938.1 2,063.2 2,229.2
Accrued expenses and other liabilities 592.0 625.0 806.0 830.5 889.2 959.5 1,021.5 1,103.7
Total Current Liabilities 2,714.0 2,611.0 2,656.0 2,891.3 3,085.3 3,439.6 3,812.7 4,087.8
Long-term debt, net 4,324.0 4,074.0 4,887.0 5,405.7 5,262.7 5,270.6 5,285.1 5,382.7
Deferred income taxes, net 10.0 10.0 44.0 47.6 36.0 38.9 29.4 31.8
Other liabilities 361.0 483.0 746.0 677.1 767.6 832.9 867.1 949.2
Total Liabilities 7,409.0 7,178.0 8,333.0 9,021.8 9,151.6 9,582.0 9,994.3 10,451.6

Stockholders' Equity:
Common Stock and Paid-in Capital 9,924.0 10,242.0 10,442.0 10,575.7 10,709.3 10,843.0 10,976.7 11,110.4
Treasury stock (5,762.0) (5,637.0) (5,563.0) (5,763.0) (6,263.0) (6,363.0) (6,463.0) (6,563.0)
Retained Earnings 3,374.0 4,096.0 4,869.0 5,591.8 6,650.4 8,137.2 9,888.3 11,833.2
Accumulated other comprehensive income (303.0) (633.0) (629.0) (629.0) (629.0) (629.0) (629.0) (629.0)
Total Stockholders' Equity 7,233.0 8,068.0 9,119.0 9,775.5 10,467.7 11,988.3 13,773.0 15,751.5

Total Liabilities and Stockholders' Equity 14,642.0 15,246.0 17,452.0 18,797.2 19,619.3 21,570.3 23,767.4 26,203.1
Activision Blizzard
Cash Flow Statement
(figures in $ millions)
Fiscal Years Ending Dec 31 2014 2015 2016
Operating Activities:
Net Income 835.0 892.0 966.0
Adjustments to reconcile net income:
Deferred income taxes (44.0) (27.0) (9.0)
Impairment of goodwill - - -
Provision for inventories 39.0 43.0 42.0
Depreciation 76.0 82.0 121.0
Amortization 13.0 13.0 708.0
Amortization of capitalized software development costs and IP licenses 257.0 399.0 321.0
Premium payment for early redemption of note - - 63.0
7.0
Amortization of debt discount, financing costs, and non-cash write-off due to extinguishment 7.0
of debts 50.0
Share-based compensation 104.0 92.0 147.0
Other 1.0 - 4.0
Changes in operating assets and liabilities
Accounts receivables (177.0) (40.0) 84.0
Inventories (2.0) (54.0) 32.0
Software development and IP licenses (349.0) (350.0) (362.0)
Other assets 18.0 21.0 (10.0)
Deferred revenues 475.0 (27.0) (35.0)
Accounts payables (12.0) (25.0) (50.0)
Accrued expenses and other liabilities 90.0 233.0 83.0
Net cash provided by Operating Activities 1,331.0 1,259.0 2,155.0

Investing Activities:
Proceeds from maturities of available-for-sale investments 21.0 145.0 -
Proceeds from auction rate securities called at par - - -
Purchases of available-for-sale investments - (145.0) -
Acquisition of businesses - (46.0) (4,588.0)
Release (deposit) of cash in escrow - (3,561.0) 3,561.0
Payment of contingent consideration - - -
Capital expenditures (107.0) (111.0) (136.0)
Other investing activities 2.0 2.0 (14.0)
Net cash used in Investing Activities (84.0) (3,716.0) (1,177.0)

Financing Activities:
Proceeds from issuance of common stock to employees 175.0 106.0 106.0
Tax payment related to net share settlements on restricted stock rights (66.0) (83.0) (115.0)
Excess tax benefits from stock awards - - -
Repurchases of common stock - - -
Dividends to shareholders (147.0) (170.0) (195.0)
Proceeds from debt issuances - - 6,878.0
Repayment of long-term debt (375.0) (250.0) (6,104.0)
Debt financing costs related to debt issuances - (7.0) (7.0)
Premium payment for early redemption of notes - - (63.0)
Proceeds received from shareholder settlement - 202.0 -
Net cash used in financing activities (413.0) (202.0) 500.0
Effect of exchange rate changes (396.0) (366.0) (56.0)
Net increase (decrease) in cash and cash equivalents 438.0 (3,025.0) 1,422.0
Cash and cash equivalents, beginning of period 4,410.0 4,848.0 1,823.0
Cash and cash equivalents, end of period 4,848.0 1,823.0 3,245.0
Activision Blizzard
Cash Flow Statement
(figures in $ millions)
Fiscal Years Ending Dec 31 2017E 2018E 2019E 2020E 2021E
Operating Activities:
Net Income 945.3 1,384.5 1,906.2 2,245.0 2,493.4
Adjustments to reconcile net income:
Depreciation 49.0 53.7 58.7 64.1 70.1
Amortization 756.0 361.0 216.0 72.0 11.0
Changes in Deferred income taxes (19.3) 62.9 (15.8) 51.4 (12.9)
Changes in operating assets and liabilities
Accounts receivable (85.1) 15.2 (63.4) (55.9) (74.1)
Inventories (87.2) 8.6 (10.1) 12.0 (10.1)
Software development and IP licenses (14.2) (33.9) (40.7) (35.8) (47.5)
Other assets (11.5) (27.6) (33.1) (29.1) (38.6)
Accounts payable 16.3 16.8 39.9 40.0 26.9
Deferred revenues 49.5 118.5 142.1 125.2 166.0
Accrued expenses and Other liabilities 24.5 58.7 70.4 62.0 82.2
Net cash provided by Operating Activities 1,623.4 2,018.3 2,270.1 2,550.9 2,666.2

Investing Activities:
Change in short-term investments 1.6 0.2 (5.2) (6.1) (4.0)
Change in long-term investments 1.6 0.2 (5.2) (6.1) (4.0)
CAPEX (73.4) (80.1) (87.4) (95.4) (104.1)
Change in intangible assets, net (111.4) 55.7 (27.9) 13.9 (7.0)
Decrease (increase) in other assets (3.4) 26.3 57.0 (3.2) 53.7
Net cash used in Investing Activities (184.9) 2.4 (68.6) (96.9) (65.3)

Financing Activities:
Change in current portion of long-term debt 145.0 - 102.0 146.0 -
Long term debt and other obligations 518.7 (143.0) 7.9 14.5 97.7
Proceeds from issuance of common stock 133.7 133.7 133.7 133.7 133.7
Repurchase of common stock (200.0) (500.0) (100.0) (100.0) (100.0)
Dividends paid (222.5) (325.9) (419.4) (493.9) (548.5)
Changes in Accumulated other comprehensive income - - - - -
Net cash used in financing activities 374.9 (835.2) (275.8) (299.8) (417.2)

Net increase (decrease) in cash and cash equivalents 1,813.3 1,185.5 1,925.7 2,154.2 2,183.8
Cash and cash equivalents, beginning of period 3,245.0 5,058.3 6,243.8 8,169.5 10,323.8
Cash and cash equivalents, end of period 5,058.3 6,243.8 8,169.5 10,323.8 12,507.5
Activision Blizzard
Common Size Income Statement

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Product Sales 63.20% 52.47% 33.23% 33.23% 33.23% 33.23% 33.23% 33.23%
Subscription, licensing and other revenues 36.80% 47.53% 66.77% 66.77% 66.77% 66.77% 66.77% 66.77%
Cost of revenues- product sales 26.59% 25.02% 10.95% 10.00% 10.00% 10.0% 10.00% 10.00%
Cost of revenues- subscription, licensing and other 5.98% 6.93% 12.73% 11.00% 11.00% 10.80% 10.80% 10.80%
Depreciation 1.72% 1.76% 1.83% 0.72% 0.74% 0.75% 0.77% 0.77%
Amortization of Intangible Assets 0.29% 0.28% 10.71% 11.10% 4.95% 2.75% 0.86% 0.12%
Gross Profit 65.40% 66.02% 63.77% 67.18% 73.31% 75.71% 77.57% 78.30%
Operating Expenses:
Product Development (R&D) 12.95% 13.85% 14.50% 15.00% 15.00% 14.50% 14.50% 14.50%
Sales and Marketing 16.15% 15.74% 18.31% 20.00% 20.00% 18.00% 17.50% 17.50%
General and Administrative 9.46% 8.15% 9.59% 12.87% 12.87% 12.00% 11.50% 11.50%
Impairment of intangible assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Operating Expenses 38.57% 37.74% 42.40% 47.87% 47.87% 44.50% 43.50% 43.50%
Income from Operations 26.84% 28.28% 21.37% 19.31% 25.44% 31.21% 34.07% 34.80%
Interest Expense 4.72% 4.29% 3.28% 3.17% 3.37% 3.04% 2.91% 2.77%
Interest income 0.14% 0.04% 0.05% 0.01% 0.01% 0.01% 0.01% 0.01%
Loss on extinguishment of debt 0.00% 0.00% 1.39% 0.00% 0.00% 0.00% 0.00% 0.00%
Income before income taxes 22.25% 24.04% 16.74% 16.14% 22.08% 28.18% 31.17% 32.04%
Provision from income taxes 3.31% 4.91% 2.12% 2.26% 3.09% 3.94% 4.36% 4.49%
Net Earnings 18.94% 19.13% 14.62% 13.88% 18.99% 24.23% 26.81% 27.56%
Activision Blizzard
Common Size Balance Sheet

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

ASSETS
Current Assets:
Cash and cash equivalents 109.98% 39.09% 49.11% 74.29% 85.65% 103.85% 123.27% 138.23%
Short-term investments 0.23% 0.17% 0.20% 0.17% 0.15% 0.21% 0.27% 0.29%
Accounts Receivables 14.95% 14.56% 11.08% 12.00% 11.00% 11.00% 11.00% 11.00%
Inventories 2.79% 2.74% 0.74% 2.00% 1.75% 1.75% 1.50% 1.50%
Software development 10.25% 7.20% 6.23% 6.23% 6.23% 6.23% 6.23% 6.23%
IP licenses 0.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Deferred income taxes, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other current assets 10.07% 8.86% 5.74% 5.74% 5.74% 5.74% 5.74% 5.74%
Total Current Assets 148.39% 72.62% 73.09% 100.43% 110.52% 128.78% 148.01% 162.99%

Cash in escrow 0.00% 76.35% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Long-term investments 0.20% 0.19% 0.20% 0.17% 0.15% 0.21% 0.27% 0.29%
Software development 0.45% 1.72% 0.82% 0.82% 0.82% 0.82% 0.82% 0.82%
IP licenses 0.41% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Property, plant and equipment, at cost 11.37% 12.80% 12.18% 12.90% 13.15% 13.30% 13.63% 13.76%
Less accumulated depreciation -7.80% -8.75% -8.28% -8.75% -8.91% -9.00% -9.22% -9.31%
Property, plant and equipment, net 3.56% 4.05% 3.90% 4.15% 4.24% 4.29% 4.40% 4.45%
Deferred income taxes, net 5.99% 5.90% 4.28% 4.49% 3.18% 3.18% 2.26% 2.26%
Other assets 1.93% 3.60% 5.87% 4.74% 5.30% 5.02% 5.16% 5.09%
Other Intangible assets, gross 19.06% 18.72% 43.45% 43.80% 40.15% 37.56% 35.11% 32.58%
Intangible assets subject to amortization 9.23% 9.43% 36.89% 37.44% 34.21% 32.05% 29.94% 27.79%
Intangible assets not subject to amortization 9.82% 9.28% 6.55% 6.36% 5.94% 5.50% 5.17% 4.79%
Less accumulated amortization -8.58% -8.38% -15.33% -25.98% -29.22% -29.82% -28.87% -26.84%
Other Intangible assets, net 10.48% 10.33% 28.12% 17.82% 10.93% 7.74% 6.24% 5.73%
Goodwill 160.75% 152.12% 147.82% 143.46% 133.99% 124.17% 116.64% 107.95%
Total Assets 332.17% 326.89% 264.10% 276.07% 269.13% 274.20% 283.80% 289.59%

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Current portion of long-term debt 0.00% 0.00% 0.00% 2.13% 1.99% 3.14% 4.69% 4.34%
Accounts payable 7.37% 6.09% 3.36% 3.50% 3.50% 3.75% 4.00% 4.00%
Deferred revenues 40.77% 36.49% 24.64% 24.64% 24.64% 24.64% 24.64% 24.64%
Accrued expenses and other liabilities 13.43% 13.40% 12.20% 12.20% 12.20% 12.20% 12.20% 12.20%
Total Current Liabilities 61.57% 55.98% 40.19% 42.46% 42.32% 43.72% 45.53% 45.18%
Long-term debt, net 98.09% 87.35% 73.96% 79.39% 72.19% 67.00% 63.11% 59.49%
Deferred income taxes, net 0.23% 0.21% 0.67% 0.70% 0.49% 0.49% 0.35% 0.35%
Other liabilities 8.19% 10.36% 11.29% 9.94% 10.53% 10.59% 10.35% 10.49%
Total Liabilities 168.08% 153.90% 126.10% 132.50% 125.54% 121.81% 119.34% 115.51%

Stockholders' Equity:
Common Stock and Paid-in Capital 225.14% 219.60% 158.02% 155.32% 146.91% 137.84% 131.07% 122.79%
Treasury stock -130.72% -120.86% -84.19% -84.64% -85.91% -80.89% -77.17% -72.53%
Retained Earnings 76.54% 87.82% 73.68% 82.12% 91.23% 103.44% 118.08% 130.78%
Accumulated other comprehensive income -6.87% -13.57% -9.52% -9.24% -8.63% -8.00% -7.51% -6.95%
Total Stockholders' Equity 164.09% 172.98% 138.00% 143.57% 143.59% 152.39% 164.46% 174.08%

Total Liabilities and Stockholders' Equity 332.17% 326.89% 264.10% 276.07% 269.13% 274.20% 283.80% 289.59%
Activision Blizzard
Value Driver Estimation
(figures in $ millions)
Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
MARGINAL TAX RATE:
Federal 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
State 0.0% 0.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Foreign -25.0% -20.0% -22.0% -22.0% -22.0% -22.0% -22.0% -22.0%
Marginal Tax Rate 10.0% 15.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%

EBITA
Operating Revenues 4,408 4,664 6,608 6,809 7,290 7,867 8,375 9,048
- Product Cost 1,172 1,167 724 681 729 787 837 905
- Subscription costs 264 323 841 749 802 850 904 977
- Depreciation costs 76 82 121 49 54 59 64 70
- Amortization of Intangible assets 13 13 708 756 361 216 72 11
- Product development expenses 571 646 958 1,021 1,093 1,141 1,214 1,312
- Sales and Marketing expenses 712 734 1,210 1,362 1,458 1,416 1,466 1,583
- General and administrative expenses 417 380 634 876 938 944 963 1,041
+ Implied interest on operating leases 7 6 7 13 14 16 17 19
EBITA 1,190 1,325 1,419 1,328 1,869 2,471 2,871 3,168

LESS ADJUSTED TAXES

Income tax provision (benefit) 146 229 140 154 225 310 365 406
+ tax shield on interest expense 21 30 30 30 34 33 34 35
- tax shield on interest income (0.6) (0.3) (0.4) (0.1) (0.1) (0.1) (0.1) (0.1)
+ tax shield on loss on debt extinguishment - - 13 - - - - -
+ tax shield on interest on operating leases 1 1 1 2 2 2 2 3
Adjusted Taxes 168 260 185 186 262 346 402 444

CHANGE IN DEFERRED TAX LIABILITIES

Net deferred tax liabilities (254) (265) (239) (258) (195) (211) (160) (173)
Net change in deferred tax liabilities 1 (11) 26 (19) 63 (16) 51 (13)

NOPLAT
NOPLAT= EBITA - adj taxes + change in DT liabilities 1,023 1,054 1,260 1,122 1,670 2,109 2,520 2,711

OPERATING CURRENT ASSETS

Average of cash on B/S 2009-2016 71.30% 71.30% 71.30% 71.30% 71.30% 71.30% 71.30% 71.30%
x revenue 4,408 4,664 6,608 6,809 7,290 7,867 8,375 9,048
Normal Cash 3,143 3,326 4,712 4,855 5,198 5,609 5,971 6,452
Cash and cash equivalent 4,848 1,823 3,245 5,058 6,244 8,170 10,324 12,508

Lower of normal or actual cash 3,143 1,823 3,245 4,855 5,198 5,609 5,971 6,452
Accounts Receivables 659 679 732 817 802 865 921 995
Inventories 123 128 49 136 128 138 126 136
Software development and IP licenses 457 336 412 425 455 490 522 564
Other current assets 444 413 379 391 418 451 480 519
Operating Current Assets 4,826 3,379 4,817 6,623 7,000 7,554 8,021 8,666

OPERATING CURRENT LIABILITIES

Accounts payable 325 284 222 238 255 295 335 362
Deferred revenues 1,797 1,702 1,628 1,678 1,796 1,938 2,063 2,229
Accrued expenses and other liabilities 592 625 806 831 889 960 1,021 1,104
Operating Current Liabilities 2,714 2,611 2,656 2,746 2,940 3,193 3,420 3,695

NET OPERATING WORKING CAPITAL

Operating CA- Operating CL 2,112 768 2,161 3,877 4,060 4,361 4,601 4,971
Net operating working capital 2,112 768 2,161 3,877 4,060 4,361 4,601 4,971

+ NET PPE
Plant, Property and equipment 157 189 258 282 309 338 369 403
Net PPE 157 189 258 282 309 338 369 403

+ OTHER OPERATING ASSETS

Software development and IP licenses 38 80 54 56 60 64 68 74
Other Intangible assets, net 462 482 1,858 1,213 797 609 523 519
PV of operating leases 146 154 293 321 351 383 419 457
Other assets 85 168 388 323 387 395 432 461
Other operating assets 731 884 2,593 1,912 1,594 1,451 1,442 1,511

- OTHER OPERATING LIABILITIES

Other long-term liabilities 361 483 746 677 768 833 867 949
Other Operating Liabilities 361 483 746 677 768 833 867 949

INVESTED CAPITAL
Invested Capital 2,639 1,358 4,266 5,394 5,194 5,317 5,545 5,935

VALUE DRIVERS
NOPLAT 1,023 1,054 1,260 1,122 1,670 2,109 2,520 2,711
/ Beginning IC 2,945 2,639 1,358 4,266 5,394 5,194 5,317 5,545
ROIC 34.7% 39.9% 92.8% 26.3% 31.0% 40.6% 47.4% 48.9%

Beginning IC 2,945 2,639 1,358 4,266 5,394 5,194 5,317 5,545

x (ROIC - WACC) 26.8% 32.0% 84.8% 18.3% 23.0% 32.6% 39.4% 40.9%
Economic Profit 788 844 1,152 782 1,240 1,694 2,096 2,269

NOPLAT 1,023 1,054 1,260 1,122 1,670 2,109 2,520 2,711

- Capital Expenditures (306) (1,282) 2,908 1,128 (200) 122 228 390
Free Cash Flow (FCF) 1,329 2,336 (1,648) (6) 1,870 1,986 2,292 2,321

Investment Rate -29.9% -121.6% 230.8% 100.6% -12.0% 5.8% 9.0% 14.4%
growth -10.4% -48.6% 214.2% 26.5% -3.7% 2.4% 4.3% 7.0%
Activision Blizzard
Weighted Average Cost of Capital (WACC) Estimation

WACC = [Re * (E/V)] + [Rd * (1-t) * (D/V)] WACC 7.98%

Re = Cost of Equity
Rd = Pretax cost of debt
E = Market value of Equity
D = Market Value of Debt
V=E+D
t = Marginal tax rate

Cost of Equity
Re = Rf + β [ E(Rm) - Rf]
Rf 2.82% based on 30-year treasury
E(Rm)-Rf 4.80% Market premium
Beta (β) 1.16 Raw daily beta- Bloomberg
Re 8.40%

Cost of Debt (Pre-tax)

Rd 4.42%

Cost of preferred stock

no preferred stock

Market Value of Equity

Shares outstanding 754,921,174
Share price $61.18
E $ 46,186,077,425

Market Value of Debt

Debt (current and LT) $ 4,387,000,000
PV of Operating Lease $ 293,008,773
D $ 4,680,008,773

Market Value of Firm (V) $ 50,866,086,198

Weight of Equity 90.8%

Weight of Debt 9.2%
Weight of preferred 0.0%
marginal tax rate 14.00%
Activision Blizzard
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:
CV Growth 4.19%
CV ROIC 50.70%
WACC 7.98%
Cost of Equity 8.40%

Fiscal Years Ending Dec 31 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

DCF Model
Period 1 2 3 4 5 6 7 8 9
NOPLAT 1,122.2 1,669.9 2,108.7 2,519.9 2,711.0 3,062.0 3,186.3 3,353.9 3,471.2
- Capital Expenditures 1,128.4 (200.0) 122.4 227.9 390.5 368.0 315.8 227.8
Free Cash Flow (FCF) (6.2) 1,869.9 1,986.3 2,292.0 2,320.5 2,694.0 2,870.5 3,126.1
CV 84,063.0

Present Value of FCF (5.8) 1,603.8 1,577.7 1,686.0 1,580.8 1,699.6 1,677.2 1,691.5 45,487.1
Value of Operating Assets $ 56,998.0

Excess Cash -
Short-term investments 13.0
Long-term investments 13.0
Value of non-operating Assets $ 26.0
Value of Debt $ 4,387.0
Value of Pfd stock $ -

Others:
PV of operating lease 293.0
PV of employee stock options 1,253.8
Long-term purchase obligations 425.0
Value of other liabilities $ 1,971.8

Value of Enterprise $ 50,665.2

Shares Outstanding 754.92 as of 10/18/2017
Intrinsic Value $ 67.11 $ 71.57

EP Model
Period 1 2 3 4 5 6 7 8 9
Economic Profit 781.8 1,239.5 1,694.2 2,095.6 2,268.5 2,588.5 2,683.3 2,825.8 2,924.9
CV 77,216.1
TO DISCOUNT
EP 724.0 1,063.1 1,345.7 1,541.6 1,545.4 1,633.1 1,567.8 1,529.0 41,782.2
Total present value of EP $ 52,731.99

Beginning Invested Capital 4,266.0

Value of Operating assets $ 56,998.0

Excess Cash -
Short-term investments 13.0
Long-term investments 13.0
Value of non-operating Assets 26.0
Value of Debt $ 4,387.0
Value of Pfd stock -

Others:
PV of operating lease 293.0
PV of employee stock options 1,253.8
Long-term purchase obligations 425.0
Value of other liabilities $ 1,971.8

Value of Enterprise $ 50,665.2

Shares Outstanding 754.92 as of 10/18/2017
Intrinsic Value $ 67.11 $ 71.57
Activision Blizzard
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec 31 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

EPS $ 1.27 $ 1.87 $ 2.57 $ 3.01 $ 3.32 $ 3.69 $ 3.91 $ 4.06 $ 4.22
3.79%
Key Assumptions
CV growth 3.79%
CV ROE 13.37%
Cost of Equity 8.40%

Future Cash Flows

Period 1 2 3 4 5 6 7 8 9
P/E Multiple (CV Year) 15.53
EPS (CV Year) $ 4.22
Future Stock Price $ 65.51
Dividends Per Share 0.30 0.44 0.56 0.66 0.73 0.85 0.90 0.98
Future Cash Flows 0.30 0.44 0.56 0.66 0.73 0.85 0.90 0.98 65.51

Discounted Cash Flows 0.28 0.38 0.44 0.48 0.49 0.52 0.51 0.51 34.36
as of 10/18/2017
Intrinsic Value $ 37.69 $ 40.19
Activision Blizzard
Key Management Ratios

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Liquidity Ratios
Current Assets $ 6,541 $ 3,387 $ 4,830 $ 6,838 $ 8,057 $ 10,130 $ 12,395 $ 14,748
/Current Liabilities $ 2,714 $ 2,611 $ 2,656 $ 2,891 $ 3,085 $ 3,440 $ 3,813 $ 4,088
= Current Ratio 2.4 1.3 1.8 2.4 2.6 2.9 3.3 3.6

(Cash + S-T investments + Accounts receivables)

$ 5,517 $ 2,510 $ 3,990 $ 5,887 $ 7,057 $ 9,051 $ 11,267 $ 13,529
/Current Liabilities $ 2,714 $ 2,611 $ 2,656 $ 2,891 $ 3,085 $ 3,440 $ 3,813 $ 4,088
= Quick Ratio 2.0 1.0 1.5 2.0 2.3 2.6 3.0 3.3

Cash assets $ 4,848 $ 1,823 $ 3,245 $ 5,058 $ 6,244 $ 8,170 $ 10,324 $ 12,508
/Current Liabilities $ 2,714 $ 2,611 $ 2,656 $ 2,891 $ 3,085 $ 3,440 $ 3,813 $ 4,088
= Cash Ratio 1.8 0.7 1.2 1.7 2.0 2.4 2.7 3.1

Activity or Asset-Management Ratios

Annual Sales $ 4,408 $ 4,664 $ 6,608 $ 6,809 $ 7,290 $ 7,867 $ 8,375 $ 9,048
/Average accounts receivables $ 585 $ 669 $ 706 $ 775 $ 809 $ 834 $ 893 $ 958
= Accounts receivable turnover 7.5 7.0 9.4 8.8 9.0 9.4 9.4 9.4

Number of days 365.0 365.0 365.0 365.0 365.0 365.0 365.0 365.0
/Accounts receivables turnover 7.5 7.0 9.4 8.8 9.0 9.4 9.4 9.4
= Average collection period 48.4 52.4 39.0 41.5 40.5 38.7 38.9 38.7

Cost of goods sold $ 1,525 $ 1,585 $ 2,394 $ 2,235 $ 1,946 $ 1,911 $ 1,878 $ 1,963
/Average Inventory $ 147 $ 126 $ 89 $ 93 $ 132 $ 133 $ 132 $ 131
= Inventory turnover 10.4 12.6 27.1 24.1 14.8 14.4 14.3 15.0

Number of days 365.0 365.0 365.0 365.0 365.0 365.0 365.0 365.0
/Inventory Turnover 10.4 12.6 27.1 24.1 14.8 14.4 14.3 15.0
= Days in inventory 35.2 28.9 13.5 15.1 24.7 25.3 25.6 24.3

Financial Leverage Ratios

(Total Debt $ 4,324 $ 4,074 $ 4,887 $ 5,551 $ 5,408 $ 5,518 $ 5,678 $ 5,776
+ PV of Operating leases) $ 146 $ 154 $ 293 $ 321 $ 351 $ 383 $ 419 $ 457
/Total Assets $ 14,642 $ 15,246 $ 17,452 $ 18,797 $ 19,619 $ 21,570 $ 23,767 $ 26,203
= Debt Ratio 0.31 0.28 0.30 0.31 0.29 0.27 0.26 0.24

Total Debt $ 4,324 $ 4,074 $ 4,887 $ 5,551 $ 5,408 $ 5,518 $ 5,678 $ 5,776
/ Total Equity $ 7,233 $ 8,068 $ 9,119 $ 9,775 $ 10,468 $ 11,988 $ 13,773 $ 15,752
= Debt to Equity ratio 0.60 0.50 0.54 0.57 0.52 0.46 0.41 0.37

Profitability Ratios
(Sales - COGS) $ 2,883 $ 3,079 $ 4,214 $ 4,574 $ 5,344 $ 5,956 $ 6,497 $ 7,085
/ Sales $ 4,408 $ 4,664 $ 6,608 $ 6,809 $ 7,290 $ 7,867 $ 8,375 $ 9,048
= Gross Margin 65.40% 66.02% 63.77% 67.18% 73.31% 75.71% 77.57% 78.30%

Net Income $ 835 $ 892 $ 966 $ 945 $ 1,384 $ 1,906 $ 2,245 $ 2,493
/ Sales $ 4,408 $ 4,664 $ 6,608 $ 6,809 $ 7,290 $ 7,867 $ 8,375 $ 9,048
= Net Profit Margin 18.94% 19.13% 14.62% 13.88% 18.99% 24.23% 26.81% 27.56%

Net Income $ 835 $ 892 $ 966 $ 945 $ 1,384 $ 1,906 $ 2,245 $ 2,493
/ Average Total Assets $ 14,327 $ 14,944 $ 16,349 $ 18,125 $ 19,208 $ 20,595 $ 22,669 $ 24,985
= Return on Assets 5.83% 5.97% 5.91% 5.22% 7.21% 9.26% 9.90% 9.98%

Net Income $ 835 $ 892 $ 966 $ 945 $ 1,384 $ 1,906 $ 2,245 $ 2,493
/ Average Total Equity $ 6,928 $ 7,651 $ 8,594 $ 9,447 $ 10,122 $ 11,228 $ 12,881 $ 14,762
= Return on Equity 12.05% 11.66% 11.24% 10.01% 13.68% 16.98% 17.43% 16.89%

Profitability Ratios
(Sales - COGS) $ - $ - $ - $ - $ - $ - $ - $ -
/ Sales $ 1,700 $ 1,760 $ 2,802 $ 3,259 $ 3,490 $ 3,501 $ 3,643 $ 3,936
= Gross Margin 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net Income $ - $ - $ - $ - $ - $ - $ - $ -
/ Sales $ 1,700 $ 1,760 $ 2,802 $ 3,259 $ 3,490 $ 3,501 $ 3,643 $ 3,936
= Net Profit Margin 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Payout Policy Ratios

Dividends Paid $ 143 $ 167 $ 192 $ 223 $ 326 $ 419 $ 494 $ 549
/ Net Income $ 835 $ 892 $ 966 $ 945 $ 1,384 $ 1,906 $ 2,245 $ 2,493
= Dividends payout ratio 17.15% 18.77% 19.92% 23.54% 23.54% 22.00% 22.00% 22.00%

Dividends paid + repurchases $ 147 $ 170 $ 195 $ 423 $ 826 $ 519 $ 594 $ 649
/ Net Income $ 835 $ 892 $ 966 $ 945 $ 1,384 $ 1,906 $ 2,245 $ 2,493
= Total payout ratio 17.60% 19.06% 20.19% 44.70% 59.65% 27.25% 26.45% 26.01%
 Activision Blizzard
Relative Valuation Models

EPS EPS P/S P/S Market Cap (B)

Ticker Company Price 2017E 2018E P/E 17 P/E 18 2017E 2018E
Direct Competitors
EA Electronic Arts $ 117.73 $3.08 $3.69 38.2 31.9 7.35 6.99 $ 36.32
TTWO Take-Two Interactive Software $ 103.18 $0.72 $1.99 143.3 51.8 5.74 6.24 $ 10.92
38.2 41.9 6.5 6.6

ATVI Activision Blizzard $61.66 1.27 1.87 48.4 32.9 6.7 6.3

Implied Value:
Relative P/E (EPS17) $ 48.71
Relative P/E (EPS18) $ 78.44
P/S Ratio (EPS17) $ 60.06
P/S Ratio (EPS18) $ 65.19

EPS EPS P/S P/S Market Cap (B)

Ticker Company Price 2017E 2018E P/E 17 P/E 18 2017E 2018E
EA Electronic Arts $ 117.73 $3.08 $3.69 38.2 31.9 7.35 6.99 $ 36.32
TTWO Take-Two Interactive Software $ 103.18 $0.72 $1.99 143.3 51.8 5.74 6.24 $ 10.92
TWX Time Warner $ 103.33 $6.26 $6.53 16.5 15.8 2.60 2.48 $ 80.37
Competitors with
MSFT Microsoft $ 76.25 $2.94 $3.39 25.9 22.5 5.83 5.41 $ 587.07
similar product lines
ZNGA Zynga $ 3.70 $0.01 $0.01 370.0 740.0 15.29 15.14 $ 3.20
UBI Ubisoft € 64.37 € 0.92 € 1.40 70.0 45.9 5.05 4.29 € 7.37 $ 8.73
7974 (TYO) Nintendo ¥ 43390 ¥ 865.55 ¥ 1279.36 50.1 33.9 3.75 2.75 ¥ 3103.5 $ 27.66
9697 (TYO) Capcom ¥ 2777 ¥ 160.35 ¥ 178.48 17.3 15.6 1.36 1.32 ¥ 118.9 $ 1.06
9766 (TYO) Konami Holdings Corp ¥ 5390 ¥ 232.87 ¥ 259.88 23.1 20.7 2.56 2.42 ¥ 639 $ 5.69
Average 28.5 26.6 4.3 4.0

ATVI Activision Blizzard $61.66 1.27 1.87 48.4 32.9 6.7 6.3

Implied Value:
Relative P/E (EPS17) $ 36.38
Relative P/E (EPS18) $ 49.86
P/S Ratio (EPS17) $ 39.28
P/S Ratio (EPS18) $ 39.33
Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013)

Operating Operating Operating Operating

Fiscal Years Ending Dec 31 Leases Fiscal Years Ending Dec 31 Leases Fiscal Years Ending Dec 31 Leases Fiscal Years Ending Dec 31 Leases
2017 65 2016 35 2015 36 2014 34
2018 59 2017 32 2016 31 2015 31
2019 52 2018 30 2017 28 2016 27
2020 44 2019 27 2018 26 2017 26
2021 32 2020 19 2019 24 2018 25
Thereafter 92 Thereafter 35 Thereafter 23 Thereafter 46
Total Minimum Payments 344 Total Minimum Payments 178 Total Minimum Payments 168 Total Minimum Payments 189
Less: Interest 50.99 Less: Interest 24.25 Less: Interest 21.55 Less: Interest 27.43
PV of Minimum Payments 293.01 PV of Minimum Payments 153.75 PV of Minimum Payments 146.45 PV of Minimum Payments 161.57

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.42% Pre-Tax Cost of Debt 4.42% Pre-Tax Cost of Debt 4.42% Pre-Tax Cost of Debt 4.42%
Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 1.8 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.8

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 65 62.2 1 35 33.5 1 36 34.5 1 34 32.6
2 59 54.1 2 32 29.3 2 31 28.4 2 31 28.4
3 52 45.7 3 30 26.3 3 28 24.6 3 27 23.7
4 44 37.0 4 27 22.7 4 26 21.9 4 26 21.9
5 32 25.8 5 19.0 15.3 5 24 19.3 5 25 20.1
6 & beyond 32 68.2 6 & beyond 19.0 26.5 6 & beyond 23 17.7 6 & beyond 25 34.9
PV of Minimum Payments 293.0 PV of Minimum Payments 153.7 PV of Minimum Payments 146.4 PV of Minimum Payments 161.6
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 31,485,000

Average Time to Maturity (years): 6.31
Expected Annual Number of Options Exercised: 4,989,699

Current Average Strike Price: $ 26.79

Cost of Equity: 8.40%
Current Stock Price: $61.66

2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Increase in Shares Outstanding: 4,989,699 4,989,699 4,989,699 4,989,699 4,989,699 4,989,699 1,546,807
Average Strike Price: $ 26.79 $ 26.79 $ 26.79 $ 26.79 $ 26.79 $ 26.79 $ 26.79
Increase in Common Stock Account: 133,674,033 133,674,033 133,674,033 133,674,033 133,674,033 133,674,033 41,438,950 - -

Change in Treasury Stock 200,000,000 500,000,000 100,000,000 100,000,000 100,000,000

Expected Price of Repurchased Shares: $ 61.66 $ 66.84 $ 72.46 $ 78.55 $ 85.14
Number of Shares Repurchased: 3,243,594 7,480,448 1,380,126 1,273,151 1,174,467

Shares Outstanding (beginning of the year) 740,000,000 741,746,105 739,255,356 742,864,929 746,581,478 750,396,709 755,386,408 756,933,215 756,933,215
Plus: Shares Issued Through ESOP 4,989,699 4,989,699 4,989,699 4,989,699 4,989,699 4,989,699 1,546,807
Less: Shares Repurchased in Treasury 3,243,594 7,480,448 1,380,126 1,273,151 1,174,467 - - - -
Shares Outstanding (end of the year) 741,746,105 739,255,356 742,864,929 746,581,478 750,396,709 755,386,408 756,933,215 756,933,215 756,933,215
VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol ATVI

Current Stock Price $61.66
Risk Free Rate 2.82%
Current Dividend Yield 0.42%
Annualized St. Dev. of Stock Returns 36.14%

Average Average B-S Value

Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 31,485,000 26.79 6.31 $ 39.82 $ 1,253,751,463

Total 31,485,000 $ 26.79 6.31 $ 41.34 $ 1,253,751,463

 DCF Beta DCF Cost of Equity
$ 71.57 0.76 0.86 0.96 1.06 1.16 1.26 1.36 1.46 1.56 $ 71.57 7.67% 7.87% 8.07% 8.27% 8.40% 8.67% 8.87% 9.07% 9.27%
3.66% 148.66 119.55 99.40 84.63 73.03 64.40 57.18 51.21 46.19 3.29% 59.90 59.99 60.08 60.17 60.23 60.35 60.44 60.52 60.61
3.86% 147.20 118.59 98.72 84.12 72.64 64.09 56.93 51.00 46.02 3.49% 62.02 62.11 62.20 62.29 62.35 62.48 62.57 62.66 62.75
4.06% 145.77 117.63 98.04 83.62 72.25 63.79 56.68 50.79 45.84 3.69% 64.33 64.42 64.52 64.61 64.67 64.80 64.90 64.99 65.09
Pre-tax 4.26% 144.37 116.70 97.38 83.12 71.87 63.48 56.43 50.59 45.67 3.89% 66.86 66.96 67.06 67.16 67.22 67.36 67.46 67.56 67.65
CV growth of
Cost of 4.42% 143.27 115.96 96.85 82.73 71.57 63.24 56.24 50.43 45.54 4.19% 71.19 71.29 71.40 71.50 71.57 71.71 71.82 71.92 72.03
NOPLAT
Debt 4.66% 141.65 114.87 96.07 82.14 71.12 62.88 55.94 50.19 45.34 4.39% 74.44 74.55 74.66 74.77 74.84 74.99 75.10 75.21 75.32
4.86% 140.33 113.98 95.43 81.66 70.76 62.59 55.70 49.99 45.17 4.59% 78.10 78.21 78.33 78.44 78.52 78.67 78.79 78.90 79.02
5.06% 139.04 113.11 94.80 81.19 70.39 62.29 55.47 49.79 45.01 4.79% 82.21 82.33 82.45 82.58 82.65 82.82 82.94 83.06 83.18
5.26% 137.77 112.25 94.18 80.73 70.03 62.00 55.23 49.60 44.84 4.99% 86.88 87.00 87.13 87.26 87.35 87.52 87.65 87.78 87.90

DCF Marginal Tax Rate DCF Depreciation Rate

$ 71.57 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0% $ 71.57 15.0% 16.0% 17.0% 18.0% 19.0% 20.0% 21.0% 22.0% 23.0%
2.06% 91.84 91.96 92.08 92.20 92.31 92.43 92.55 92.67 92.79 16.00% 85.41 84.29 83.31 82.44 81.67 80.98 80.37 79.82 79.33
2.26% 85.47 85.58 85.69 85.80 85.91 86.02 86.13 86.24 86.35 17.00% 82.78 81.69 80.74 79.89 79.14 78.47 77.88 77.35 76.87
2.46% 79.84 79.94 80.05 80.15 80.25 80.35 80.45 80.56 80.66 18.00% 80.15 79.10 78.17 77.35 76.62 75.97 75.39 74.88 74.42
2.66% 74.83 74.93 75.02 75.12 75.22 75.31 75.41 75.50 75.60 Sales and 19.00% 77.51 76.50 75.60 74.80 74.10 73.47 72.91 72.41 71.96
Risk Free
2.82% 71.21 71.30 71.39 71.48 71.57 71.66 71.76 71.85 71.94 marketing as % of 20.00% 74.88 73.90 73.03 72.26 71.57 70.96 70.42 69.94 69.50
Rate
3.06% 66.31 66.39 66.48 66.56 66.65 66.73 66.82 66.91 66.99 Sales 21.00% 72.25 71.30 70.46 69.71 69.05 68.46 67.94 67.47 67.05
3.26% 62.65 62.73 62.81 62.89 62.97 63.05 63.14 63.22 63.30 22.00% 69.62 68.70 67.88 67.16 66.53 65.96 65.45 65.00 64.59
3.46% 59.32 59.40 59.48 59.55 59.63 59.71 59.78 59.86 59.94 23.00% 66.99 66.10 65.31 64.62 64.00 63.45 62.96 62.53 62.14
3.66% 56.28 56.35 56.43 56.50 56.57 56.65 56.72 56.79 56.87 24.00% 64.36 63.50 62.75 62.08 61.48 60.95 60.48 60.06 59.69